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Caracas, Venezuela — Venezuela's already freefalling crude production may have a way further to tumble.

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Current oil output is around 1.4 million b/d, and the oil ministry's "worst case scenario" projects a further 200,000 b/d decline by December to 1.2 million b/d, a ministry source told S&P Global Platts on condition of anonymity.

That would be a precipitous halving of output in two years.

"The downside risk is large," the source said, adding that he does not see any short-term solution to Venezuela's woes, which include labor unrest, hyperinflation, failing equipment, crushing debt and a brain drain among state oil company PDVSA's management ranks following a purge overseen by oil minister Manuel Quevedo.

The International Monetary Fund has pegged Venezuelan inflation this year at a staggering 13,865%, with GDP projected to contract by 15% from 2017.

Crude exports -- the country's main source of revenue -- have plunged, exacerbating a cash crunch that makes it difficult for PDVSA to support production of the vast Orinoco reserves that a decade ago were projected to underpin the country's oil resurgence.

Those reserves consist of extra heavy crude that require injection of lighter crude or naphtha to extract. But declining output from Venezuela's conventional fields and an inability to consistently afford imported diluent prevent PDVSA from boosting Orinoco production.

"Venezuela would not be able to increase production even if they wanted to," said Tamas Vargas, an analyst with brokerage PVM Oil Associates. "Only God knows how low oil production will fall."

Making matters worse, what exports Venezuela is able to sell have to be priced at a $5-$7/b discount, due to water contamination of as much as 9% that refineries must pay to have removed as PDVSA no longer has the capability to do so, according to an official at a crude processing company in Venezuela who asked not to be identified.

PDVSA has seen 25,000 employees -- almost 20% of its workforce, ranging from engineers to lawyers to oil rig roughnecks -- walk off the job over security and safety concerns and low pay, according to Ivan Freites, a union head and fierce government critic.

'A LACK OF EVERYTHING'

Venezuela's oil ministry has not responded to several requests for comment in recent weeks.

Quevedo, a brigadier general in Venezuela's national guard with no oil industry experience, was installed in November as oil minister and head of PDVSA with an audacious directive from President Nicolas Maduro to add 1 million b/d of production in a year's time.

With no signs of progress, Quevedo last month was granted broad powers in a presidential decree to renegotiate contracts with joint venture partners, including Total, Statoil, Chevron, Rosneft and CNPC, and reorganize operations within PDVSA.

The partners appear unimpressed.

Total CEO Patrick Pouyanne indicated last week that the Petrocedeno heavy oil project, which was producing 70,000 b/d out of a capacity of 120,000 b/d, could be shuttered for safety reasons. The project is a joint venture with Statoil and PDVSA.

"Our production is declining because there is a lack of machines, there is a lack of crude, there is a lack of everything," Pouyanne said on an earnings call with investors.

Eni's chief financial officer, Massimo Mondazzi, also said last week the Italian major, which has a stake in the giant offshore Perla gas field, expects to recover just 20% of what it is due from PDVSA in 2018 and 2019, although operations continue. Eni's outstanding receivables from Perla are some $650 million and rising, he added.

Chevron, meanwhile, is reeling from the arrests of two of its employees at its Petropiar joint venture with PDVSA in mid-April that have yet to be fully explained.

Even Venezuela's key allies Russia and China, who soak up the bulk of PDVSA's oil exports under cash-for-crude loans, seem loathe to offer further lifelines.

China reportedly did not renew a two-year grace period that expired last week on about $19 billion it is owed, and analysts say Russia may be running out of patience after having restructured a $3 billion loan last November, although state-owned Rosneft has said its separate loans to Venezuela are being repaid on schedule.

ELECTION OBJECTION

Looming over Venezuela are the prospects of additional US sanctions targeting PDVSA, which the Trump administration has threatened over ongoing corruption and Maduro's crackdown on political dissent.

The US has already imposed sanctions that hamper Venezuela's ability to refinance debt and fund new projects. Further measures could include bans on US exports of oil and diluent to Venezuela or restrictions on international sales of Venezuelan crude, White House sources have told Platts.

Analysts expect Venezuela's May 20 presidential election, for which Maduro has essentially cleared the field to ascertain victory, to be a potential catalyst for any new sanctions.

A Maduro win "would remove almost any prospect for the economic reforms required to reverse production declines, and could create even more pressure on PDVSA by triggering US oil sector sanctions," Platts Analytics said in a recent note.

--Mery Mogollon, newsdesk@spglobal.com
--Herman Wang, herman.wang@spglobal.com
--Edited by Jeremy Lovell, newsdesk@spglobal.com