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Page added on March 1, 2014
A cascade of woes hitting Venezuela’s oil industry
At a conference that annually celebrates–for the most part–the explosion of North American supply, a panel that featured two PDVSA alumni turned into a bleak review of an almost unfathomable crisis gripping the Venezuelan oil industry.
The strife in the streets of Caracas, and the lines of people waiting to buy the basic stuff of life, are almost secondary to the fact that, as the panelists noted, the Venezuelan government has mortgaged the future of its oil industry. Waiting for the country’s rapidly sinking ship of state to be righted by an increase in production, and maybe a boost in prices too, increasingly appears to be a pipe dream.
The two panelists discussing this on day two of the Platts Crude Oil Market-Americas conference in Houston were Alberto Cisnernos Lavalier, CEO and president of Caracas-based Global Business Consultants, and Ramon Espinasa, the lead oil and gas specialist in the Infrastructure and Environment Department at the Interamerican Development Bank.
One of the topics to be discussed at the panel was whether Venezuela was ripe for a “mini-apertura,” an opening into new investment in the country’s oil sector. The initial apertura of the 90′s was squashed by the election of Hugo Chavez as Venezuelan president, and it started the downward spiral of Venezuelan production that sent output down to 2.1 million b/d from 3.6 million b/d at its peak.
After listening to the panelists, one could only conclude that the industry is ripe for total collapse, not a surge in foreign investment.
Cisnernos noted Venezuela’s series of financial deals with China, in which loans from the Asian country are sent to Caracas in exchange for oil. The oil is sold at fixed-price numbers, which don’t look all that bad at first glance, up in the $90-$100 level, but in which the prices are CIF China and Venezuela absorbs the shipping cost. He reviewed the complicated structures of the various deals, ultimately describing them as “mortgaging the future.”
The Venezuela-China deals also violate the market’s “iron law” that usually sees oil marketed regionally, Cisnernos said. Instead, shipments taking 35-45 days to China are replacing one-week voyages into the US, Cisnernos said. And since most of the shipments are of lesser-value heavy oil or fuel oil, the shipping costs are deducting a higher percentage from the final netback than if a higher-value crude was being moved.
Venezuelan shipments to China stood at 66,000 b/d in 2008, Cisnernos said, but had averaged 326,000 b/d through the first eight months of 2013; he said he drew those figures from unofficial–and undisclosed–sources. But they’ve been as high as 488,000 b/d, he added, and “it’s roller-coaster behavior. There is no relation to production.” By contrast, the decline in exports to the US very much tracks Venezuela’s sliding output.
And the debts to China are just one of the obligations facing Venezuela. The joint ventures in the Orinoco belt each need upgraders that cost anywhere from $8 billion to $10 billion each. PDVSA must put up about 60% of the costs. “How in the world are they going to be able to pay for this?” Cisnernos said.
And Espinasa echoed what Platts Oilgram News reported a few weeks ago (and which The Barrel published in this post): financing the required PDVSA contributions to the Orinoco projects have been paid for to some degree by promising future oil shipments that would otherwise have gone to the Venezuelan coffers. “For a number of PDVSA deals they have paid for them with future supply,” he said.
The list of lamentations went on, few of them particularly shocking: the enormous brain drain from PDVSA “which will take a long time to recover,” as Espinasa said; a safety record at PDVSA refineries that could charitably be described as appalling; and a refinery operating rate that may at best top out at 60%, requiring the country to import lots of things it previously had exported, like gasoline blending components.
And with the growing street unrest in the country, forget any chance of ending the subsidy of gasoline prices that keeps retail numbers at less than 10 US cents per gallon, and leads to smuggling of what Espinasa said was about 100,000 b/d of product through Colombia and other parts of the Caribbean. The government had considered it, but given street protests, that move would be—pun clearly intended–like “throwing gasoline on the fire.”
Yet Cisnernos actually showed some optimism. He said that if there was “light at the end of the tunnel”—though why there would be was not clear—then production could be like a “hammock,” continuing to slide now but rebounding by 2020.
Espinasa offered sobering numbers on the task ahead. Twice in its history as an oil producer, Venezuela produced annual average growth rates of 110,000 b/d. The first was in the post World War II period, ending in about 1958; the second was during the Luis Guisti-led apertura of the 90’s. For Venezuela to get back to its peak output of 3.6 million b/d, reached around 1997, it would need to hit that average growth rate and sustain it for at least ten years, maybe more depending on the rates of decline in existing fields.
And he didn’t say this, but that would have to be done while some of the output that would otherwise finance that growth has already been put up as a sort of petroleum dowry to China and the Orinoco partners.
