Week 20 to 24 April 2020
Summary of the week.
The week closes with a modest recovery in the price of oil after the impact suffered by the oil market on Monday, April 20, when the price of WTI, the US oil reference, traded at negative values for the first time in history, at -$36.98 a barrel, a reduction of 259% compared to Monday, April 13. Brent, the European oil marker also suffered a significant fall, although it did not reach negative values, it was quoted at $17.36 a barrel, 46% with respect to the previous week.
As we explained in our Special Bulletin of the same April 21, “the fundamental reason for this phenomenon is linked to the fact that traders left their contracts early in May because there was not enough demand or storage capacity for oil.” We also pointed out that this unusual fall was suffered by WTI “basically because there is no storage capacity in Cushing, Oklahoma, a U.S. oil storage “hub”, whose inventories are based on the price of WTI, which is then quoted on the NYMEX.”
Likewise, we point out about the market’s “short-term outlook” that “although futures prices for May are in negative values, for June and July prices are being estimated for WTI at 15.55 dollars a barrel and 23.3 dollars a barrel, respectively, and for Brent at 20.46 dollars a barrel and 24.93 dollars a barrel, respectively.”
The market and the price have been behaving in the way we expected. Today, we will review the effect this situation has had on market fundamentals: price, supply, demand, and inventories of crude oil and products, as well as the implications this situation is having on the market and its fundamental players.
Likewise, we will make our customary review of the oil situation in Venezuela, where the sector, already affected by a severe crisis of governance and destruction of operational capacities, reflects the collapse of the refining system and oil production, which is now greatly affected by the fall in the price of the main export segregation, Merey crude, and by the new restrictions of the U.S. administration and OFAC on U.S. companies operating in the country.
As of today, Friday, the WTI closed trading at $15.89 per barrel, showing a 142% recovery from its opening value on Monday, when it suffered the historical collapse, so the average price for the week was $3.52 per barrel. The WTI is, thus, close to the values of $18 a barrel that mark the futures for June.
WTI fall xxxx
Brent crude oil stood at $20.85 a barrel showing a recovery of 20%, compared to its price on Monday, April 20th, so the average price this week was $17.36 per barrel.
The performance of oil markers has been downward since the OPEC+ agreement of April 9th, 2020, when it was agreed to cut 9.7 million barrels of oil a day from production. The market reaction has been downward, showing a 27% drop for WTI and a 35% drop for Brent, relative to that day’s price.
Concerning the prices at the beginning of March, before the OPEC+ meeting, both references, the WTI and the Brent, are at a price 59% lower than on that date when the failed meeting took place.
Oil demand continues to be severely affected by the global economic downturn and by the massive restrictions on travel, transportation, and movement in the world’s largest economies due to COVID-19.
Major market monitoring sources such as OPEC, the International Energy Agency, as well as the US Energy Information Administration, agree that demand by 2020 will drop by as much as 9 million barrels per day, according to the IEA.
Both OPEC and the IEA agree that the April date may be up 20 to 30 million barrels. This would leave only a margin for demand recovery for the third and fourth quarters of the year. This scenario will depend fundamentally on the lifting of restrictions on movement and transport in the large industrialized economies of Europe, the United States, and Asia, affected by the Covid-19.
As we have already pointed out in our previous reports, the production cut agreed by OPEC+ has been insufficient and late.
Insufficient because the drop in oil demand, at least in the second quarter, far exceeds the 9.7 million barrel oil cut.
Late because they have run two months, March and April, with an overproduction of oil that has flooded the market with cheap oil that has no demand, so those volumes go to commercial stocks and strategic reserves in consuming countries around the world.
In other words, the second quarter of the year, which has seen the greatest drop in demand for oil, coincides with the period of production of greater volumes, especially due to the so-called “price war” announced by Saudi Arabia and other countries of the Persian Gulf.
OPEC production for the second quarter
If the production cut of 9.7 million barrels per day agreed upon by the OPEC and non-OPEC countries is strictly adhered to, it means that the OPEC countries (excluding Iran, Libya, and Venezuela) will be producing 23.4 million barrels per day by May and June. But during April, it is estimated that OPEC, mainly due to overproduction by the Gulf monarchies: Saudi Arabia, Kuwait, and the United Arab Emirates, was producing 3.2 million barrels of oil per day over its March production of 28.6 million barrels per day, reaching an OPEC production of 31.8 million barrels per day in April. This would give an average OPEC production for the second quarter of 26.2 million barrels per day.
