Venezuelan Oil, an industry in deep crisis with no signs of improvement
Venezuelan oil production In April 2018, fell by 0.46 million barrels per day (mbd) to 2.194 mbd, which is a fall of around 17% since 2015.
Largest reserves of oil in the wrong place
Venezuelan oil sector:
The country with the largest reserves on the planet is going thru a deep crisis. Caused by the lack of funds and bad control, a situation with no signs of improvement in the short term.
Given the statement made by the Venezuelan oil minister, Nelson Martínez. Who told OPEC on Thursday that the sector works “normally.” Analysts draw something much more complicated, no good outlook, where Petróleos de Venezuela (PDVSA), is the weakest link.
“PDVSA is forced to import US products and oil at international prices, and it would not have to. It is terrible management”, said Gonzalo Escribano, in charge of the energy program of the Elcano Royal Institute.
And this, in the first place, is the result of production that has been declining with not stop for more than a ten years, which confirms the latest figures from OPEC.
“It’s a typical case of lack of investment,” says Abhishek Deshpande, an oil analyst at Natixis. “The real problem is that PDVSA has become the President´s dairy cow, but there have been no funds, so it does not increase production, and it is forced to import oil very often from the US,” says Christopher D., head of economic research at Saxo Bank.
To the paradox of a country rich in natural resources but with a horrible economy (which is known as “the curse of resources”) now joins a political and social crisis. In the face of the lack of necessary goods and with the highest inflation in the world, which the IMF projects at 720% this year, Venezuela has been going thru a wave of violence for almost two years due to street protests. For nearly two years of hate against Nicolás Maduro, more than 155 people have got killed.
“The firms that invest in Venezuela are losing faith in their ROI from their investments. To stop the decline [of production] it is necessary to invest, but there will be no funds coming in while the country is still in crisis. No more investment from China
Analysts agree that the management of PDVSA is ruled by corruption and, in recent months, by a growing worrying debt. “Today, PDVSA has a very high level of debts and since September of last year has problems to return their credit,” and there is a level of corruption so high that nobody knows what the real liquidity is.”
In parallel, Russia and China, which had invested in the Venezuelan oil sector, are also now reviewing their positions in a country where oil is more than 90% of Venezuela’s currency. Is the case of the government of Beijing, which in 2009 agreed with the then President Hugo Chávez to invest in the sector in exchange for Caracas to sell oil at low prices.
But for a year and a half, China gradually withdraw its investments from Venezuela, including the returning of numerous engineers working in the oil sector. Taking into account the fall in the price of the barrel in recent years, China no longer needs Venezuelan crude as much as before.
Faced with this issue, they see a point of aggravation of the situation, at least in the short term. Can production go down even further? Yes, if Venezuela continues in crisis.
In the long term, the only solution is a political agreement that allows “a drastic reform of the country’s energy system.
The only path for the country to move forward is through the oil sector, but not waiting for the price to improve through OPEC, but by dedicating itself of making PDVSA work, with funds, with investments, oil flows, and refineries working.
IEA: A broader drop in Venezuela’s oil could lead to a deficit.
The situation in Venezuelan oil production and the risk of the decline in oil production are for the IEA the main risk factors. In this oil market, despite all, is giving once more signs that it is balanced.
In its monthly report, the IEA slightly revised up its forecasts on global oil demand for this year to 99.3 million barrels per day, where Venezuelan oil used to play a huge role, which means an increase of 1.5 million barrels per day more than in 2017 and 90,000.
This increase is explained by a consumption higher than 240,000 barrels per day as expected in the Organization for Economic Cooperation and Development (OECD), and in particular in Poland, Turkey, the US, and Japan. On the contrary, the authors of the study corrected their expectations downwards on demand outside the OECD, especially in Pakistan, Russia and several countries in the Middle East, where oil is being replaced by gas for electricity.
On the supply side, they stressed that “the biggest risk factor is, and it seems that it will continue to be, Venezuelan oil reductions,” which as per its figures reduced its production in February again by 60,000 barrels per day, to reach 1.55 million barrels per day.
Daily barrels. The IEA considers that the issue there is “clearly vulnerable to an acceleration of the decline” and without a change of other producers to compensate this possible evolution, Venezuelan oil “could be the final element that tilts the market towards the deficit.”
Beyond the uncertainty about Venezuelan oil, that beautiful Latin American country, the agency has not changed its expectations for 2018, in particular as regards the leading actor, the US, which will increase it’s in 1.3 million barrels. Daily thanks mostly to the shale deposits.
The Organization of Petroleum Exporting Countries (OPEC) did pump 32.10 million barrels per day in February, compared to 32.17 million barrels per day, a change explained mainly by Venezuelan oil production. The agency, which brings together the large energy consumers members of the OECD, forecast that the output of the oil cartel will stay stable in the whole of 2018, at the expense of what may happen in Venezuelan oil and, to a lesser extent, in two others. Countries subject to a situation of instability, Libya and Nigeria.
In February, OPEC more than fulfilled its commitments to reduce the amount of crude oil it takes out for sale to balance the market, at 147%. And without the fall of the Venezuelan oil contribution concerning its objectives that percentage would have been around 100%.