Grim, indeed.
7 Comments on "A cascade of woes hitting Venezuela’s oil industry"
Welch on Sat, 1st Mar 2014 1:05 pm
Just as western nations security apparatus’ planned?
Davy, Hermann, MO on Sat, 1st Mar 2014 1:13 pm
Cisnernos noted Venezuela’s series of financial deals with China, in which loans from the Asian country are sent to Caracas in exchange for oil. The oil is sold at fixed-price numbers, which don’t look all that bad at first glance, up in the $90-$100 level, but in which the prices are CIF China and Venezuela absorbs the shipping cost. He reviewed the complicated structures of the various deals, ultimately describing them as “mortgaging the future.”
I read post here complaining about the US meddling in Venezuela affairs. It can be argued this is natural “Realpolitik”. BTW is the opposition in Venezuela not privileged to outside help just as the Chavistas are? Now to my point, China is out for itself just as most others. The above mention China deal is indicative of many deals China is making in the third world and that is pure and simple exploitation of a countries natural resources. China is making deals that will haunt many of these countries in the end. These deals offer the high immediate NPV of cash through loans. This cold hard cash is then dumped into a black hole of deficit spending. Later the country is left with a hangover of repayment. This repayment is often without the benefits of productive assets that should have been built or invested in by the original loan. Instead part or much of the initial loan goes into wide range of needs. In Venezuela’s case much of these loans should have gone into the energy and electricity sector. I hear little about this Chinese exploitation and volumes about US exploitation. I do not deny the various US exploitation and political manipulation. China tends to avoid the political and focusses on economic rape instead. This also points to how a system such as the Chavez revolution was a little more than a dictator raping his country. Out of fairness this Chavez example is benefitting a large segment of the population and Chavez was elected. This Chavez outcome ended as usual with the same third world brand market manipulation, shunning foreign capex, and making ones country anti-business. Chavez revolution is a broken economic policy in today’s global interconnect economy. Chavez had original lofty goals of social justice but they were drug into the mired of the usual killing the goose that laid the golden egg. Those here who put China on a pedestal of a model country in the world and the next world power should rethink your love.
DC on Sat, 1st Mar 2014 3:49 pm
LoL! What a PoS article.
Another whore for empire. Why exactly is this propagandist so worried about Venezuela’s oil industry anyhow? It is none of the uS’s concern who Venezuela deals with, and how the deals are structured.
Here, lets take just a tiny sample of just how poorly this trash is written.
Q/The strife in the streets of Caracas, and the lines of people waiting to buy the basic stuff of life, are almost secondary to the fact that, as the panelists noted, the Venezuelan government has mortgaged the future of its oil industry. Waiting for the country’s rapidly sinking ship of state to be righted by an increase in production, and maybe a boost in prices too, increasingly appears to be a pipe dream.
Lets fix it up a little-make it more, accurate shall we?
The strife in the streets of amerika, and the lines of people waiting to buy the basic stuff of life, are almost secondary to the fact that, as the panelists noted, the amerikan corporate government has mortgaged the future of [everyone]. Waiting for the country’s rapidly sinking ship of state to be righted by an increase in production in[tar, shale,corn and frak gas], and maybe a boost in prices too, increasingly appears to be a pipe dream.
There, all fixed! I *knew* platts was talking about themselves, but somehow got the two parties confused…
Davey on Sat, 1st Mar 2014 4:41 pm
DC add to your new adaption to include the other whores Russia and China then I will listen to your usual North Korean style anti American propaganda spew
noobtube on Sat, 1st Mar 2014 7:31 pm
U’re either fo’ us or agin’ us.
USA! USA! USA!
The United States is like watching a trainwreck in slow motion.
Davey on Sat, 1st Mar 2014 8:00 pm
Noo, come on get over your prejudices and realize we are all a train wreck waiting to happen. Why be part of the blame and complain lobby ?
bobinget on Sat, 1st Mar 2014 8:07 pm
Suncor, Imperial or Canadian ‘Natural’ Resources got no help from China to build up-graders at Five to Six Billion a copy. In the early days bitumen up-graders were always bursting into flame often, once or twice with fatal consequences. Now, two or more are required to keep production moving.
I mention this because of incipient and actual civil wars in Nigeria, Venezuela, Syria, Iraq and Iran,
Canadian heavy oil has become highly undervalued.
The US for all intents has lost future Venezuelan crude.
Essentially, removing two million B p/d, from US supply over time is bound to have profound effects on pricing. Canadian oil sands cannot be ramped up quickly to fill that void, Keystone or no Keystone. None of the ‘majors’ can can continue to replace reserves economically.