Venezuela’s Oil Production Plans Are Entirely Unrealistic

Despite a near economic collapse, shattered petroleum industry infrastructure and empty government coffers, Venezuela's oil minister Tareck El Aissami continues to talk-up the prospects of the OPEC members crude oil output significantly expanding.

In a June 21 interview with Bloomberg El Aissami claimed that Venezuela would quadruple its oil output by the end of 2021. The oil minister further asserted that regardless of U.S. sanctions foreign investment would gush into the founding OPEC member's petroleum industry and production would eventually recover to such a level that Venezuela would rank among the world's four largest crude oil production nations. According to El Aissami's Venezuela will be pumping up to two million barrels of crude oil daily by the end of 2021, which is four times greater than the 500,000 barrels per day produced during 2020. Current circumstances, regardless of El Aissami's assertions, indicate that the state goal is nearly impossible to achieve. OPEC's July 2021 Monthly Oil Market Report shows that based on direct communications Venezuela pumped an average of 6330,000 barrels per day for June 2021. While this does represent a 9% increase compared to May and an impressive 67% year-over-year gain, it is still significantly less than the record 3.1 million barrels per day pumped during 1998 before Chavez came to power. Furthermore, the data released by Venezuela concerning the performance of the national oil company PDVSA is unreliable leading many analysts to rely on information from secondary sources. OPEC data from secondary sources indicate that Venezuela only produced an average of 529,000 barrels per day during June 2021, which is 16% less than the earlier number provided by Venezuela. Those numbers indicate there is a considerable way to go before petroleum production recovers to pre-crisis levels. 

Venezuela's immense production decline over the last two decades is the result of strict U.S. sanctions preventing Caracas from accessing international energy and capital markets. Those restrictions are also preventing oil companies from doing business with the Maduro regime with many opting for over compliance to avoid penalties. The late-2014 oil price collapse, systematic malfeasance and endemic corruption accelerated that deterioration. Despite El Aissami's optimism, there are signs of a long road ahead for Venezuela before any sustained recovery in oil production will occur.

A leaked PDVSA document states the national oil company believes investment of $58 billion in Venezuela's oil industry is required to revive production to 1998 levels. That is a tremendous amount of capital which ultimately will only be obtained by courting and attracting substantial investment from major foreign oil companies. Even Russian energy supermajor Rosneft chose to sell its substantial Venezuelan assets, acquired through a series of unprofitable joint ventures with PDVSA and government loans to a Kremlin-controlled entity during 2020.

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This was because of stricter U.S. sanctions, which saw Washington impose penalties on two Rosneft subsidiaries. The Russian energy supermajor took the decision despite sinking $9 billion into joint ventures with PDVSA since 2010 and incurring a significant loss on those investments. That event highlights U.S. sanctions are now a major deterrent for privately owned energy companies seeking to operate in Venezuela or conduct business with the Maduro regime.

Washington's sanctions have also substantially amplified the logistical difficulties associated with maintaining, repairing, and refitting Venezuela's crumbling petroleum infrastructure. Chinese engineering firms which initially committed to repairing and upgrading Venezuela's heavily corroded refineries backed out of the deal because of their seriously dilapidated condition and lack of access to crucial parts.

While Iran has provided some assistance with rebuilding Venezuela's ramshackle refineries, U.S. sanctions have prevented Teheran's technicians from obtaining key parts for the western designed and built facilities. Much of Venezuela's petroleum infrastructure was built by western energy majors, making it reliant upon parts and technical expertise sourced from outside of Venezuela, primarily from the U.S., for maintenance and refits. Those issues stress how important it is for U.S. sanctions to be eased before Venezuela can attract sufficient capital to rebuild its crumbling petroleum infrastructure. That simply will not occur for as long as strict U.S. sanctions preventing the sale of Venezuelan oil and penalizing companies doing business with the Maduro regime remain in place.

It is not only sanctions that are blocking much needed foreign energy investment, Venezuela's heavy and super-heavy high sulfur content carbon emission intensive crude oil grades are also deterring foreign investment. French supermajor Total Energies and Norway's Equinor recently announced they had decided to exit Venezuela transferring their 30.32 % and 9.67% respective interests in the Petrocedeño (Spanish) extra-heavy oil project to PDVSA. Both companies cited the decision was reached on the basis that the high carbon intensity of the project did not meet their stated goals of reducing carbon emissions and the environmental impact of their operations.

Petrocedeño lifts extra-heavy crude oil from the Orinoco belt and then processes it into lighter oil grades for sale or refining. This latest development highlights the risks connected with Venezuela's heavy and extra-heavy crude oil, which are estimated to make up over 80% of the country's vast oil reserves, becoming stranded assets as the global economy is decarbonized. 

A chronic lack of access to condensate because of limited local supplies, for diluting the extra-heavy crude oil grades so they can be transported and processed, is weighing heavily on production. Until a 2.1 million barrel July 2021 shipment from Iran, Venezuela had not received any condensate since September 2020 forcing it to rely on limited local light oil and condensate production. Prior to Washington's imposition of additional sanctions in January 2019 the U.S. was the primary source of crucial condensate imports. Until those sanctions are eased it is unlikely that the OPEC member can obtain sufficient condensate to increase petroleum output, which is a further deterrent to energy companies considering investing in the Orinoco Belt.

Clearly, neither Caracas nor PDVSA can significantly expand Venezuela's oil production until strict U.S. sanctions are eased. No global oil major, which are the only energy companies possessing the resources and expertise required to rebuild Venezuela's shattered oil industry, is willing to invest until they can operate profitably in the petrostate. That will not occur until a significant portion of Washington's sanctions are lifted.

The carbon-intensive nature of exploiting Venezuela's heavy and extra-heavy crude oil in a post-Paris Agreement world is an additional deterrent to investment with big oil under considerable pressure to make operations carbon neutral. Those impediments to investment are further magnified by the risks associated with investing in a country led by an autocratic socialist regime that has a long history of nationalizing privately-owned petroleum assets. For those reasons, El Aissami's claims appear unrealistic and Venezuela's derelict oil industry will not recover nor will petroleum production experience sustained growth any time soon.

By Matthew Smith for Oilprice.com

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