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Venezuela’s Oil Output Decline Accelerates as Drillers Go Unpaid

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Venezuela’s oil output, already the lowest since 2009, is set to slide further this year as contractors scale back drilling after the cash-strapped country fell more than $1 billion behind in payments.

The Latin American nation’s oil production, which generates 95 percent of export revenue, will decline by about 11 percent to 2.1 million barrels a day by the end of the year, Barclays Plc estimates. Output is falling largely because oil-services companies aren’t being paid, according to the International Energy Agency.

Venezuela’s economy has been in crisis since crude prices slumped, with sporadic looting as the desperate population fights for food and other essentials. President Nicolas Maduro has pledged to continue payments to bondholders, while the partners of state-run oil company Petroleos de Venezuela SA, known as PDVSA, aren’t paid. Further output decline in the OPEC nation, combined with disruptions in fellow members Nigeria and Libya, could leave the oil market short of supply next year.

“The situation is becoming more and more difficult for oil services in Venezuela,” Baptiste Lebacq, an analyst at Natixis SA in Paris, said by phone. As long as oil prices are at current levels, it’ll be “very difficult” for PDVSA to pay the contractors, he said.

Unpaid Debts

Schlumberger Ltd., the world’s largest oil-services company by market value, was owed $1.2 billion by PDVSA as of March 31, according to an April 27 filing. Halliburton Co. said last month the amount it was owed rose 7.4 percent in the first quarter to $756 million.

The number of rigs drilling for oil in Venezuela fell by 10 to 59 in May, the lowest level in more than a year, according to Baker Hughes Inc.

Schlumberger has reduced activity in line with the drop in payments, the company’s president, Patrick Schorn, told investors last week at the Wells Fargo West Coast Energy Conference. It still works in the country and could boost operations if “new payments models” are implemented, he said.

Italy’s Saipem SpA declined to comment on its operations in Venezuela. The company referred back to comments from Chief Executive Officer Stefano Cao, who said in April that it had idled all but 3 of 28 rigs in the country.

Halliburton declined to comment.

Minister’s Response

While Oil Minister Eulogio Del Pino declined to say whether PDVSA has delayed payments to contractors, he said the companies would remain in Venezuela.

“They have been operating in the country for more than 100 years,” Del Pino said. “They are not going to leave.”

Venezuela is preparing to take over some of the functions of the oil-services providers with the creation of Camimpeg, a new state enterprise under the control of the military. This is unlikely to solve the problem, according to consulting firms Energy Aspects Ltd. and FGE.

“You’ll get more natural declines at a steeper rate” because these local providers don’t have the experience needed to maintain production levels at the country’s aging wells, said FGE analyst Thomas Olney.

Declining Production

Supply reductions in Venezuela, combined with a political stalemate in Libya and militant attacks on oil infrastructure in Nigeria, helped curb an oversupply in the oil market this year. The surplus could turn into a shortfall in 2017 if the Organization of Petroleum Exporting Countries can’t pump an extra 650,000 barrels a day, according to Bloomberg calculations based on IEA data.

Venezuela faces further hurdles with the finances of its state-run oil company. While PDVSA has continued paying back the debt it owes to bondholders, almost $4 billion is due in the fourth quarter and the company will probably default, Moody’s Investors Service said in a report this month.

An oil price of about $50 a barrel is enough for PDVSA to avoid default, said Del Pino, who is also the state oil company’s president. “We have been paying all of our debts” during “the longest cycle of low prices that we have had,” he said.

West Texas Intermediate crude, the U.S. benchmark, traded at $47.43 a barrel on the New York Mercantile Exchange at 1:04 p.m. Tuesday. The average price of all crudes handled by PDVSA was $40.16 on June 24, according to government data.

In the worst case scenario, the nation’s output could fall as low as 1.7 million barrels a day by year-end, Barclays said. That would be the lowest since a strike halted much of the nation’s oil output in 2003, according to data compiled by Bloomberg.

“Further supply weakness from Venezuela cannot be ruled out,” Barclays said in a note.

10 Comments on "Venezuela’s Oil Output Decline Accelerates as Drillers Go Unpaid"

  1. Hello on Wed, 29th Jun 2016 9:07 pm 

    Good move by V to reduce output during the glut.