Excess of Oil
This indicates that, according to estimates made by OPEC and the IEA for the organization’s demand for crude oil, or the so-called “call on OPEC,” for the second quarter of the year, there will be an overproduction of oil in the market of 6.5 million barrels per day according to OPEC and 17.7 million barrels per day according to the IEA, excesses that will go to oil storage, building more inventories in the second quarter of the year.
The Russian Federation’s oil production has remained stable at March production levels of 11.5 million barrels of oil per day, according to information provided by the Russian energy ministry.
According to the OPEC report of April 15, 2020, Russian oil supplies are expected to decline by 1.38 million barrels per day to an average of 10.14 million barrels, revised downward from the March assessment. Russia will make a cut of 2.5 million barrels a day of oil, the bulk of the non-OPEC production adjustments.
Russia’s crude oil production, which has been free to pump at will since April 1st after the collapse of the previous OPEC+ agreement, has remained stable in April because, as Energy Minister Alexander Novak said earlier this month, Russia sees no point in increasing production given the global oil surplus.
Oil production in Russia appears to have been stable for some time now, especially in its already developed fields, where production and lifting costs, according to accounting information of the main producing companies presented to the IFRS for 2019, the average production cost in Rosneft was US$ 3.80 per oil, in Lukoil US$ 3.59 and in Gazprom Neft US$3.78.
One element that may strike Russia in the medium term is its relatively small storage capacity with only eight days of tank cover. Although, it has many more alternative storage options, such as pipelines, ships, trains, as well as commercial storage rented from other parts of the world.
Production in the USA
In our previous bulletins, we stated that the United States has taken the place of the first oil-producing country in the world, with a production of 13 million barrels per day, which gives it an extraordinary strategic advantage, not only because of its energy independence but also because of the possibility of influencing the international oil market with its capacities. We also point out the weaknesses of this advantage, above all, because of the high production costs of North American oil, Shale Oil in particular.
The U.S. can sustain that strategic advantage that is in dispute at the moment. The Americans, the Russians, and the Saudis all know this very well.
That is why President Trump has been determined to demand an end to the price war between Russia and Saudi Arabia, pressing for an OPEC+ production cut agreement and acting, as in the case of Mexico, to get other countries to cut back on their production. All this without the U.S. having to make any sacrifices.
However, the collapse of the WTI price, just the U.S. oil marker, has been a tremendous blow to U.S. production and evidence that the impact of the collapse of the oil market was either not anticipated or was underestimated. Some Texas producers requested the Railroad Commission to reduce excess supply or provide additional storage capacity which caused the Cushing Oklahoma’s operational storage capacity to peak, causing the WTI to fall to negative levels.
The U.S. Energy Information Administration, in its April 22nd report, had already estimated that, as a result of the price collapse, the U.S. would lose 2.9 million barrels a day of oil production, making the country a net energy importer again by 2022.
U.S. production is being impacted with prices below $15 a barrel, which is causing a massive shutdown of production wells and a drop in drilling activity.
Some estimates, such as Evercore ISI’s, indicate that, by the end of June, a temporary shutdown of up to five million barrels a day of U.S. production may be noted. Operators in the U.S. are abandoning “fracking,” withdrawing an average of 30% of the drills in operation.
The characteristics of Shale Oil production and the use of fracking complicate the picture for North American production, as these decline at a rate of 60% per year. This indicates that the lost production must be replaced by new wells drilled.
Some analysts, such as the IHS Markit Energy Expert, based on its latest PumpingIQ report, estimate that U.S. production could fall even more than EIA estimates, with a decline to 10 million by the end of this year, and about 8.5 million by 2022.
On the other hand, the debt of the North American energy sector has grown enormously, rising to $190 billion, an increase of $11 billion in one week, so some companies have made budget cuts that, together, reach $31 billion in drilling activities.
In general, the oil and energy production sector in the country is key to the U.S. economy, not only in terms of employment, which provides about 1.1 million, but in the benefits of having domestic production, safe supplies, and low cost for the revival of the U.S. economy.
In this scenario, oil producers have the advantage of having an administration in the White House that has no commitment to reducing emissions into the environment, nor to seek alternatives to fossil fuels, oil, gas, and coal.
At this juncture, President Trump has not only lobbied internationally for further production cuts by OPEC+ countries but has also threatened Saudi Arabia and other oil exporters to impose tariffs on oil imported into the U.S.
