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Page added on February 10, 2018

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The Crisis Engulfing Venezuela’s Oil Patch Is Far Worse Than Anticipated

Production

Summary

Venezuela’s oil industry is caught in a deep-crisis.

There are signs that oil production is declining at a faster rate than many analysts are anticipating.

If output drops as sharply as it appears to be it could dislocate anywhere up to 900,000 barrels daily from global supplies bolstering prices.

President Maduro’s attempts to hang on to power will only cause the crisis to deepen.

Venezuela’s crisis will give OPEC and Russia an opportunity to review their stance on production cuts.

Deeply troubled Latin American nation Venezuela is in economic and political freefall. The turmoil surrounding the regime of President Maduro continues to deepen while Venezuela’s economy lurches closer to failure. There are signs that not only is this turmoil in conjunction with Caracas’ policies doing irreparable damage to the nations’ oil industry, but that Venezuela’s oil industry is in freefall and its energy patch is on the verge of collapse.

Source: stock photo.

That has a created the potential for a massive geopolitically driven supply disruption, which when compared to only a few years ago when global energy markets were awash with crude, will have sharp impact on supply and consequently prices.

The key problem is that Venezuela’s oil industry and state owned integrated energy company PDVSA are in total disarray. Years of political mismanagement, a lack of investment, growing insecurity and policies that have driven away foreign energy companies have all created a perfect storm that sees Venezuela’s oil production caught in deadly spiral that shows no sign of ending any time soon.

Production is declining at a faster rate than forecast

According to OPEC’s January 2018 Monthly Oil Market Report Venezuela’s December 2017 oil production dipped to 1.6 million barrels daily. This represents a massive 32% plunge compared to the daily average for 2016 and is a crushing 42% lower than daily average production during 2013.

In fact, if output deteriorates from the 1.6 million barrels daily for December by 30% then it isn’t unreasonable to expect it to plunge by almost 500,000 barrels to somewhere between 1.1 million and 1.2 million barrels daily. That is far lower than 2018 production of 1.4 million to 1.5 million barrels daily predicted by Moody’s, Barclays and RBC Capital Markets, representing a 900,000-barrel decline compared to 2017.

In an environment where the global economic upswing has given oil demand growth a healthy bump, OPEC production cuts are keeping around 1.8 million barrels daily off global energy markets and other supply disruptions are looming this could have a far greater impact on global supplies than traditionally thought.

It is likely that despite the ruminations of Caracas and the newly installed PDVSA leadership that they can grow production, such catastrophic declines are going to continue at an even brisker pace. Even the introduction of the Petro cryptocurrency aimed at circumventing U.S. financial sanctions won’t be sufficient to reinvigorate PDVSA’s operations.

The economic crisis is intensifying

The likelihood of such a monumental drop occurring is high, when the ruinous state of Venezuela’s economy is considered. What was once considered one of the wealthiest and economically advanced nations in Latin America is battling chronic shortages of basic foodstuffs, significantly declining government income and rampant inflation.

That is creating a vicious feedback loop whereby neither Caracas or PDVSA can garner sufficient funds to perform critical maintenance on crucial energy infrastructure or to conduct drilling and exploration activities.

It is the reason for Venezuela’s selective default on bond coupon payments that fell due in November 2017 and for growing fears that a hard default is imminent. This not only symptomatic of Caracas’ financial distress but also highlights PDVSA’s plight when it comes to paying operational costs. Its inability to pay oil field service companies such as Halliburton and Schlumberger saw them essentially end their operations in the country.

Drilling activity is declining rapidly

The lack of drilling activity is evident from Venezuela’s rig count falling to its lowest level since 2003. This is causing decline rates at Venezuela’s all important mature oil fields are accelerating at a rapid rate. Naturally they decline at around 25% annually, highlighting the need for drilling and field development to maintain production but it is believed this will accelerate to 30% during 2018 and even higher in later years unless a sudden turnaround in the situation occurs.

The likelihood of any significant turnaround occurring is slim to nonexistent.

Sanctions will cause the crisis to worsen

Maduro continues to apply pressure to opposition groups and strengthen his own power, including overriding the opposition-led national assembly and replacing with his own 545 seat super assembly.

The U.S. believes that the only means of removing Maduro from power is to apply further pressure by implementing additional sanctions and has gone as far as alluding that a military coup is required. A coup nonetheless is highly unlikely because of the beneficial alliance that exists between Maduro’s government and the military.

The additional sanctions being considered are focused on restricting imports of Venezuelan crude as well as exports of U.S. naptha and light crude which are important diluents crucial to the processing of the heavy oil Venezuela produces.

While the U.S. is a crucial market for Venezuela with it accepting 39% of all exports including claiming just over a third of its oil production, they have been declining in recent months. For January 2018, oil exports to the U.S. nose-dived 32% compared to the previous month and plummeted by 50% when compared to the same period in 2016. That sharp decline is already intensifying the impact of declining oil production on an economy where over half of its GDP and almost all export income comes from oil.

