Friday, July 21, 2017

Venezuela’s National Oil Company On Its Last Legs

The following excerpts from Mr. Colasante’s article appeared in Oil on July 18th.

On Sunday 9th, 2017 Venezuela hit a hundred days of anti-dictatorial regime demonstrations. Hundreds of thousands of Venezuelans have taken over main streets and roads demanding a new presidential election, a humanitarian solution to counter food and medical supply shortages, the release of political prisoners and the reinstitution of the National Assembly’s functions.

Since the protests started, more than one hundred people have been killed, 3,500 arrested and thousands injured across the country.

Falling oil revenues due to low international oil prices, as well as institutionalized government corruption, caused a further backlash, leaving the government to respond once again with brute force. Tear gas, water cannons and pepper-spray were fired into crowds by the National Guard and its paramilitary force, the “colectivos”, a heavily armed civilian branch supporting the Venezuelan government.  

This critical economic, political and social situation does not seem to have an easy solution. In Venezuela, 96 percent of foreign currency earnings come from oil industry, and with the collapse of oil prices, income has fallen more than 50 percent. But in addition to a decline in revenues, oil production has also dropped, adding insult to injury.

Venezuelan refineries are operating significantly below operational capacity, a product of a lack of investment and maintenance, as well as a lack of technical knowledge (a lot of the highly qualified personnel from PDVSA who rebelled against Hugo Chavez’s regime in 2002 were fired and now work in various other countries, such as; Colombia, Mexico, Canada and the USA). Falling output at refineries means that Venezuela needs to import gasoline, further squeezing the national budget. Refineries are currently working at less than 40 percent of average 2016 levels as state-run oil company PDVSA is importing between 100 and 150 thousand barrels per day of gasoline and between 80 and 90 thousand barrels per day of diesel.

Venezuela’s daily demand for gasoline and diesel are 225 and 170 thousand barrels respectively. Several tankers are waiting off the coast of Venezuela to discharge cargoes as the PDVSA has difficulties in paying their shipping bills, resulting in a penalty of $26 000 per tanker per day. An almost surreal paradox in a country that owns twenty refineries; five in Venezuela and fifteen worldwide.

One of the issues that PDVSA and their joint venture partners have to overcome will be the result of the new “constituent assembly”. Hermann Escarrá, a constitutional lawyer, candidate to the constituent assembly and one of the key people participating in the new constitution, declared in front of hundreds of PDVSA workers that one aim of the new constituent will be to nationalize all oil joint ventures.

Venezuela produces 40 percent of its crude in joint ventures with foreign companies, where PDVSA has at least 51 percent of the shares. If Venezuela succeeds in nationalizing the joint ventures, Venezuelan oil production will likely decline at an even faster rate.  

Until today, PDVSA has used the joint ventures for two purposes: firstly, to increase oil production and secondly, to maintain the low credit line that helped PDVSA pay its bond obligations. Now any foreign oil company will need to think twice if it wants to invest in the Venezuelan oil sector.

Day after day, PDVSA’s financial situation worsens. In 2006 the PDVSA’s financial debt was around $3 billon, eleven years later, its debt has reached $44 billion – with another $20 billion to be added for non-supplier and services payments.

A total default of PDVSA could potentially lead to a complete crash in oil production, a doom scenario for the country, but a potential boon for global oil prices.

“Venezuela is suffering gasoline shortages despite having the world’s largest oil reserves. The proven oil reserve in Venezuela is recognized as the largest in the world, totaling 302 billion barrels.”

Sound familiar? Remember gas and oil prices soaring while the left made it impossible to take advantage of massive oil reserves in the United States?  

Socialism...Ain't it swell?  Ed.

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