Through the Department of Energy and the Treasury, the administration has developed initiatives to try to stop the decline in U.S. oil production. During the week, President Trump announced the decision to purchase up to 75 million barrels of U.S. oil to be stored in his strategic reserves.
President Trump, likewise, promised to make funds available to the country’s oil companies with a plan being considered by Treasury Secretary Steven Mnuchin that could create a showdown with Democrats in Congress, who have warned that they are against any financial aid to oil producers.
On the other hand, the Independent Petroleum Association of America wants the Federal Reserve to allow oil companies to use loans under the Main Street program to pay off existing debt falling due amid the crisis.
As we have stated previously, the excess oil, coupled with the drop in demand has caused inventories to rise to record levels, restricting the ability to continue to receive oil at the rate it has in this second quarter, and as a result, traders are not taking any more contracts, causing prices to drop, even to the historic levels we saw this week.
As storage is reaching its limit, physical deliveries in the US have been severely restricted, and the pipeline or Cushing storage facility does not have the capacity to lease or store uncommitted oil. The EIA reported that in the week ending April 17, the Cushing storage facility reached 60 million barrels (79% of its capacity), and US refinery operations dropped to 12.8 million barrels per day, 4.1 million barrels per day less than the same date last year.
Upload Inventory in the U.S.
U.S. refineries could lose up to $3 per barrel of gasoline processed in March and April, according to Rystad’s report, in light of the collapse in demand and the overflowing storage of this fuel. The agency reported that gasoline storage will reach its limit by the end of May.
The same situation exists worldwide. The world’s oil storage companies, such as Royal Vopak NV in Rotterdam, are almost out of storage capacity.
The storage of countries, in this scenario of collapsing demand and overproduction of oil, tests the capacities and flexibilities of the large economies to manage in this situation. In large consumers, such as India, the collapse of oil demand has caused inventories to be at maximum levels.
The shortage of storage capacity has led operators and traders to resort to using oil ships as floating storage facilities, pipelines, trains, and anything else that is available to store oil and products. The use of floating storage has triggered the cost of shipping, as ships are being used as storage.
The impact on the oil market of the collapse in demand and the overproduction of oil in the second quarter of the year will depend, among other factors, on the national storage capacity of each of the major oil-consuming or oil-producing countries. Those with longer days of coverage will be able to take advantage of cheap oil or have greater flexibility so as not to affect their oil production to any great extent, while the market disruption lasts.
Chart of internal storage coverage days
Source: IHS Markit
Chart of internal storage coverage days
Source: IHS Markit
The World Trade Organization (WTO) reported, in its Situation Report — 95 of April 24, 2020, that the number of confirmed cases worldwide reached a total of 2,626,321, resulting in 181,938 confirmed deaths. Europe remains the region with the most confirmed cases, with a total of 1,284,216. The number of cases in the United States continues to rise rapidly, with a total of 830,053 confirmed cases and 50,000 deaths, figures that are hitting the country, especially in New York City.
According to the International Monetary Fund’s April 2020 report, the world economy will be in recession by 2020, which continues to make it unlikely that oil demand will be restored to its levels in March.
Global economic growth is projected to be -3% in 2020, a much worse outcome than that of the 2009 global financial crisis. The growth forecast is down by more than six percentage points from the October 2019 update of the World Economic Outlook and the January 2020 update.
Growth in the group of industrialized economies that have experienced widespread COVID-19 outbreaks and deployed containment measures is projected to be -6.1% in 2020, with most economies in the group contracting this year, including the United States (-5.9%), Japan (-5.2%), the United Kingdom (-6.5%), Germany (-7%), France (-7.2%), Italy (-9.1%), and Spain (-8%).
In China, indicators such as industrial production, retail sales, and investments in fixed assets suggest that the contraction of economic activity in the first quarter may have been around 8% yearly. Even with a strong rebound in the remainder of the year and considerable fiscal support, the economy is expected to grow at a moderate pace of 1.2% in 2020.
On the other hand, the dramatic decline in oil prices since the beginning of the year has affected the short-term economic prospects of oil-exporting countries, where the group’s growth rate is expected to fall to -4.4% in 2020.
The depth of the economic damage caused to countries highly dependent on oil revenues will have to be assessed since it could compromise, not only the economic and social stability but also the political and governance stability of many of them that have already been experiencing severe problems before this price crisis.
