Venezuela’s oil production plunged by another 47,500 barrels per day (bpd) in June, compared to a month earlier. An exodus of workers and field shut downs were reported for the month, pointing to a grim near-term future that could see total production dip below 1 million barrels per day (mb/d) by the end of the year.
According to OPEC’s secondary sources, Venezuela’s output fell to 1.34 mb/d in June, which, aside from a brief interruption of output due to a strike in 2002-2003, puts production at its lowest point in nearly seven decades.
The problems plaguing Venezuela’s oil industry are well-publicized, but the situation continued to deteriorate in June. Two officials from state-owned PDVSA told Argus that workers are fleeing operations. “More production wells are being shut down, the skilled oilfield labor force declined in all upstream divisions by at least a combined 1,000 workers in June, and scheduled maintenance continues to be postponed,” a PDVSA official from the western division said.
A separate official from the eastern division told Argus that production continued to fall in the first 11 days of July as more rigs were scrapped and more wells were shut down. PDVSA is “dying operationally,” the official said.
You wouldn’t know that if you went by government statistics, however. While OPEC’s secondary sources estimated average output at 1.34 mb/d in June, the Venezuelan government reported production figures at 1.531 mb/d, flat from May levels. Those figures defy belief and are not credible, but PDVSA’s leader, Manuel Quevedo, is “cooking the official data sent to OPEC to hide the truth about [PDVSA] from president Maduro and from the public,” an official from the energy ministry told Argus.
Venezuela’s production is now down nearly 800,000 bpd from a year ago, and falling.
“Output from Venezuela’s ageing conventional oil fields is in rapid decline and upgraders operated by foreign joint-venture partners in the vast Orinoco heavy oil belt are malfunctioning and running below capacity,” the IEA said in its latest Oil Market Report. “At the end of June, PDVSA and Chevron restarted the 210 kb/d Petropiar upgrader after almost a month-long closure.”
“In total, upgrading projects in Venezuela can turn roughly 600 kb/d to 700 kb/d of extra-heavy Orinoco crude into export grades. Recently they have been largely out of action due to bottlenecks at loading facilities.”
China has decided to invest $250 million to help slow the decline underway in Venezuela, but it isn’t at all clear that that amount of money will have a significant impact. After all, China has poured $50 billion in loans into Venezuela over the past decade, and the trajectory of Venezuelan oil production has only gone in one direction.
There is also the possibility that the June figures might look a bit better than should be the case because PDVSA drained inventories. Reuters reports that Venezuela’s crude exports to the U.S. recovered a bit in June, compared to May, but that PDVSA drew down on stocks in Curacao and Aruba ahead of ConocoPhillips’ seizure of the facilities. As Conoco presses its case against PDVSA, Venezuela has largely lost control of its facilities on those Caribbean islands.
There is no shortage of reasons to believe the situation will continue on a downward spiral. Oil wells are being shut down and the worker exodus will put an even deeper strain on operations. More than $9 billion in bond payments fall due this year, and it is hard to imagine the government and PDVSA marshalling the resources to meet those payments. Inflation is set to top some 13,000 percent this year, a mind-boggling figure, while GDP could shrink by a further 15 percent. By the end of the year, GDP will have contracted by nearly 50 percent since 2013.
The lack of payment to PDVSA’s joint venture partners threatens to accelerate production losses. The rig count fell to just 26 in June, according to Argus, down from 70 in the first quarter of 2016.
Venezuela has been losing around 50,000 bpd each month so far this year, which means it could lose another 300,000 bpd before the end of 2018. The losses are tightening the oil market, and Saudi Arabia is now forced to ramp up production – and cut into its spare capacity – to make up for the declines.
