Russia’s military intervention in Ukraine, and the development of the war on the eastern flank of Europe itself, places the oil market under great pressure from the possibility that military operations may escalate and that the massive sanctions imposed against Russia may affect the country’s ability to supply oil and gas to the market.
The price of Brent and WTI oil, which were at 98.1 and 92.5 dollars per barrel on February 24, the day on which the war began, increased and surpassed 130 dollars per barrel after the US announcement to prohibit the import of Russian oil. After the different diplomatic initiatives, the price of oil fell to 112.7 and 109.3 dollars per barrel for Brent and WTI, respectively, at the close of last Friday, March 11.
Last week I published in my blog www.rafaelramirez.net the Oil Bulletin where, in an extensive work, I explain and comment on all aspects of the oil market situation in the current context of the war and the possible scenarios as well as the consequences and evolution of what is called the «market fundamentals». I invite you to read and comment on it.
What is clear is that the price of oil has risen above 100 dollars per barrel and, evidently, this fact will have consequences for Venezuela.
Government inconsistency.
On March 9, a high-level delegation from the US government met with Maduro, Delcy and Cilia at the Miraflores Palace, in what Nicolás himself described as a «respectful, cordial and very diplomatic» meeting, as he expressed in an address to the country where, surrounded by his closest circle, he repeated over and over again, with undeniable anxiety and satisfaction, that «it is not true what they say over there», because «Venezuelan oil is available for the US».
The concrete result of this visit was the release of two US citizens, which makes us very happy, especially for the release of Gustavo Cardenas – who we know and send greetings to from here – a former director of CITGO, kidnapped in November 2017 by the government, along with five other directors, after being brought to Caracas, under deception, to imprison them in a humiliating ambush in the Simón Bolívar hall of La Campiña.
The visit of the US delegation radically changed the discourse of the government and Maduro. At the very beginning of the Russian aggression, the Maduro government resented Putin; Maduro tore his clothes supporting the invasion. From that moment on, all the officials and the propaganda machinery of Maduro’s government made a blind defense of the war.
But the declared support of Russia did not withstand a visit from the US authorities. After this, from there on down, all Madurismo is talking about is peace and, as if by magic, the support of Russia has disappeared. This support, as it is popularly said, «did not hold up to two requests».
The untimely visit of Delcy Rodriguez to Turkey to deliver a message to Russian Foreign Minister Sergei Lavrov – obviously Maduro does not trust his Foreign Minister Felix Plasencia – is the pure and simple exercise of the government’s cynicism and inconsistency. At this moment, the Kremlin must be evaluating the attitude of its «unconditional» ally.
But can Venezuela play a role in the international oil market?
Definitely not. After eight years of permanent aggression by Maduro against PDVSA and its workers, of imprisonments and political persecution, of having diverted PDVSA’s operational resources, surrendered assets and oil fields of the company, the reality is that the country’s oil production, which we delivered in 2013 in 3,015 million barrels of oil per day, has fallen by 78% to stand today (as of January), according to OPEC, at only 668 thousand barrels per day.
In 2008, with a production of 3.3 million barrels per day, our country was ranked as the fourth country with the highest production within OPEC, our voice was heard and consulted, and we were important players in the international oil market. Today, with an average production in 2020-2021 of 500 thousand barrels per day, Venezuela has fallen to the basement (10th place) within OPEC, only surpassing the new African producers: Congo, Gabon and Equatorial Guinea.
At this moment, our country’s opinion does not count in OPEC. While PDVSA has lost its oil and gas production capacities, international partners have abandoned the country, and our economy has fallen 83% in the Maduro period.
Some international analysts estimate that, as a result of the massive economic sanctions against Russia and the military development of the war in Ukraine, Russian oil production (which as of January stood at 10 million barrels per day) could fall to 6-7 million barrels per day in the worst-case scenario. In other words, this is a drop of 3-4 million barrels per day.
The big question in the market is who can increase its oil production and supply this eventual shortage of Russian oil?
As we have indicated in our Oil Bulletin, according to the world production level of April 2020, we find that the ONLY countries capable of increasing their production in the short and medium term are: USA, Saudi Arabia, United Arab Emirates and Iran (if it reaches a nuclear agreement).