Europe is finally making more determined progress in supporting the countries in the group most affected by the economic impact of the COVID-19.
After strong questioning of the European Union’s lack of solidarity and agility in dealing with the pandemic, it seems that obstacles are being overcome to take decisions more broadly and quickly, during a global crisis that requires it; an unprecedented situation that tests all world leaderships and will produce a major redefinition of the importance and weight of the various geopolitical blocs.
European Union leaders have agreed to set up a fund that could raise at least EUR 1 trillion to rebuild regional economies devastated by the coronavirus pandemic.
“This fund will be of sufficient magnitude, targeted at the most affected sectors and geographical areas in Europe, and will be dedicated to addressing this unprecedented crisis,” the leaders of the 27 EU countries said in a statement after meeting by video conference on Thursday.
EU government leaders asked European Commission officials to submit “urgent” detailed proposals that include how the recovery fund relates to the bloc’s budget for 2021–2027.
The EU is planning to expand its budget from around 1.2% to 2% of GDP and then to use these additional funds as guarantees for low-interest loans on the financial markets.
Governments across Europe are trying to soften the economic blow of the virus with unprecedented stimuli, and on Thursday signed a $540 billion plan to support businesses and economies from the immediate consequences of the coronavirus.
EU leaders also signed an immediate rescue package worth at least 500 billion euros that was drawn up earlier this month by finance ministers. The package includes up to $100 billion in wage subsidies to prevent mass layoffs, as well as hundreds of billions in loans to companies and credit for EU governments.
The International Monetary Fund expects the EU’s GDP to fall by 7% this year, and the latest data suggest that economic activity in March and April may have plummeted by 20–30%.
The European Central Bank will increase the purchase of emergency bonds in the coming months to increase support for the region’s economy which ECB President Christine Lagarde sees reduced by up to 15% this year.
Amid the controversial debate on financing a rescue package for the eurozone, the European Central Bank also took action, saying it would accept some low-quality debt as collateral for loans to banks.
The American administration of President D. Trump, in what has been the exercise of a Keynesian policy to intervene in the country’s economy during this severe crisis and recession, has approved massive economic aid for both companies and the population in an attempt to keep productive capacities afloat, prevent business failures, protect jobs and keep the public with some capacity to demand products.
It has been a process of intense pressure and negotiations with Congress, which at some point seems like a desperate race by President Trump to maintain his chances of being re-elected for a new term in the coming elections as well as keeping the country in a position to continue leading the world economy, with China recovering more quickly from the effects of COVID-19 and Europe paralyzed by the pandemic.
The Trump administration has allocated approximately $881 billion of the major components of the pandemic aid package signed a month ago, and last Friday signed an additional half-billion dollars approved by Congress for the economy.
The Treasury Department was responsible for distributing, through multiple channels, almost half of the $2.2 trillion Coronavirus Economic Assistance, Relief and Security Act.
This Friday, President Trump signed into law the law already approved by Congress for another $484 billion in bailout money, including replenishing assistance to small businesses, helping hospitals and funding virus testing.
About 20 percent of the stimulus, or $454 billion, was given to Mnuchin, Secretary of the United States Treasury, to be used as support for the Federal Reserve’s lending facilities to leverage more than $4 trillion to help stabilize financial markets through targeted lending to businesses and local governments.
The Federal Reserve could keep interest rates near zero for three years or more, and its balance sheet will soar above $10 trillion as policymakers try to revive the U.S. economy from recession.
The Federal Reserve will also soon launch a series of credit facilities — with the capacity to lend billions more — designed to help businesses, states, and cities directly and indirectly.
But as these massive economic and financial aid packages come closer to trying to moderate the impact of the crisis on the U.S. economy, unemployment continues to rise.
Last week, more than 4 million people applied for unemployment benefits, bringing the total to 26.5 million unemployed in five weeks during the coronavirus pandemic.
US Unemployment Benefits Claims Chart
US Unemployment Benefits Claims Chart
Most states continued to see declines in initial unadjusted claims, and several states reported declines in layoffs from the previous week — both signs that job losses are slowing somewhat. Government assistance to small businesses may encourage some employers to restore jobs in the coming months.
Applications could continue at an extraordinary pace for several more weeks, although the latest figures suggest a potential unemployment rate in April of around 20%, as Thursday’s data reflects the reference week for the monthly employment report. This level of unemployment had been pointed out by President Trump as a “catastrophic and denied scenario” for the country.
