Energy Markets

The Deteriorating State of Venezuela’s Oil Markets

Venezuela's oil markets, which had once been a source of international investments, continue to deteriorate. A myriad of political and financial risks from corruption to decaying oil production, Venezuelan oil will continue to face turmoil unless there is significant change in the state of affairs.

BY: JOSE LUIS CHALHOUB

Since the Bolivarian Revolution came to power in Venezuela after Hugo Chávez’s election in 1998, its oil industry has been plagued by a myriad of political and security risks, which have prevented it from developing to its full potential.

Overall, it is estimated that the Orinoco Belt (the Venezuelan territory overlying its petroleum deposits) holds around 280 billions of barrels of heavy and extra heavy crude oil, according to the U.S. Geological Service and many international auditing and certification processes permitted by the Venezuelan government. Up until now, this had been the top reserve in the world, surpassing those of Saudi Arabia as well as Canada, the other big leaguer in non-conventional oil.

Unfortunately, though a very attractive venue for international oil companies (IOCs) and national oil companies (NOCs), it has not been easy to set up shop with major investments as was once expected. In general, according to internal sources, current production at the Orinoco Belt doesn’t even reach 1,000,000 barrels a day. Most of the reasons for this are related to political and financial risks that so far have no end in sight.

Specifically, these include: threats to personal security of foreign expats working in the country; increasing rates of delinquency and criminality; the ongoing political turmoil and the recurrence of strikes; public demonstrations by either government or opposition sympathisers; increasing levels of hunger; scarcity of basic food and healthcare products; and the many loopholes for foreign personnel working for international oil companies in Venezuela to get access to the local currency.

Altogether, these problems have caused many companies, previously interested in the Orinoco Belt projects, to keep away from Venezuela. To name the most prominent: Petronas, from Malaysia, left in September 2014; Lukoil, the largest private Russian oil company left in December 2014; and Petro Vietnam left at the end of 2015, not to mention PETROPARS of Iran, which left earlier. Exxon and Conoco, meanwhile, have been forced to leave their former projects due to the threat of having their assets nationalised and have taken their respective cases to the international courts.

With the ongoing persistence of political and security risks in Venezuela has come financial and economic turmoil, both at the macroeconomic and at the grassroots microeconomic level. There is also a painful lack of a stable and clear legal framework to fall back on amongst continuing government seizures of oil facilities and nationalisation of assets. These have made it incredibly difficult to keep up a healthy and sustainable level of oil and natural gas production in the country.

PROBLEMS AT HOME

Sustained political turmoil between  government and opposition parties striving for power, meanwhile, have guaranteed the decay of national oil company Petróleos de Venezuela (PDVSA) – whose production has plunged in the last decade to the point where it barely reaches 2,000,000 down from 5,000,000 barrels daily seen 20 years ago.

In general, the operational situation of PDVSA, the iconic company that has long been the financial tool of the Bolivarian Revolution, is worrisome. Far from a recovery, it is heavily indebted to creditors like China and Russia, to name the most prominent. Ironically, these ‘close allies’ have become, in some ways, reluctant to be involved in Venezuela’s situation and are angling for full payments of their debts to the administration under Nicolas Maduro. Recently, Russia decided to move to a restructuring of Venezuela’s debt to Moscow, which is around 3.5 billion dollars, a move based on geopolitical imperatives for the Kremlin. Russia is trying to sustain its only pawn close to the U.S., which is now in a totally different geopolitical landscape in the region, having steered to the right and substantially pro-Washington.

Internationally, Venezuela and PDVSA have not been able to fare well, even within OPEC. Because of its decaying oil production, it stopped being a force inside the oil bloc, as it once was. The Government is now heavily dependent on high oil prices to keep sustaining big spending on social programs and the continuation of the Bolivarian Revolution, led by current president Nicolas Maduro.

As for one of its main clients, the United States, even if Venezuela keeps on exporting around 750 to 800,000 barrels a day to the US, it falls short of the 1,500,000 barrels a day it was once shipping off to US ports and terminals. This is in no small part because of the longstanding political and ideological strife between the two countries. Now Russia and China have become the main allies and stakeholders of PDVSA.

With the US moving towards being a net shale oil and gas producer, the day that the US no longer needs Venezuelan oil at all could come sooner than expected. This will be a huge issue for Venezuela since the US has long been the biggest buyer of Venezuelan oil and also has refineries that are well-equipped for Venezuelan heavy and extra heavy oil.

But under the Trump administration, with Rex Tillerson as Secretary of State, the former CEO of ExxonMobil, there could be more of a bad taste in the US’ mouth: ExxonMobil was pushed out of Venezuela during Chavez’s rule, with its assets in Venezuela being nationalised and disputed through international arbitration.

This underscores the huge importance of political risk factors in Venezuela in the past and how it could factor in for the IOC’s still active in Venezuela. More importantly, this is sure to influence the upcoming political dynamics in the country and regionally in the Caribbean and South America, with Venezuela’s influence waning gradually in mechanisms it created under Hugo Chavez aegis. For instance, PETROCARIBE, which due to the myriads of operational problems of PDVSA, is no longer able to comply with the diverse quotas of shipments to the different Caribbean islands members, who the U.S. is trying to simultaneously influence now as an emerging natural gas and oil exporter. The changing landscape in South America with players like Brazil, Argentina Colombia, Peru, Ecuador and Guyana has the potential to displace Venezuela as a reliable oil producing and exporting country to the Caribbean and the U.S..

PDVSA- THE ROAD AHEAD

With problems and obstacles across the different stages of the value chain in its oil and gas business, from upstream to downstream operations with no exception, the need for a thorough restructuring of PDVSA has become urgent. It needs to undergo a wide set of reforms and potentially a privatisation in the case of a regime change in the country in order to overcome all the troublesome situations it has gotten pulled into.

In this regard, PDVSA needs to go back to its original purpose, to dedicate itself to the oil and gas business; rooting out corruption, bureaucracy, nepotism, conflict of interests that have existed for far too long in the industry. The PDVSA must delink political issues and preferences of the workforce from its skills and the direction of the company. In general, it must clear up the rules of the games for national and international investors in order to partner on the different projects in the country. To bring the PDVSA back to its original international standing as one of the top three energy companies worldwide, the systemic issues hindering its growth must be addressed.

Jose L. Chalhoub is an oil and political risk analyst based in Venezuela. He has over 13 years of experience in the Venezuelan oil and gas industry and now works as a freelance consultant and advisor on oil and political risks for businesses and investors. Mr. Chalhoub is a political scientist and with a Masters in International Politics and Oil Trading. He is also proficient in Russian, English, French and Arabic, along with Spanish as his mother tongue.

Please note that opinions expressed in this article are solely those of our contributors, not of Political Insights, which takes no institutional positions.

 

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