New York — Venezuela's near economic collapse has taken a toll on the country's oilproduction, causing shifts in oil flows as buyers look to secure alternativesupplies.
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As workers have fled the country, state-owned oil company PDVSA has had adifficult time maintaining crude output, let alone boosting production.PDVSA's refining sector has also deteriorated on a lack of funds andmanpower.
PDVSA has had difficulty pulling crude from storage because its suppliesare subject to seizure by creditors. Most notably, on April 26 theInternational Trade Court ordered PDVSA to pay $2.04 billion to ConocoPhillipsfor the 2007 expropriation of ConocoPhillips' 50.1% interest in its Petrozuatajoint venture in PDVSA, and its 40% stake in the Hamaca project, both of whichwere heavy oil installations in the Orinoco Belt of eastern Venezuela.
And US has sanctioned individuals in Venezuela, including PresidentNicolas Maduro, prohibited the purchase and sale of any Venezuelan governmentdebt, including any bonds issued by PDVSA, and banned the use of theVenezuela-issued digital currency known as the petro.
Below are some key takeaways from the current situation.
CRUDE OUTPUT, EXPORTS FALLING
* Venezuela crude production could be on the verge of sinking to 1million b/d, and a drop in crude exports is causing a shift in trade flows.
* Venezuela's crude output averaged 1.36 million b/d in May, down from1.41 million b/d in April, and 1.9 million b/d in May 2017, according to S&PGlobal Platts. The International Energy Agency said it could fall to 800,000b/d or even lower next year.
* S&P Global Platts Analytics sees Venezuelan production remaining above1 million b/d during 2019. "They have a certain amount of production that theycan keep going although the heavier grades would get impacted if they can nolonger buy diluents," said Chris Midgley, head of Platts Analytics.
* In early June, PDVSA notified 11 international customers that it wouldnot be able to meet its crude supply commitments in full, a PDVSA officialsaid. It is contractually obliged to supply 1.495 million b/d to thesecustomers in June, but only has 694,000 b/d available. The customers eitherwould not comment, or could not be reached for comment.
* Venezuela's rig count has fallen to 28 in May from 36 in April, and 49in January, according to Baker Hughes International Rig Counts.
* PDVSA has experienced similar drops in the past. In the 1980s, thenumber of rigs fell to less than 30, causing crude production to fall to 1.3million b/d.
* Production has slowed largely because of a lack of maintenance and asskilled employees have fled the country. For instance, PDVSA Friday wasoperating its 202,000 b/d Petrocedeno extra heavy crude upgrader at just 39.6%of capacity, due to delayed maintenance, lack of spare parts, and electricalfailures, according to an operator at the facility.
* PDVSA's three other upgraders -- the 120,000 b/d Petrosanfelix, 120,000b/d Petromonagas and 190,000 b/d Petropiar upgraders -- are expected to beoperating below capacity in June.
* PDVSA planned to build a 200,000 b/d upgrader at an estimated cost of$5 billion-$6 billion in the PetroCarabobo project. However, India's ONGCVidesh has put on hold plans to invest in the upgrader until it has receivedfull payment for its equity oil sales.
SHIFTING CRUDE FLOWS
* US Gulf Coast refiners have been increasing their imports of Canadianand Iraqi crude, likely making up for the Venezuelan shortage. * US Gulf Coast imports of Venezuelan heavy sour crude have averagedroughly 249,100 b/d so far this year, down from nearly 529,760 b/d in the sameperiod in 2017 and 658,600 b/d in 2016.
* Iraq, which had long blended its heavier sour crude with medium grades,exported 301,600 b/d of heavy crude to the US Gulf Coast in March,according to the latest EIA data. It was the highest average sinceJanuary 2017, when about 341,650 b/d of Iraqi heavy sour crude wasshipped to the Gulf Coast, an all-time high, according to the EIA data. * Through May, roughly 35.5 million barrels of Basrah Heavy crude hadbeen imported by US Gulf Coast refiners, up about 1 million barrelscompared with the first five months of 2017, but more than doubleimports in the same time period in 2016, according to the latest USCustoms and Border Protection data.
* Canadian crude producers are of late stepping up supplies to the USGulf Coast, with the bulk of the increase being shipped on rail cars.
* Crude exports to the USGC are currently around 530,000 b/d, said DinaraMillington, vice president of research with the Canadian Energy ResearchInstitute said Thursday in Calgary. That's up from 443,000 b/d in March, and336,000 b/d in January 2017, according to EIA data.
* Canadian crude is competitive because of deep price discounts. TheWestern Canadian Select coking margin on the USGC has averaged $21.29/b so farin June, compared to a $5.94/b margin for Mexican Maya. The bulk of that WCSadvantage comes from the deep spot price discounts for the grade.
* China's independent refiners are looking for alternative sources ofheavy crude, with Mexican Maya, Colombia's Castilla and Canadian Cold LakeBlend options being considered.
* Independent refiners are major buyers of Venezuelan crudes, takingaround 69% of the Latin American shipment to China, mainly through CNPC, whichis the solo buyer under the oil-for-loan deal between the countries. Chinaimported 4.7 million mt crude from Venezuela in Q1, out of which 3.22 millionmt was taken by the independent refiners, data from the General Administrationof Customs and S&P Global Platts showed.
* Venezuelan crudes are mainly used for asphalt production in China, thedemand for which peaks over September-November.
* A CNPC source said it is difficult to find good alternatives forVenezuelan Merey crude, which with an API of 16 degrees and 2.46% sulfurcontent is a good feedstock for asphalt production. Some heavy crudes,like Maya from Mexico, can be used as an alternate to produce asphalt, asource with independent Wonfull Petrochemical said. But no crudes have beenimported from Mexico by independent refineries since 2016.
REFINED PRODUCTS IMPORTS
* Venezuela's imports of oil products have been rising as output from itsrefineries has been declining due to lack of crude feedstock,accidents, unscheduled shutdowns, and delays in maintenance of variousfacilities.
* PDVSA will process just 499,000 b/d of crude at its domestic refineriesin June, accounting for just 31% of its 1.6 million b/d of refiningcapacity. This would be 144,000 b/d lower from the same month in 2017.
* PDVSA's system is comprised of five refineries: Amuay, Cardon, ElPalito, Puerto La Cruz, and Isla, which it operated in an agreementwith the Curacao government. The government of Curacao is open to athird party operating the PDVSA-run Isla refinery.
* PDVSA plans to import 9.735 million barrels of oil products in June, upfrom 6.188 million barrels in May, and the highest since 2016, according to aninternal PDVSA report seen by S&P Global Platts.
* PDVSA sources its imports from Russia's Rosneft, India's RelianceIndustries Ltd., and Citgo, PDVSA's US-based refining arm.
* The decline in refinery utilization has also forced PDVSA to suspendoil product exports to eight countries in the Caribbean as part of its longstanding Petrocaribe agreement. PDVSA has indefinitely suspended delivery of38,000 b/d of oil products to Antigua and Barbuda, Belize, Dominica, ElSalvador, Haiti, Nicaragua, San Vicente and St Kitts. --Staff report, firstname.lastname@example.org
--Edited by Richard Rubin, email@example.com