Venezuela’s oil production plunged to a 13-year low in June as the economic crisis continues to eat into the nation’s only source of export revenue.
Venezuela’s oil production has declined by 170,000 barrels per day since the start of 2016, dipping to 2.18 million barrels per day (mb/d) in June, according to the IEA’s latest Oil Market Report. Part of that was due to electricity blackouts that cut 120,000 barrels per day from the country’s output between April and June, but even with some of those issues resolved – rain has restored some output at hydroelectric dams – the IEA says that “further losses are expected in 2H16.” A year-on-year decline in oil production of 200,000 barrels per day “looks unavoidable as foreign oil service companies reduce their activity and international oil companies face repayment issues and daily operational challenges.” But 200,000 barrels per day could be just the start.
Venezuela does have some of the largest oil reserves in the world, but much of its oil production occurs at mature fields that require maintenance. But maintenance requires cash, something that is increasingly scarce in the country. Venezuela’s state-owned PDVSA was already failing to properly invest in oil production even when oil prices were in triple-digit territory several years ago. In fact, production has been gradually declining for more than a decade. The problem is that the declines are now accelerating.
In the mature oil fields around Lake Maracaibo in the west, wells are depleting as investment falls short. The IEA says that even in the Orinoco Belt in the southeast output is falling because PDVSA is struggling to process the heavy crude due to a shortage of light crude for blending. Venezuela has long predicted that it would be able to ramp up production from its heavy oil fields in the Orinoco Belt, which holds some of the largest heavy oil reserves in the world and accounts for half of the country’s output, in order to compensate for the aging fields in the Maracaibo region. The predictions were always overoptimistic, but now they are entirely off the table.
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The economic crisis, as the IEA notes, is forcing companies to pack up and abandon assets in Venezuela because they have often not been repaid for services. Earlier this year Schlumberger announced its decision to scale back its presence in the country because PDVSA was $1.2 billion in arrears to the oilfield services giant. Halliburton was owed $756 million as of May. As others follow suit, Venezuela’s oil production could fall much farther. Aside from nonpayment, sky-high inflation on the order of 500 percent makes it costly and confusing to work in the country.
In a sign that things continue to deteriorate, earlier this week Citigroup said that it was ending some operations in Venezuela by putting a stop to “correspondent banking services,” both public and private. Citigroup will shut its accounts with the Venezuelan central bank within a month, which could hinder Venezuela’s ability to conduct foreign currency transactions. Citi was quick to downplay the move, emphasizing that it was not pulling out or reducing its presence in the country. But Venezuelan President Nicolas Maduro called the move a “financial blockade,” insinuating that the move came at the behest of the U.S. government. He went on to add that “with or without Citibank, we’re going forward.”
Barclays estimates that oil production will fall another 100,000 barrels per day to 2.1 mb/d by the end of the year. But that estimate could be conservative. The investment bank’s more pessimistic scenario sees oil production falling to 1.7 mb/d before the year is out. Related: Is Iran’s Claim About Doubling Oil Exports Just Hype?
The biggest threats to Venezuela’s oil supply are above-ground issues, not related to oil per se. Food and medicine shortages are creating a humanitarian crisis that worsens by the day. President Maduro, despite his stranglehold on power, is increasingly unpopular. The opposition is trying to remove him from power through a recall referendum, but the outcome is uncertain.
Meanwhile, Venezuela has more debt that falls due in the third and fourth quarters. Strangely, the Venezuelan government has always prioritized meeting payments to bondholders even if that means people going hungry in the streets. But steeper bond payments come later this year with $1.4 billion due in October and another $2.8 billion maturing in November. With hard currency running low, it is unclear if those payments can be met. Even if they are, paying off creditors does not do much for the country’s oil sector. Production should continue to fall throughout this year and there are very few, if any, reasons for optimism.
By Nick Cunningham of Oilprice.com
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