That’s twice the 10% peak has been reached after the last recession in 2009 and is approaching the levels last seen during the Great Depression.
The second economy in the world, and the first oil importer, begins to recover slowly from the effects of the COVID-19 with the lifting of restrictions on movement and the reactivation of its economic apparatus.
According to official data from China’s National Bureau of Statistics (NBS), the country’s economy suffered a historic contraction in the first quarter, with gross domestic product falling by 6.8% compared to the same period a year ago, while investment fell by 16% in March, the industrial contraction in March stood at 1.1%.
This year’s GDP expansion is considered the slowest since 1976, according to the National Statistics Office.
As the world economy is likely to suffer its worst downturn since the Great Depression, China will have difficulty recovering from the first-quarter downturn. Economists estimate that the Chinese economy expanded by only 1.1% in the second quarter, before making a stronger return in the last half of the year.
To help mitigate the coronavirus crisis, China is resorting to monetary policy changes and financial stimuli.
The Central Bank of China refinanced some of the funds planned for Friday and cut interest rates on loans, the latest in a series of measures aimed at ensuring sufficient liquidity.
The People’s Bank of China injected $7.9 billion into the banking system through the medium-term credit line, just as 267.4 billion yuan of debt was due. The one-year financing was offered at an interest rate of 2.95%, down from 3.15% in the last operation in January. Analysts expected a cut after the central bank reduced the rates on some of its other policy instruments to record lows.
A series of measures in recent months have kept liquidity plentiful to support China’s weakened economy, and last week’s data shows the first contraction in decades in the first quarter.
For its part, the government is expected to sell between three trillion yuan (US$424 billion) and four trillion yuan of debt, more than last year’s total of 2.15 trillion yuan.
This economic crisis is testing the leadership and responsiveness of the Chinese government, which has greater decision-making capabilities and discipline of its workforce. Additionally, the COVID-19 was very localized to certain regions of China, so there was no need to impose restrictions on manufacturing any industrial activity to the rest of the country, as has happened in Europe and the United States.
The country continues to be shaken by the collapse of the economy and the oil industry; political and social destabilization; and shortages of fuel, gas and petrol, electricity, water, inputs, medicines, and food. In addition to this catastrophic scenario, there is Covid-19 and the collapse of oil prices.
The country is in a pre-conflict situation, with a lot of social tension and no possibility of activating the political mechanisms to resolve the crisis. Venezuela could be the first oil country to be immersed in a deep process of destabilization.
With an economy in recession, an accumulated fall of 63% of the GDP since 2015, shaken by hyperinflation and the devaluation of the bolivar (this week the exchange rate reached 1 dollar = 200,000 bolivars), which places the minimum wage at 1.25 dollars/month, the government has imposed a total quarantine, as a way of keeping the movements of the population restricted in the face of an acute shortage of fuel for internal consumption.
Throughout the week there have been acts of violence in the interior of the country, the areas most affected by food and fuel shortages, where the population has taken to the streets to loot, clambering for food amid the quarantine. The government’s response has been violent, using both the police and military forces, as well as armed civilian groups.
How the drop in price affects Venezuelan crude oil
Because Venezuelan crude oil is produced in the Atlantic basin, where its natural markets are located, and above all, because heavy crude oil such as Merey crude is the only crude oil being exported, the price of Venezuelan crude is indexed to both WTI and Mexican Maya crude (the benchmark index for heavy crude).
This has been going on forever. When Venezuelan oil has other markets, such as the Asian or European markets, then the markers become Brent or Singapore, with the appropriate quality adjustments.
Regardless of whether the government has eliminated pricing for the sale of our oil using WTI-referenced price formulas, the market will continue to take the Mayan crude oil, Mexican heavy crude oil, the main price reference in the Latin American region, which is in turn referenced to WTI, to price our heavy crude oil.
Therefore, given the lack of information from the government and the lack of control of the sale prices of our oil, after the closing of the price control office of the Ministry of Oil in Vienna, a good estimate to know the quotation price of our Merey segregation will be the quotation of Maya crude.
The quotation of Maya crude.
This week, the Mexican basket is quoted at $7.19 per barrel, a decrease of 105% over the previous week’s prices of $22 per barrel. On April 21st it reached its lowest price with -2 dollars, a variation of 400% over the previous day, according to the report of OilbMex agency.
