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Oil production will remain stagnant because PDVSA has no money to finance investments, and foreign partners are unwilling to disburse 100 percent of financial requirements, experts say. (Photo: PDVSA)
Wednesday, February 19, 2014

PDVSA: More Production Declines

PDVSA is expected to see a production decline this year, following a fall last year, experts say.

Inter-American Dialogue 

Venezuelan state oil company PDVSA last December saw production decline to 2.45 million barrels per day, as compared to 2.9 million bpd a year earlier, according to a Bloomberg News survey, and has sought to import more oil as accidents cut into its refining capacity. Will production in the country continue to decline or will the pace of output pick up? Why? How are economic conditions in the country, including rising inflation and falling foreign reserves, affecting PDVSA's ability to operate?

David Voght, managing director of IPD Latin America: We estimate that Venezuelan crude production was roughly 2.75 million barrels per day at the end of 2013, though annual output averaged 2.85 million barrels per day. Production hikes in joint venture projects, including three major heavy oil efforts, were encouraging but not enough to fully offset declines in the country's western fields and in North Monagas. Unfortunately, PDVSA has not disclosed production numbers since the first half of 2013. This makes any responsible, independent estimate quite tricky without extensive, well-elaborated analysis. Nationally, we expect continued production decline in 2014. Last year's joint venture gains will not be replicated. A shortage of transport capacity and diluent for blending will restrain incremental extra heavy oil production. While PDVSA is currently negotiating big loans and worthwhile contract adjustments with some partners, the benefits will not be seen this year. Continued delayed payments to contractors and intricate greenfield project negotiations in the Orinoco Belt will result in status quo short-term production. Venezuela's macroeconomic situation appears to be spiraling out of control, making it harder for the oil industry to ignore fundamental and critical fiscal challenges that will make project finance increasingly complex. The government will be forced to look to PDVSA to provide dollars to fund growing imports. Without substantial devaluation and unpopular economic reform, PDVSA will have fewer resources to invest in its core activities. The cycle is a vicious one that demands the government's absolute attention and decisive action. At this time we note that such action does not appear to be forthcoming. 

Dan Hellinger, professor of political science at Webster University in St. Louis: Venezuelans should be concerned about tendencies in the oil sector and PDVSA, the state oil company. However, we should question the reliability of the Bloomberg claim because it is based on a survey of experts. Company figures always differ from surveys and also OPEC reports because exports and both of the latter exclude extra heavy oil from production figures. However, it would be a major surprise if December production, when released, met the goal of producing 3.25 million barrels per day (bpd) that Oil Minister Rafael Ramírez set in June 2013. It is not good enough for PDVSA to simply hold steady. Already, according to Ramírez's own estimates, Venezuela exports 310,000 bpd against loans, mainly from China, only some of which target boosting production. (Others support PDVSA's mission to support social and economic development projects.) Venezuela also discounts financing on oil exports to a number of hemispheric neighbors (including a number of poor communities in the United States). The largest of these programs, Petrocaribe, absorbs more than 200,000 bpd—counting the parallel arrangement with Cuba. Some revenue is recovered in barter trade and loan repayments; it would behoove Bloomberg occasionally to acknowledge Venezuela's contribution to the development and well-being of its neighbors. Still, the exports involved are earning less than full market value. Also, domestic consumption has crept close to 800,000 bpd, all produced at a loss. In short, Bloomberg is likely to have exaggerated the production decline, but the goose that lays the golden eggs is looking noticeably wan these days. 