Nevertheless, the real impact is being felt by ordinary Venezuelans and not by the Maduro government. That impact would only worsen if the U.S. proceeded with the additional sanctions being discussed. Declining export income will only further reduce spending on critical maintenance for oil infrastructure causing decline rates to spiral ever higher, leading to even lower production.

For these reasons it is easy to see Venezuela’s oil production sinking far lower than the numbers being put out by Moody’s, Barclays and RBC Capital markets, to somewhere around 1.1 million barrels daily. Analysts from Citibank have formed a similar view warning it could fall to as low as one million barrels daily during 2018. Such a significant decline in a world where energy markets have rebalanced would constitute an unexpected supply shock, buoying oil prices and potentially leading OPEC and Russia to reconsider the mechanics of their deal on production cuts.

Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha



24 Comments on "The Crisis Engulfing Venezuela’s Oil Patch Is Far Worse Than Anticipated"

  1. Jef on Sat, 10th Feb 2018 8:40 am 

    We need to get big oil back in there to syphon all the oil, gas, and profits out of Venezuela as soon as possible.

  2. Shortend on Sat, 10th Feb 2018 8:44 am 

    , the real impact is being felt by ordinary Venezuelans and not by the Maduro government. That impact would only worsen if the U.S. proceeded with the additional sanctions being discussed. Declining export income will only further reduce spending on critical maintenance for oil infrastructure causing decline rates to spiral ever higher, leading to even lower production.

    Looks like Uncle Sam has a plan…the Economic Hitmen are in place and the Wall Street Gangsters will be carpetbaggers to rape the resources, it works every time…well, almost…

  3. Boat on Sat, 10th Feb 2018 10:26 am 

    Short,

    Export income went to the masses instead of critical maintenance for oil infrastructure. Iran is begging for more countries to come in and rape their resources as does any poor third world country if they want a dime for their masses from their oil.

  4. Dutchman on Sat, 10th Feb 2018 10:52 am 

    Why is it that the authors of articles like this never point out the most import driver of the Venezuelan oil collapse? The oil they sell is aa super heavy grade that is so bad it requires pre-refining in the oil fields just to make it possible to pump it to the loading docks. It takes specially equipped tankers with steam heating systems to transport it since it turned into a solid gel otherwise and can not be off loaded. Similarly the storage tanks require steam heating. The refining process is hugely expensive to and had a terrible yield per barrel of viable product. And the refineries that can process the goo are 3-4 times as expensive to build as light oil refineries. The US government subsidized its refineries to put in the equipment during the cold war since Venezuela was local and a viable alternative to the Middle East. However, the refiners can not meet EPA regulations for emissions using the stuff. China can not use anymore of it without hurting their refineries.Europe is cracking down on refinery emissions and has no need to the expensive equipment. And US refiners have discovered the Alberta Heavy crude can be run in the same refinery processes as the Latin goo and yield a much more profitable product mix at lower costs and lower emissions. Venezuela’s oil industry is collapsing because it is inferior dirty oil an no one needs it any more. Venezuela’s oil industry is in a death spiral. the only way out is to sell refined product but they have no money to build refineries to do that and no one will invest.

  5. Dutchman on Sat, 10th Feb 2018 10:58 am 

    And the push to complete the Keystone XL to bring 800,000 barrels of Alberta Heavy to the gulf refineries will eliminate the US as an export market for the Venezuelans. No one ever mentions that the Keystone capacity matches the Venezuelan imports. Every wonder why? There will be nary a ripple int eh world market if Venezuela collapses and ceases to export oil. They just are not that important and new sources are opening up that can easily replace them. Funny how the author never mentions that.

  6. Shortend on Sat, 10th Feb 2018 11:10 am 

    Really, Boat? Suppose Uncle Sam by its sanctions has no bearing on the situation?

    Act Two

    The Shock Doctrine: The Rise of Disaster Capitalism Paperback – June 24, 2008

    Sure, Boat…

  7. Boat on Sat, 10th Feb 2018 12:12 pm 

    Short,

    Google all the write offs and losses by oil companies who signed good faith contracts the Venz gov. Who raped who.

  8. Shortend on Sat, 10th Feb 2018 12:18 pm 

    Boat, got one better

    http://www.connectthedots.com

    Ask yourself this.
    How well would the United States have done if it was blockaded with sanctions for the past 50 years like Cuba?

    Don’t think too hard on that one or you may sink the boat.

  9. Anonymouse1 on Sat, 10th Feb 2018 12:42 pm 

    Wtf is the venz gov.? Retarded AND lazy? Can we get someone in here who speaks retarded to interpret boatietards gibberish? if the exceptionalist isn’t too busy with his meltdown, maybe he help with that.

    Go read your bible boatietard, watch some 700 club on the TV, or go fill in your coloring book. If you haven’t swallowed all your crayons again that is.

    Retard

  10. Davy on Sat, 10th Feb 2018 12:49 pm 

    The stupid struggling to be an engineer Canadian millennial waste case decided to get out of bed. LOL. How did you like your spanking dumbshit? I do have to give you a little compliment after at least 2 months you were actually able to make a barely coherent comment yesterday. It was only at a juvenile level but that is a start.

