Venezuelan Oil Is Largely Staying in Ground or Going Up in Smoke

PUNTA DE MATA, Venezuela—This fading oil town has an eerie glow at night, illuminated by dozens of oil wells burning off precious oil and gas for lack of functioning equipment to process it.

Every month, Punta de Mata’s smoke columns grow higher, a staggering waste at a time when Venezuela, the holder of the world’s largest oil reserves, desperately needs cash from every barrel to import scarce food and medicine. The wells are, quite literally, burning money.

Making matters worse, for every barrel of light crude burned off at Punta de Mata’s wells, Venezuela needs to spend dollars importing a barrel of diluent to mix with the very heavy oil produced in the country’s south.

“This is pure mismanagement,” said Carlos Bellorin, an oil analyst at IHS Inc. in London. “There’s no other rational explanation for such waste.”

The decrepid state of aging fields like Punta de Mata, which provide the bulk of Venezuela’s revenues, is a crucial reason why the country’s oil output is falling faster than that of any other major oil producer bar insurgency-riven Nigeria.

Venezuelan crude production shrank 11% to 2.3 million barrels a day in a year to September, according to government figures, and the consulting firm Medley & Associates expects the fall to accelerate in the next 12 months. Barring a spike in oil prices, falling production will plunge Venezuela ever deeper into economic crisis.

The decline in output deepens Venezuela’s economic pain at a time when the economy is already forecast to contract by 10% this year. The government is struggling to earn enough dollars to import food and medicine and pay almost $16 billion due to foreign creditors between now and the end of next year.

In the oil fields that dot the country’s eastern savanna, pump jacks sit idle because of parts shortages, abandoned oil barges rust onshore and drillers earning $9 a week often skip shifts.

Overall, the number of working oil rigs in Venezuela declined by a quarter in the 12 months to September, according to Houston-based oil-field-service company Baker Hughes Inc. There are now more rigs drilling in Oman, where proven reserves are just 1.7% of Venezuela’s.

“I don’t think this government will be able to stabilize production even if the oil prices start to rise,” said Luisa Palacios, Medley’s Venezuela analyst.

Socialist President Nicolás Maduro has blamed the country’s economic crisis on the U.S., which he says orchestrated the oil-price collapse to aid its economy. The decline wiped out two-thirds of Venezuela’s national dollar revenue, hurting investment, the government says.

Yet global output fell a mere 0.5% since the oil prices dropped from about $100 a barrel in mid-2014 to about $50 in June, according to the International Energy Agency. Many producers, from Russia to Iran, managed to boost output.

Oilmen in Punta de Mata, once Venezuela’s major oil-producing hub, blame Venezuela’s production decline on government expropriations, corruption and collapsing wages that left state oil company Petróleos de Venezuela SA, known as PdVSA, increasingly hobbled.

The international oil service companies including U.S.-based Schlumberger Ltd., Halliburton Co. and Baker Hughes, which once drilled Punta de Mata’s wells and managed the flow of associated gas, are almost all gone, either squeezed out by billions of dollars of unpaid invoices or their local assets expropriated by the government.

As foreign companies began to idle drilling rigs and skilled workers left, output at the Northern Monagas Basin, which includes Punta de Mata, plunged two-thirds in the past decade, the steepest decline in the country, according to PdVSA’s regional managers.

Hit by the cash crunch, PdVSA is now trying to postpone $5-billion-worth of maturing bonds for three years, a move rating agency Standard & Poor’s said is “tantamount to default.”

PdVSA has already practically defaulted on its domestic debts. The company owed $19 billion to contractors—who provide everything from rigs to lunches—at the end of last year, according to its latest annual report.

After writing off $500 million in the country, Schlumberger, the world’s biggest oil-services provider, began to wind down operations at mature fields in June. It fired hundreds of workers, mothballed some rigs and said it would only work with PdVSA when prepaid in cash.

“Schlumberger just threw in the towel,” said Hector Navarro, a PdVSA production manager in Northern Monagas. “They left us to fend for ourselves.”

Earlier this year, a services subsidiary of Italian oil giant Eni SpA, called Saipem, removed its rigs from Northern Monagas and dismissed about 300 workers, according to the national oil union FUTPV. Saipem’s finance chief told investors in July that the company had “reduced almost to zero our operating exposure to Venezuela.”

As of this year, Halliburton will only drill for PdVSA when it is partnered with a foreign shareholder and has a better chance at getting paid, according to two company engineers in Venezuela.

“Those foreign firms had the know-how and capital that we simply can’t match,” said Igor Miranda, owner of Venecia & Service Co., Punta de Mata’s largest oil-service company. “The situation is critical.”

Schlumberger and Halliburton declined to comment on their operations in the country. PdVSA President Eulogio del Pino said the company is investing in reducing gas flaring and working to attract more small companies to take over mature wells.

He said Venezuela’s crude and other liquids production will finish the year at 2.7 million barrels per day, down 2% on the 2015 average.

In the 1990s, Punta de Mata was a booming town of oil professionals, with a golf course, tennis courts and a nearby airport with direct links to Caribbean getaways. Driller Luis Centeno recounted how he bought a new Jeep Cherokee in 1998 with that year’s Christmas bonus. Today, in the wake of multiple currency devaluations and soaring inflation, he earns $20 a week at the weakest official exchange rate.

A Schlumberger petroleum engineer, Julio Vargas, quit the company in April to make more money serving coffee in Sydney, he said during a telephone interview from Australia.

“The demoralization at the fields is absolute,” said drilling engineer Luis Herrera, who recently left Halliburton after his wage fell to $100 a month.

PdVSA has tried to reverse the fall in mature fields by doubling down on the development of vast extra-heavy-oil reserves along the Orinoco River, on the principle that it is easier to get that oil out of the ground. In September, it awarded a $3.2 billion contract to three companies, including Schlumberger, to drill 480 wells in the Orinoco Oil Belt.

To guarantee payment, the companies will be paid from each barrel of oil PdVSA sells from those wells.

But the new drilling campaign is unlikely to make a significant difference to the country’s revenues, given the high cost of processing the goo-like extra- heavy oil in the Orinoco, said Mr. Bellorin, the IHS oil analyst.

The billions spent by PdVSA in Orinoco would be better deployed on maintaining mature light crude fields, like those in Punta de Mata, he said.