Can Venezuela increase its production by two million barrels per day, and how far can it increase it?
If, in order to analyze the collapse of oil production, we leave aside political considerations, especially Maduro’s cruelty against PDVSA and its workers, as well as the government’s privatizing stance, willing to hand over the oil, we would be committing a basic error in the analysis because, as I have said before, PDVSA’s problem is in Miraflores.
But, even if we address only the technical problem of increasing oil production in the country, we can assure that Venezuela, under the leadership of the Maduro government, IS NOT ABLE to substantially increase its oil production in the short term, as I stated to the EFE news agency in an interview published on March 12.
Let’s see why:
- Status of PDVSA’s different production areas:
Oil production in the country is mainly grouped into three large areas or executive divisions: East, West and Belt. The rest (offshore and PDVSA Gas) contribute very little oil production in the country.
At the end of 2013: production audited by the Ministry of Petroleum, after extracting water and diluent, was: East 825 MBD, West 776 MBD and Belt 1,274 MMBD, for a total of 2,899 MMBD, plus 24 MBD of PDVSA Gas and 116 MBD of condensates, for a total of 3,015 million barrels per day. We were at our OPEC production quota.
As of today: according to information provided by PDVSA, the non-audited operated production (the Ministry no longer audits), without extracting the volumes of gas and water, is as follows: East 180 MBD, West 142 MBD, Faja 205 MBD, plus 4 MBD from PDVSA Gas and zero MBD from offshore, for a total of 530 MBD. The volumes of water and the diluent brought from Iran must be extracted from this production, which the government does not do.
Even so, these production numbers are below OPEC’s figures, which place Venezuela’s production at 668 MBD by January 2022, which possibly includes volumes of oil in storage that were exported in the period.
If we make a comparison between 2013 and 2022 by each Executive Directorate of the oil areas we observe that production has plummeted as follows: ORIENTE (-645 MBD), OCCIDENTE (-634 MBD), FAJA (-1,069 MMBD), PDVSA Gas (-20 MBD).
This fall is a disaster, a failure all along the line, for which Nicolás Maduro and the members of his government who have been at the head of the successive Boards of Directors of PDVSA are solely responsible.
Current problems:
Despite the fact that Venezuela has 319 billion barrels, the largest oil reserve on the planet certified by us as of 2007, the country’s current oil situation evidences several problems:
- DEFERRED PRODUCTION in the country is estimated at 1.5 million barrels per day due to lack of equipment, pipelines, pumps, spare parts, maintenance, well work, infrastructure, services and personnel. The deferred production can be placed, from less to more complex, in 1, 2, 3. The rest of the production must be recovered with intense drilling activity of new wells.
- DRILLING ACTIVITY is vital and must be continuous in oil production, even more so if we consider that, due to the characteristics of our crude oil, production declines 20% annually. That is to say, when we produced 3 MMBD, the decline was 600 MBD, today, with a production of, let us say, 668 MBD, the decline is 140 MBD.
Up to 2013, we had 371 drills operating in the country, with which we performed: 1,087 drilled wells, 591 Ra/rc wells, 10,152 well services and 11,673 subsoil works.
Today, only 20 operational drills have been reported in the country, with little or no work to wells and subsoil.
- THE OIL FACTORY has collapsed and fallen by one million barrels since 2014. This fall is directly related to Maduro’s rampage against our managers and directors, Engineer Pedro Leon and other workers are still in prison. The government ended with the Faja and with it the Orinoco-Apure project dreamed by Chávez.
In this area, the government ceded our best joint ventures to the transnationals in Petromonagas and Petrosinovensa and both companies have collapsed. Petromonagas produced 142 MBD in 2013 and today produces, barely, 9 MBD; while Petrosinovensa produced 135 MBD in 2013 and today produces 50 MBD.
The country’s most important transnational companies were in the Belt: Total, Equinor and Rosneft, all of which abandoned operations. Only CNPC remains in Petrosinovensa and Chevron in Petropiar, whose production has fallen from 160 MBD in 2013 to 46 MBD currently.