These values, assuming that the massive price discounts that have been referred to by analysts and traders are not taking place, place the price of Venezuelan crude below the production costs of the most expensive segregations of production, such as the traditional areas in both the west and the east of the country, the latter inflated by the over-costs of the oil service contracts.
This indicates that Venezuela’s future and possibilities of sustaining or even increasing its oil production are concentrated in the Orinoco Oil Belt, as long as the diluent for well injection and transportation can be guaranteed, as well as the operability of the oil improvers in Jose, to produce improved oil segregations of better quality and price.
Otherwise, the oil produced in the Oil Belt would be sold as crude oil mixed with naphtha, called Decom, which is marketed at a much lower price than the market, which would make its production equally unviable.
The country continues to suffer from a severe shortage of fuel, gasoline, diesel, and gas, mainly due to the collapse of our refinery system due to government mismanagement, persecution of managers and workers, and the diversion of resources for operations, maintenance, and expansion of the refinery system. So our fuel production capacities of 13 million barrels a day of our national circuit have collapsed, with the subsequent fuel shortages that have affected the country for two years. These shortages have become more acute since the beginning of the sanctions against Rosneft Trading, which prevented the government from continuing to import fuel shipments in the way it had been doing.
The government will continue to import fuels using traders and all kinds of intermediaries, but the problem will be solved as our national refinery complex is reactivated.
As we mentioned in our April 10th Oil Bulletin, the problem of fuel shortages is not only a problem of the national refining system, it is a consequence of the collapse of the whole PDVSA and the national oil sector.
The government has been trying since last week, erratically, to advance the recovery of some capacity in our refineries. The networks announce the possible reactivation of the Catalytic Cracking Unit of the El Palito refinery, which could produce at least 35 MBD of gasoline for the national market, using spare parts and equipment extracted from the Paraguaná refinery complex. This operation, as we have mentioned, has its risks associated with the disparity of technologies and operations of our refineries.
However, during the whole week, when the refinery was supposed to be in operation, in the face of the silence of the authorities, the workers finally reported that the unit could not go into operation due to technical problems.
On the other hand, it is rumored that aircraft from the Islamic Republic of Iran have arrived at the airport of the stones in the Paraguaná peninsula to support the reactivation of operational units of the Paraguaná Refinery Complex, providing equipment, technicians, and catalysts for the production of gasoline.
Once again, in the face of the silence of the authorities, all kinds of rumors have been spread about the objective of these flights, until the Deputy Minister of Refining, Erling Rojas, touted his gratitude to the Islamic Republic of Iran for the support it is giving PDVSA in its attempt to put into operation the units of the Paraguaná Refining Complex, the PRC’s Colossus, to produce fuel in the country.
However, the deputy minister of refining was dismissed by the same mature president on April 23rd, most probably for breaking the government’s secrecy regarding management that should be facing the country.
The government brings technicians, equipment, and chemical inputs that can be obtained in any oil-producing or industrialized country such as Russia, China, India, or Iran itself, as long as they are compatible with the technology handled by our process units in the refineries.
But the technical teams that are now being sought on the outside, in absolute secrecy, are either imprisoned by the government or persecuted, are the best technicians and managers, with experience and knowledge in handling the technologies and operations of our Refining Complexes, the CRP, the largest in the world.
The collapse of oil production
As we extensively indicated in our last bulletin of April 18, oil production in the country has collapsed from 3,011 million barrels at the end of 2013, to 660 thousand barrels per day in March 2020, as reported by OPEC in its last report of the 15th of this month.
A drop of 2.4 million barrels per day of production in seven years of poor management of the sector and persecution against PDVSA’s workers and managers that have decimated its technical and managerial capacities, in addition to a diversion of the company’s resources that is reflected in an operational collapse of the industry and a drop in oil, gas, and fuel production, as well as drilling and oil service activities.
In the last seven years of its administration, the government has carried out a de facto privatization of the oil activities reserved by the Constitution for the Venezuelan State, through PDVSA, in its article 302 and the Organic Law of Hydrocarbons in force.
However, in a series of decrees and sales decisions, PDVSA’s oil production has been transferred to Oil Services operators, as well as, through the Mixed Companies, to which PDVSA has transferred its operations.
Thus, by March 2020, 84% of the country’s production, located in 660 MBD of oil, is in private hands and only 16% is operated directly by PDVSA.
The OFAC licenses.
On April 21, the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury extended the operating licenses of U.S. oil companies operating in the country.
