After defaulting on debt, Venezuela’s crisis continues to unfold, threatening to worsen the state-owned oil company’s production.
PDVSA reportedly told employees that they needed to carry out an austerity campaign, looking for ways to cut costs by 50 percent. The internal memo said that savings needed to be found amid the “national economic emergency” while avoiding any hit to the company’s oil production. Profits at PDVSA fell by 90 percent in 2016 compared to the year before.
But it is hard to see how the company can prevent a deeper slide in output after slashing spending to such a degree. Bloomberg reported that PDVSA is demanding financing plans from its joint venture partners, and that any projects will be halted if they do not receive financing. The memo included a long list of other cost saving measures: credit card use for employees will be limited, employees should use video conferencing instead of traveling; company vehicle use should be curtailed; and the use of electricity, water, cell phones, internet cards, computing gear and PR will all see reductions.
Venezuela’s oil production has been sliding for years, but the descent accelerated in 2015 amid low oil prices and a deteriorating cash position for PDVSA and the government. Production dipped below 1.9 million barrels in recent weeks, the lowest level in more than three decades.
The problems will only grow worse, especially because they tend to snowball. Without cash, PDVSA will struggle to import diluent to blend with its heavy oil – the result could be steeper production losses. Again, without cash, existing facilities cannot be maintained, likely leading to an accelerating pace of decline. An array of refineries are “completely paralyzed,” the head of an oil workers union told Bloomberg. Defaults on more debt payments could spark retaliation from creditors, which could eventually put oil exports in jeopardy.
In short, the woes in Venezuela’s oil industry contributed to the crisis, but the dire economic situation will accelerate the decline of oil production.
A group of analysts told Bloomberg that they expect Venezuela’s output to average 1.84 mb/d in 2018, a level that seems surprisingly optimistic given the pace of decline underway. Other analysts predict output will plunge much lower.
The austerity drive is not limited to PDVSA. Venezuela is ordering its embassies around the world to renegotiate rents at their diplomatic missions, hoping to squeeze some pennies out of every corner of the government. Some diplomatic personnel, according to Bloomberg, are owed several months’ worth of wages. Caracas is even considering shutting down some embassies for good.
Meanwhile, PDVSA is soliciting its joint venture partners to put up more financing for oil projects. “We are speaking to our allies, with our strategic partners, which are Rosneft, Eni, Repsol, Statoil, and they are willing to continue working with us, to continue financing our projects to boost crude and gas output in the short-term,” Cesar Triana, PDVSA’s vice president for gas, told Reuters.
PDVSA’s Cesar Triana said the company hopes to add 500,000 bpd in 2018 – a statement that seems pretty detached from reality. Most analysts see Venezuela’s production continuing to fall for the foreseeable future.
Without cash, and without access to the international bond markets, PDVSA is trying to find some arrangement to prevent oil producers and oilfield services companies from completely abandoning the country, a situation that would definitely lead to sharper production losses. Last year, PDVSA gave oilfield services companies like Halliburton and Schlumberger promissory notes in lieu of payment, an offer that the firms had little choice in accepting. PDVSA will likely try to double down on such strategies. “They remain in the country, working with us,” Triana said in an interview with Reuters.
Despite his confidence, the relationship between PDVSA and its partners is almost certainly deteriorating. In a separate report, Reuters said that the oil company is siphoning oil from its joint venture projects in order to supply its domestic refineries.
PDVSA ordered the Petropiar joint venture to turn over 45 percent of its oil output, a volume of oil that was supposed to be exported. PDVSA runs the project in conjunction with Chevron, and according to Reuters, did not offer Chevron any repayment. Reuters said that PDVSA has also diverted oil from joint ventures with Statoil and Total SA. PDVSA seems to be growing more desperate – the volume of oil diverted from the Petropiar project picked up in recent weeks, doubling from 1 million barrels in October to 2 million barrels in November, Reuters reported.
In a sign of how bad things are getting, President Nicolas Maduro ordered a purge at Citgo, PDVSA’s U.S.-based refining subsidiary, ostensibly to root out corruption, but likely because Maduro is looking for someone to blame. The government arrested 50 people, including Citgo’s president. “Money is running out, the economy is about to collapse and the government is looking for a scapegoat -- corruption -- ahead of what appears to be one the most difficult years in the Chavez era,” Diego Moya-Ocampos, a political risk analyst at IHS Markit, told Bloomberg.
By Nick Cunningham of Oilprice.com