Richard Obuchi, professor at the public policy center at IESA in Caracas, and Barbara Lira, both consultants at ODH Grupo Consultor: Since 2008, PDVSA has promised every year to increase production, but failed. We do not expect it to be different in 2014. PDVSA needs high investment, and recent events point to limited resources: financial debt increased from $15.5 billion in 2008 to $43.4 billion in 2013; accounts payable to suppliers also increased; and in 2013, PDVSA tried to reach agreements with partners—in cases such as Chevron's—to receive loans 'attached' to production. These agreements are probably trying to substitute the issuing of regular debt, since financial costs are now higher due to perceived risk of the company and the country. PDVSA's available resources are also lowered by the supply agreements it keeps with China, Petrocaribe and others, which do not entirely add to cash flow. Also, PDVSA has to deal with the burden of some social expenses, but currently its biggest burden is to supply almost all the currency the republic needs. Oil represents 96 percent of exports, while Venezuela has become increasingly dependent on imports—since the government built a hostile environment for local private production. The government has total control of all currency allocations and keeps the official exchange rates considerably below the black market rate, so there are few incentives for any other sources of currency besides oil to emerge. With high inflation and scarcity, the craving for currency for imports just increases, and resources required for production-related expenses (like paying suppliers or maintenance) take second place.

Gustavo Coronel, member of the founding board of PDVSA: The true extent of the collapse of Venezuela's petroleum industry is still little understood by the public. Not only has oil production declined by about 500,000 barrels per day since Chávez took power, but PDVSA's strategic plan structured by the pre-Chávez management that would have increased oil production to 5 million barrels per day by 2012 was never executed. In 2012, PDVSA imported an average of 85,000 barrels per day of refined products from the United States at a huge loss, since these imports are essentially sold in the domestic market at minimum prices. Venezuelan refineries today operate at around 75 percent capacity. Oil production will remain stagnant because PDVSA has no money to finance investments, and foreign partners are unwilling to disburse 100 percent of financial requirements. Most new production would have to come from the heavy oil deposits of the Orinoco River region, but this oil needs deep conversion refining to be commercial. These installations are quite expensive and take years to build. In the last 15 years none have been built. Reluctance of foreign partners to invest has two components: distrust in PDVSA's management capabilities and the extremely volatile political and financial environment in the country. The government is barely hanging on. It is not only that inflation and falling foreign reserves are affecting PDVSA's ability to operate but, conversely, it has been PDVSA's inability to operate during these last 15 years that has generated the economic collapse of Venezuela. The snake is now biting its tail. 

Asdrúbal Oliveros, director of Ecoanalítica in Caracas: The need to increase production is almost desperate. Defending higher oil prices at the sake of production became the core of the government's energy policy after Hugo Chávez took power in 1999. However, the higher rent collection didn't translate into core investments, which has negatively affected production capabilities, with oil production falling from 3.33 million barrels per day (mb/d) in 1998 to 2.91 mb/d in 2012. The restructuring of PDVSA after the oil strike in 2002 added a new element to energy policy: contributions to social development. These increased contributions at times have been greater than the core investments in the company itself, which resulted in a production drop and, therefore, an increase in indebtedness. Although hopes were placed in the oil belt's potential to produce, the fact is that between the production drop in the east and the heavy oil secondary recovery issue, crude oil production in that zone continues to decline. Last year, according to PDVSA reports, production in the east fell 4.1 percent and, in the oil belt, it fell 3.2 percent. Things don't look any better for 2014. Although Oil Minister and PDVSA President Rafael Ramírez has hinted at the possibility of revoking contracts with companies that don't increase production, the oil belt appears to be stagnant. Given all of the above, we would expect Ramírez to continue going to capital markets and trading partners like China for resources, which will increase the financial pressure on the partners of mixed companies. In general, in the present economic framework, we could say that supporting the state apparatus has become a very heavy burden for PDVSA. The stagnation of oil prices has led to an urgent need to increase oil production, given the constant fiscal needs, while the state company is tied to an over-valued exchange rate, high debt levels, and agreements like Petrocaribe, which reduce its income. A true restructuring of the nation’s oil policy is necessary to allow PDVSA recover its position as a company devoted to production.

Republished with permission from the Inter-American Dialogue's weekly Energy Advisor



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