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Analysts doubt Venezuela's ability to boost crude production in 2020

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Analysts doubt Venezuela's ability to boost crude production in 2020

Highlights

Crude from storage inflates output

US sanctions deter crude buyers

PDVSA running low on diluent

Caracas, Venezuela — Venezuela's PDVSA is hoping to boost its crude production to over 1 million b/d, but analysts are skeptical the state-owned company, faced with deteriorating infrastructure and a lack of buyers due to US sanctions, will be able to push output higher in 2020.

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Commodities 2020 | S&P Global Platts

While PDVSA may be able to bolster output in the short term, an exodus of experienced workers and a lack of diluent for crude blending will present major challenges down the road.

PDVSA's crude production averaged 700,000 b/d in November, up from 650,000 b/d in October, according to an S&P Global Platts survey.

PDVSA was planning on producing 1.1 million b/d in December, but that will be difficult to achieve, analysts said.

Related story: US has cut Venezuelan flows and output, but plans for China, Rosneft trade unclear

One analyst, Einstein Millian, thinks Venezuelan crude production, which has fallen from 2.1 million b/d in February 2017, has bottomed out.

"The sizable reduction in blackout periods, and the shift from upgrading to blending extra heavy crude, allowed PDVSA to stop a consistent production drop observed during the whole year," said Millian.

According to Millian "there is no increase in production. The increase we have seen in recent weeks is an illusion caused by draining inventories."

"The total accumulated inventory up to October exceeded 40 million barrels, which have been gradually finding their way out in spite of the US sanctions," Millan added.

"Effective production will remain around 700,000 to 750,000 b/d," Millian said. Other analysts also believe that the recovery of oil production in Venezuela will be very difficult in the short term. S&P Global Platts Analytics expects production to end 2020 at around 600,000 b/d.

Thomas O'Donnell, professor of energy and geopolitics at the Hertie School of Governance in Berlin, sees two main factors depressing production: PDVSA's declining ability to produce crude, and its inability to sell crude.

"First, declining ability to produce the oil. This is due to utter disrepair from chronic absence of investments, managerial incompetence and PDVSA not paying employees enough to make it possible to go to work," O'Donnell said.

"Although Venezuelan Orinoco Belt crudes strata have very simple geology structure, unfortunately the damage done by 20 years of underinvestment and mismanagement, and by now often the complete shutdown of wells, will be difficult to recuperate. It will require investment, technology, infrastructure and skilled labor. PDVSA, or any domestic successor, will not be able to do this in the short term," O'Donnell said.

BRAIN DRAIN

As Venezuela's economy has collapsed, PDVSA has lost high-value oil sector employees.

According to the most recent figures from the Central Bank of Venezuela, the Venezuelan economy contracted 26.8% in the first quarter of 2019 compared to the same in 2018.

According to Venezuelan union leader Ivan Freites, in the last five years 30,000 trained oil workers have migrated to other countries, while another 30,000 have applied for early retirement.

"Of 70,000 professionals and technicians, only 10,000 remain in PDVSA," Freites said, citing statistics kept by oil unions.

DILUENT SHORTAGE

Maintaining, let alone lifting, production will also be a problem in 2020 due to a shortage of diluents, such as naphtha and light crude.

PDVSA and its foreign partners have concentrated their major production projects in the Orinoco Belt, one of the largest fields in the world.

However, Orinoco crude is very heavy, with a high metals and sulfur content, and needs to be diluted to transport and market.

PDVSA needs one barrel of diluent for every three barrels of extra-heavy crude.

PDVSA planned to stop the production of Merey 16 crude in December due to lack of diluent, according to PDVSA crude plan seen by S&P Global Platts.

The plan says that the joint ventures, Petropiar and Petromonagas, will be out of service due to lack of diluent, or light crude. Petro San Felix and Petrocedeno joint ventures also will be out of service.

Until January, PDVSA received naphtha from its subsidiary, US refinery Citgo, but US sanctions eliminated those imports.

Companies from India, Russia and China had been regular suppliers of naphtha, but have seen their deliveries to Venezuelan ports reduced due to the unavailability of tankers willing to risk US sanctions.

Without access to imported diluents, PDVSA uses light Venezuelan crude oil, but its production has also fallen and is insufficient to meet production requirements in the Orinoco Belt and maintain supply to local refineries. According to official figures, the production of light crudes (Mesa 30, Santa Barbara and Anaco Wax) is 285,000 b/d, which are used almost entirely to dilute extra-heavy crude, leaving very little for local refining.

LACK OF BUYERS

Even if PDVSA could lift production, the company has a hard time selling barrels, said O'Donnell.

"US sanctions have reduced exports to mainly efforts by Russia's Rosneft, largely for Chinese delivery, although Chinese firms themselves firms have broadly withdrawn from Venezuela," he said. "Spain's Repsol reportedly is the second taker, then Cuba," O'Donnell said.

But Millian thinks PDVSA will be able to find some customers.

"PDVSA has been creative in bypassing the US sanctions, from offshore traders in Central America, to ship to ship (STS) operations, and third party offload/upload in the Far East," he said.

Commodities 2020 | S&P Global Platts

-- Staff reports, newsdesk@spglobal.com

-- Edited by Gary Gentile, newsdesk@spglobal.com