Energy Insight: Venezuelan oil

Venezuela has the largest proven oil reserves in the world (according to the IEA, BP, EIA and OPEC) so why are they in such financial difficulties?

This Energy Insight aims to give a very brief overview of the situation of the oil industry in Venezuela.

Reserves

Source: OPEC Annual statistical bulletin 2019
(Note - OPEC's list differs from the BP Statistical Review of World Energy.  Canada does not appear in OPEC's top 20 as Canada's tar sands are not included)

Venezuela’s proven reserves have tripled since 2007, in part due to the discovery and exploration of the very heavy crude oil reserves in the Orinoco Oil Belt.  Unfortunately for Venezuela, there is a greater worldwide demand for lighter crudes, and Venezuela has to import lighter liquids to mix with their heavy crude (although export of these from the USA was banned by executive order in January 2019) in order for it to find a market.

Source: OPEC annual statistical bulletin 2019 

Production

Almost coinciding with Venezuela’s increase in reserves, came a steady decrease in their crude oil production.  The Venezuelan oil industry is considered to have been mismanaged, there is a lack of experienced workers and managers, investment levels have fallen, and payments have been missed to service companies.

The decrease in Venezuela’s crude production was the major reason that total OPEC production reduced in 2017. Venezuela has been a member of OPEC since its founding in 1960.

Venezuela's oil production continues to decline and the International Energy Agency (IEA) expects Venezuela’s oil production capacity to drop by nearly 700,000 b/d by 2023.

Source: OPEC annual statistical bulletin 2019  

Refining

Source: OPEC annual statistical bulletin 2019  

All the refineries are owned and operated by the state owned Petroleos de Venezuela SA (PdVSA).

Refinery throughput and output of petroleum products have declined in line with the drop in crude production.

Despite the fall in demand for oil, and persistent economic problems, Venezuela has been forced to import crude and petroleum products, because domestic demand growth outpaces domestic supply and oil refining investment. As stated above, lighter crudes have also to be imported to mix with the heavy Venezuelan crudes, to make them marketable. 

Investment

The cut in production, according to the IEA, was greatly due to lower investment.  

China is still a major investor in Venezuela.  They have loaned them over $50bn over the last ten years, which they are having difficulty in getting them to repay.  Trust has also been lost as PDVSA , the state oil company, is being sued for unpaid bills by the American subsidiary of Sinopec.

Venezuela has also “skipped payment on nearly $4 billion in bonds” since November 2017.

Venezuela’s unilateral re-writing of heavy oil contracts in 2015 didn’t help.

PDVSA owes Russia's Rosneft $3.1 billion for loans, despite repaying $500 million in the third quarter of 2018.  Rosneft has stakes in various oil projects in Venezuela.

Sanctions

The US has imposed sanctions on Venezuela since 1959, but has not placed a complete embargo on oil imports.  However, US refineries have been reducing the amount of Venezuelan oil imported, thinking that the Trump administration might impose a full embargo at any time.

In January 2019 US  sanctions were strenghtened banning the export of petroleum products to Venezuela.  Also, although Venezuela is not banned from exporting to the US, any payments made to PdVSA for petroleum or petroleum products have to be "placed into an escrow account inaccessible by the company"

Despite the sanctions, in January 2019 five US companies were granted licenses by the Trump administation to operate in Venezuela - Halliburton Co, Schlumberger, GE's Baker Hughes, Weatherford International and Chevron.  The first four have largely ceased opeations, but Chevron, whose license expires on 3 July 2019, hopes their license will be renewed thus protecting their, over $2.68 billion, investmants in Venezuelan oil and gas joint ventures.

Following the election of Maduro as Venezuelan president in May 2018 the USA forbade the purchase of debts owed by Venezuela, including those of PDVSA.

On 20 August 2018, PDVSA reached an agreement with Conoco to pay the $2 billion awarded in April for assets nationalized in 2007.  The settlement will allow exports of Venezuelan crude to ship again from the Caribbean. $2 billion is about a quarter of Venezuela’s international reserves. 

Source: OPEC annual statistical bulletin 2019 

Finance and economic situation

Oil revenues account for almost all export earnings and nearly half of the government’s revenue, so the decline in oil production, coupled with the drop in the price of oil on world markets, has only added to the economic crisis.

The news continues to be full of stories of political and social unrest. The Venezuelan capital Caracas has been ranked the top, or near the top, murder capital of the world for several years.  In 2016 the International Monetary Fund (IMF) forecast that the inflation rate could reach 750%, but by October 2018 was forecasting Consiumer Price inflation at 10,000,000 per cent. for 2019 but by May 2019 this estimate was being reduced to 99,900% by some commentators such as Bloomberg

Venezuelan oil in a nutshell

Source: OPEC annual statistical bulletin 2019 

Further reading

Policy and measures – Venezuela  International Energy Agency

Venezuela’s crude oil production declines amid economic instability USA Energy Information Administration (EIA) 13 March 2018

Venezuelan crude oil production falls to lowest level since January 2003.  USA Energy Information Administration (EIA) 20 May 2018

Troubled times - The contraction of global markets and resulting lower oil export revenues has heightened the levels of protest, militancy and terrorism in a number of producing countries. Nigel Bance examines the issues in Nigeria and Venezuela. Petroleum Review, Sep 2016 pp14-15

CIA World factbook – Venezuela  Central Intelligence Agency

Venezuela facts and figures  OPEC