The Death Spiral Of Venezuela's Oil Sector And What Can Be Done About It
https://www.forbes.com/sites/thebakersinstitute/2018/01/24/the-death-spiral-of-venezuelas-oil-sector-what-if-anything-can-be-done-about-it/JAN 24, 2018
The Venezuelan oil sector is on a death spiral despite having one of the largest resource endowments in the world. According to its report to OPEC, Venezuela’s production was 1.62 million barrels per day (b/d) in December 2017, a decline of 649 thousand b/d (or 29%) in just one year, and more than 1.1 million b/d in five years. The country had not seen such low levels of production since the 1980s.
The current troubles of the oil industry are rooted in the oil policies implemented by President Hugo Chavez (1999-2013). He fired about half of the workforce of the national oil company, PDVSA, during an oil strike in 2003, including the vast majority of top executives and technical staff. He forcefully renegotiated joint-ventures and operational contracts with foreign companies and partially nationalized them. ExxonMobil and ConocoPhillips withdrew from the country as a result. Thereafter, no relevant new oil projects have been completed. He also expropriated some service companies. In addition, Chavez drove PDVSA to run into significant debt, and transformed it, de facto, into a social and development ministry. Consequently, investment in oil development and production declined, even during the oil price boom.
After the oil price collapse, in 2014, the problems of the country’s oil sector became much more severe. The average price of the Venezuelan oil basket, which had been above $100 in 2011 and 2012, fell to $35 in 2016. As a result of the consequent cash-flow collapse, PDVSA accumulated massive arrears with suppliers, which began to reduce their activity in the country. The average number of oil rigs in operation went from 69 in 2014 to 49 in 2017.
In addition, most of the oil produced, does not generate cash flow to PDVSA. Of the close to 1.8 million b/d of crude that Venezuela was producing until late 2017 (1.9 million b/d, including gas liquids), more than 400 thousand b/d were heavily subsidized and consumed in the domestic market at a huge loss. About 500 thousand b/d were committed to repay loans to China, Russia, and other countries, as well as to some PDVSA JV partners. Around 50 thousand b/d were supplied, at a large discount, to Caribbean countries, mainly to Cuba. Finally, Venezuela imported about 100 thousand b/d of refined products and light oil, partly as a diluent for the extra-heavy oil. Thus, PDVSA’s net cash flow came from just about 800 thousand b/d....