  11. Boat on Sat, 10th Feb 2018 12:56 pm 

    amouse,

    So Venz would be better managed like Norway if only for the US. Do you comprehend why a country like Venz would be sanctioned and why a country like Norway avoids US sanctions.
    Lack of these comprehension skills gets you labels like radical, extreamist and idiot among others.

  12. Robert Gillies on Sat, 10th Feb 2018 1:12 pm 

    I just came back from spending a month in Colombia. It used to be that Colombians would go to Venezuela because of better opportunities. Now large numbers of Venezuelans are escaping to Colombia because they are starving in Venezuela.

  13. Anonymouse1 on Sat, 10th Feb 2018 1:39 pm 

    How about that? Dumbass comes waddling from across the internet to rescue little boatietard from his most recent bout with stupidity. And in record time to. Hey dumbass, mail him some new crayons and send him some of your surplus anti-psychotic meds. They won’t do a thing for retard, but it would be funny to watch.

    Again boatREtard, what is a Venz?

  14. Davy on Sat, 10th Feb 2018 1:58 pm 

    mousy1, will it take another couple of months for a semi-intelligent comment out of you? LOL. Anyone can prick but it takes a mind to put ideads out. This is obviously something you don’t have. What a fine specimen of the Canadian educational system and money well spent..cough cough….

  15. Plantagenet on Sat, 10th Feb 2018 8:54 pm 

    Cuban style socialism will soon have Venezuela producing just as much oil as Cuba.

    Cheers!

  16. Anonymouse1 on Sat, 10th Feb 2018 9:02 pm 

    Hey, look, its two retards back-to-back. Find any cubans or venezuelans hiding under you your bed plantetard?

    Cheerio, retard!

  17. Charles on Sat, 10th Feb 2018 9:06 pm 

    Get the dumb ass out of the drivers seat and put him back in a bus where he belongs.

  18. print baby print on Sun, 11th Feb 2018 1:52 am 

    The world need every single barell that can get , even Venezuela heavy. Problem with the system is banks and their interest . You sell something that you print out of thin air ( and never get enough ) and you want others to work for food , good luck I am not that stupid

  19. ManuelPl on Sun, 11th Feb 2018 10:21 am 

    thanks God we have this two idiotic country systems ( Venezuela & Bolivia ) as a clear stupid samples for not to follow , or copie, the rest of the countrys in America, I only fell sorry for the inocent people involved .

  20. rockman on Sun, 11th Feb 2018 11:22 am 

    Dutchman – “And the push to complete the Keystone XL to bring 800,000 barrels of Alberta Heavy to the gulf refineries will eliminate the US as an export market for the Venezuelans.” There’s no current need for the KXL pipeline: every bbl of Alberta oil being produced is able to be exported to the US via existing pipelines. In fact, when you factor in rail transport, there is significant export capacity. You should understand that part of the reason for building the KXL pipeline was to provide pipeline access to Bakken oil producers. But now that the Dakota Access Pipe Line has been built that need has been satisfied.

    IOW how much Venezuelan oil US refineries buy has nothing to do with Canadian export capacity. It’s a function of price competition: if US refineries can satisfy their needs cheaper from exporters in other countries they won’t buy a single bbl from Vz. But if the price is right our refineries will buy every bbl Vz can export.

    It isn’t personal with Vz exports…simple business.

  21. rockman on Sun, 11th Feb 2018 11:27 am 

    Robert – “It used to be that Colombians would go to Venezuela because of better opportunities.” Heard a report last week that Columbia is beginning to tighten its border security with Vz. Who knows: maybe they’ll build a wall.

  22. peakyeast on Sun, 11th Feb 2018 11:36 am 

    Of course, Venezuela wouldnt be in a better situation if they had 1/5 the population because human well-being is measured in rising BNP and not … well… well-being.

  23. Norman Pagett on Sun, 11th Feb 2018 1:43 pm 

    any nation dependent on oil becomes totally dependent on it.

    doesn’t matter what the political system is, or how idiotic the politicians, people expect oil benefits to go on forever.

    as oil declines, as it must for all of us, Venezuela paints a clear picture of what is going to happen.

    No ifs buts or maybes about this—Venezuela is our certainty.

    The USA is totally oil dependent—the Don boasts that 10mbd is produced—same as Saudi—he chooses not to mention that the USA USES 18Mbd—

    imagine an oil depleted USA with everyone armed to the teeth, in a state of denial and convinced that it’s some kind of Russian plot.

    Venezuela will look like an argument in a kids playground by comparison

    We all demand cheap oil–but there’s none left. We are trying to make the world economy run on expensive oil—it can’t be done. That’s what Venezuela is telling us right now

    There’s no more cheap oil

    The Book: The End of More (Pagett Amazon) explains why

    It doesn’t make for very pleasant reading

  24. MASTERMIND on Sun, 11th Feb 2018 2:07 pm 

    Normans book the end of more is an excellent read! And only cost one dollar on kindle!

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