  2. Cloud9 on Thu, 30th Jun 2016 8:07 am 

    There is no political solution to collapse.

  3. charmcitysking on Thu, 30th Jun 2016 8:16 am 

    “Good move by V to reduce output during the glut”

    As if they had a choice?

    You can’t be serious…

  4. geopressure on Thu, 30th Jun 2016 11:47 am 

    They most definitely had a choice…

    The only reason their economy has collapsed is because they made the CHOICE not to increase production like the US Government demanded…

    Their punishment was runaway inflation, civil unrest & a collapsed economy…

  5. JuanP on Thu, 30th Jun 2016 11:57 am 

    Venezuela is collapsing and its oil production is never coming back. I consider Venezuela to be the second most fucked up country in the Americas after Haiti. Venezuelans are the second most arrogant Latin Americans; only the Argentinians are more arrogant than them. They take the third place for arrogance in the Americas since US Americans are number one, of course. If you live there you should try and get out ASAP!

  6. Rucker on Thu, 30th Jun 2016 3:59 pm 

    Venezuela does not lack for oil. It lacks for honest markets and rule of law. Corrupt, like Brazil and the former Peronista Argentina, Venezuela is the future that Russia can look forward to.

    Lots of oil left. Too corrupt and incompetent to do the job right and pay the people who help you do it.

  7. JuanP on Thu, 30th Jun 2016 5:06 pm 

    Rucker I guess that all Venezuela needs, in your opinion, is a helping hand from the USA. If only they had a “democratic capitalist” system like the USA then all their problems would be instantly solved. LOL! You are just another American exceptionalist moron or a complete fool. Want to see unbridled corruption? Look at the USA!

    Everyone here knows that Venezuela has the largest oil resources in the world. Venezuela is irrefutable proof that the amount of oil reserves and resources is totally irrelevant if we lack the social, political, financial, technological, and economic systems necessary to exploit them.

  8. Northwest Resident on Thu, 30th Jun 2016 5:52 pm 

    “Venezuela does not lack for oil.”

    True. But what Venezuela does lack is sufficient price for its oil. Which is the same problem all oil producers are suffering from these days. And as the oil producers suffer, so suffers the entire global economy and (almost) all who depend on it. Depletion dynamics at work.

    Too bad the oil industry doesn’t have a plunge protection team that works tirelessly to keep that oil price inflated to a level that works out for producers. Not that they haven’t thought of that or even tried it (they have). Sad fact is that the price of oil can’t be artificially inflated like stocks, except perhaps in short unsustainable bursts. You can’t sell oil for a price that the economy and those within it can’t afford to pay, not for long.

    On a per-capita basis, there is a SERIOUS (terminal!) energy deficit at play, and that energy deficit translates into not enough extra cash for the billions of little people to buy more oil and the things oil is required to produce.

    So, while the central bank plunge protection teams keep stock markets elevated, BTFD’ers busy, and the global economy humming along for a little while longer, the harsh physical reality of too-expensive-to-produce oil keeps gnawing away at the foundation that our modern high-tech global economy is built on.

    It is mathematically certain that a catastrophic breaking point is approaching, and a lot closer than the political and financial elites let on. Watching it all unfold is non-stop entertainment of the shock and awe variety!

  9. Boat on Thu, 30th Jun 2016 6:53 pm 

    ” the harsh physical reality of too-expensive-to-produce oil keeps gnawing away at the foundation that our modern high-tech global economy is built on.”

    If thats the case what oil price is needed to spur normal growth.

  10. Go Speed Racer on Thu, 30th Jun 2016 8:51 pm 

    I don’t get thIs story. Somebody splain it to me. So they are fighting for food. That is a food fight, right? Bunch of guys in a cafeteria. Somebody throws a dinner roll, the next guy throws a chicken wing, next thing you know everybody getting hit with mashed potatoes and jello. Why are the VeneZuelans having food fights ?

    Yeah seems like 5 years ago, they were double middle fingers to the US gubbamint. So probly we sent down some spies to throw wrenches into their gears. Make an example of them.

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