The upgraders operate at very low capacity, so PDVSA imports diluent from Iran and mixes it with the crude from the Faja, but cannot extract it in the upgraders, so the diluent is exported mixed with the crude as diluted crude oil (DCO) at a significant discount. However, the government totals the volume of crude and diluent as if it were all produced in the country.
- ORIENTE production has plummeted by 645 MBD. PDVSA’s workers and managers were also wiped out there. In these areas there is an important requirement for gas compression and reinjection; all of these projects were abandoned, and huge volumes of gas were dumped into the environment.
Most of the «service contracts» illegally granted by General Quevedo are concentrated in the Oriente, although the handover of PDVSA’s areas has not had the expected result.
Most of the gas produced in the country comes from this area, which in 2013 amounted to 7,395 million cubic feet per day (MMPCD), and after subtracting the gas used by PDVSA for injection into wells, 4,616 MMPCD was available for the domestic market, achieving full supply.
Today, gas production barely reaches 3,250 MMPCD and, obviously, much less is available for the domestic market, which is evidenced by the chronic lack of gas and LPG in the country.
- OCCIDENTE has been abandoned; its production has fallen by 634 MBD. The government imprisoned all of the company’s directors as a result of pressure from Petrozamora’s powerful minority partners.
The lack of maintenance and subsurface work is deadly for an area with centennial wells, although this basin still has reserves of more than 30 billion barrels, which are found at greater depths in the so-called «La Luna» formation, the source rock.
Production in Lake Maracaibo has fallen from 460 MBD in 2013 to 30 MBD today. Operations in the lake require boats, equipment, barges, workers and divers to operate in difficult situations typical of this area, as well as the thousands of kilometers of lines and pipelines at the bottom of the lake, flow stations, platforms and compressor plants. Today most of these operations are shut down or dismantled, with serious spills and losses.
In 2013, to maintain an operation of 460 MBD in the lake, we had operating a light fleet of 345 boats for the multiple services of personnel transportation, divers, operational check, maintenance and PCP; a heavy fleet of 107 units distributed in 88 tugboats, 4 buoyed barges for moving drilling/repair drills, 3 barges for laying flexible pipe lines, 10 flat barges for transporting materials and equipment and 2 hammers for pile driving/removal. All this made up a total of 345 light fleet vessels and 107 heavy fleet vessels.
- CONTINUOUS OPERATION.
Oil production is a continuous activity. It cannot stop; it works 24/7. The supply of pipes, spare parts, pumps, compressors, drills, underground works, well services, connections, valves, cathodic protection, materials in warehouses and pipes in the «tigritos», which are necessary to be able to solve the requirements and problems of the operations, cannot be stopped.
When Maduro, once he managed to take control of PDVSA’s Vice-Presidency of Finance by placing his nephew Erick Malpica in this position, began to divert PDVSA’s operational funds, disbursements were suspended and the thousands of processes of procurement and supply to the oil production areas were paralyzed. This also happened with refining, gas and all operational areas.
After his absurd and irresponsible decision to paralyze PDVSA’s contracting and procurement processes, and his announcement that he would «review them in Miraflores», all processes were paralyzed, and the operational collapse of the company began.
Then the Vice-Presidency of Finance of PDVSA was eliminated; it no longer exists, and today everything is managed from the office of Delcy Rodriguez, Minister of Finance, evading all control and accountability mechanisms. Now PDVSA «pays» with crude oil (which nobody can sell) and in cash (in paper bags) to the luckiest contractors.
Any production recovery effort requires the reestablishment of corporate finance functions to ensure the flow of resources to operations and then – with a Contingency Plan – to restore supplies of materials and equipment, perform well workovers and lift deferred production, as well as recover infrastructure in all operational areas that have been dismantled to be sold for scrap or abandoned and looted.
- WHERE ARE OUR DRILLS, EQUIPMENT AND VESSELS?
Following the drop in oil prices from US$120 to US$39 per barrel between 2008-2009 and after the imposition of U.S. sanctions against PDVSA in 2010, due to Venezuela’s relations with Iran, we implemented a special PDVSA Economic and Operational Sovereignty Plan in order to address the situation.
Within the framework of this plan, we established financing mechanisms with the Chinese Fund to guarantee investment resources for the country and PDVSA, and we acquired supplies, technology and equipment for the industry from China, Brazil, India, Russia and Argentina, which allowed us to guarantee operations under these circumstances.