An extension conditioned on not participating in any way in operations that allow the production of oil in Venezuela, nor the commercialization or lifting of oil barrels in the country. Basically, the license allows these companies to stay in the country, but without operating, just maintaining their presence and preserving their investments.
The U.S. companies subject to these restrictions are Chevron Corporation, Halliburton, Baker Hughes GE Company, and Weatherford International Public Limited Company. One production company and three drilling, boring, and service companies remained in the country.
What are the implications of these sanctions for oil production?
Chevron is operated in Venezuela as a joint venture between PDVSA and Petroboscán in the state of Zulia, in the west of the country, and Petropiar, in the Orinoco Oil Belt, in the east of the country. The company is also affiliated with PetroIndependencia, but the partnership is not operational.
Petropiar and PetroBoscán produce 110 MBD and 69 MBD, respectively, representing 31% of the Orinoco Oil Belt’s production (352 MBD) and 50% of the western production (138 MBD).
That is to say that Chevron alone produces 179,000 barrels of oil per day in the country, which represents 27% of Venezuela’s total production (660,000 barrels per day).
OFAC’s sanctions on Chevron are total, so PDVSA would need to take charge of Venezuelan oil production, which is contemplated in the contracts signed by the Mixed Companies and approved by our National Assembly at the time, precisely to preserve the country’s oil production from any decision or situation that affects the operations of the private sector in Venezuelan territory. The big question is, will PDVSA be able to assume and maintain the oil production envisioned by the mixed companies, solely relying on its own efforts?
However, in addition to the suspension of Chevron’s production in Venezuela, there is another event that has gone unnoticed but complicates the picture of the situation.
On March 28, Russian giant Rosneft announced that it was terminating operations in Venezuela, and selling assets linked to its operations to an unidentified Russian company.
However, this sale is illegal under our Organic Law on Hydrocarbons, which establishes that any change in the contracts signed by the Mixed Companies must be authorized by both the National Executive and the National Assembly. Rosneft’s departure opens up a new debate in our country: what will happen to Rosneft’s production in the Mixed Companies PetroMonagas, PetroMiranda, and PetroVictoria?
These mixed companies produce 78.9 MBD, 2.1 MBD, and 2.1 MBD respectively, all in the Orinoco Oil Belt. In other words, Rosneft produces in Venezuela 83.1 thousand barrels per day, which represents 24% of the Orinoco Oil Belt’s production (352 MBD).
Again, no authority has explained or said anything about Rosneft’s departure and what will happen to the joint venture’s production in the country, where this Russian company was a partner. Who will maintain that production? PDVSA must step in, as is established in the Joint Venture Agreement approved in April 2009. But we have reasonable doubts that PDVSA can successfully take over these operations.
The departure or suspension of these two international companies has struck a tremendous blow against Venezuela which is severely affecting its oil production, since together they account for 262.1 MBD, 40% of the current production.
Drilling activity in Venezuela
The other U.S. companies that must suspend operations in the country because of OFAC’s limited licenses are giant oil drilling and service companies.
The impact of the departure of these drilling and service companies, in addition to Chevron and Rosneft, touches on another key aspect of oil production in the country: the drilling activity in the country.
Number of drills operating in the country
Number of drills operating in the country.
As can be seen from the graph, until 2013–2014, a significant number of drills remained in operation in the country, keeping oil production at levels of 3,011 million barrels per day.
However, the drop in the number of drills operating in the country has been constant since 2015, once the government-controlled Vice Presidency of Finance canceled and diverted the resources required to maintain oil and gas production operations, in addition to drilling, production, and well-services activities.
This indicator is a clear sign of the problems that PDVSA has been facing for its production activities in the country. Drilling, well conditioning and repair (Ra/Rc), and services are vital, fundamental, to maintain oil production operations in the country and the services that prevent the production of what is known as deferred production, that is, volumes of oil that are there but require well-services to produce.
Of course, the exit of the companies are decisions that have been made, but it is precisely for this reason that the country must have a national oil company, a PDVSA that is capable of exploiting, producing Venezuelan oil, to put it in the function of the well-being of all its citizens.
In our next Oil Bulletin, we will talk about our oil service subsidiaries that guaranteed PDVSA’s operations with their efforts, subsidiaries created within the framework of the Technological Sovereignty Plan, initiated in PDVSA, to guarantee our operations in the face of any circumstance that would affect or threaten oil production in the country.