Between 2009-2013: PDVSA’s own drilling rigs increased from 41 to 196 (+155); 167 specialized well services equipment were acquired; 92 directional drilling sets, 48 cementing units, 21 continuous tubing equipment and 6 hydraulic units.
By 2013 PDVSA had 83 vessels: 28 of its own (26 PDV Marina and 2 Transalba), including VLCCs with a capacity of over two million barrels for trade with China and India: 29 from joint ventures and allied companies and 26 controlled by third parties, which mobilized 1.8 MMBD that year.
None of these exist or are operative today, they were ceded to others, dismantled or lost, reducing the company’s capacity to successfully face any circumstance (such as sanctions).
All these equipment and assets are consolidated in our financial reports and are part of the 129.8 billion dollars in Plants and Equipment of the Company for 2013. The question to Quevedo and the government is what happened to all of PDVSA’s own equipment?
- WORKERS AND KNOWLEDGE
A fundamental factor, the most important, is our workers, the knowledge and expertise accumulated over almost 100 years in our oil industry.
Today, our managers and executives have been displaced from the management of the company and operations and replaced by military, politicians, opportunists and a whole range of characters without the necessary knowledge and experience. Maduro claims a lack of knowledge and has swept away this not only in PDVSA but also in our universities. From his opportunistic perspective, knowledge and technical preparation are a problem, not an advantage for the country.
But it turns out that our PDVSA management, its workers and laborers, who were at the helm of the company since the defeat of the oil sabotage until 2014, when the persecution and debacle began, not only had the knowledge and experience, but also the conscience of social duty, the commitment to the whole country, guaranteeing with enormous effort and work all the assigned activities and the fundamental responsibilities of PDVSA.
Today the oil worker is despised by the government. It has sullied, persecuted, imprisoned and cornered; in such a way that more than 30 thousand have left the company and the country since 2016.
The government wiped out our human, technical and knowledge capabilities, and is now looking outside the country, to its transnational «partners» for a capacity that we had secured and operational in PDVSA.
The workers who remain in the company receive starvation wages (like all workers in the country). They are permanently manipulated and humiliated, fear and clientelism have been imposed, their contractual benefits, salaries, medical services and even their pension and retirement funds have been taken away, resources that NO ONE CAN TAKE AWAY FROM THEM.
- THE CHAOTIC SITUATION IN THE COUNTRY
Some analysts and many «experts» have joined the government’s revelry over the announcements of an imminent oil «boom». All this is as ephemeral and false as the bubble of Las Mercedes or the Starbucks in Caracas.
Some refer to the possibility of increasing production, as if the collapse were only a problem of PDVSA. It turns out that the whole country has collapsed; the entire productive apparatus, the large companies, the service companies and oil contractors. Maduro’s government not only destroyed PDVSA’s oil production capacities, but also the productive capacities of the whole country.
Raising oil production from its current collapse levels requires a gigantic effort and the support of all the country’s capacities, from workers with a living wage, to industrial capacities, the procurement of equipment, materials and financial support.
Furthermore, it is essential to have a political leadership with a national, patriotic and revolutionary sense, and not this motley conglomerate of interests and a sum of incapacities that put their privileges and benefits before the supreme interest of the country.
We have to get out, urgently, with the urgency of saving the homeland from the chaos of this government that has destroyed all our possibilities and capacities as an oil-producing country. In order to increase oil production and for this to serve the country, all the people, we must get rid of Maduro and his nefarious government.
Lifting sanctions on Iran is not the same as lifting sanctions on Venezuela. The Persian country, in spite of the harsh sanctions, has never abandoned its oil industry, it still produces 2.5 million barrels per day, it has maintained its industrial capacities, its workers and managers, and its oil know-how, which is why, if the sanctions were lifted, Iran could increase 800 MBD in the space of a year.
But in the hypothetical case that the US lifts the sanctions against Venezuela, the country is so hopeless, weak, devoid of capabilities of any kind, of at least a patriotic leadership, that we will not be able to increase production, at least in a substantial way. Furthermore, there is no guarantee that this «increase» will benefit the Venezuelan people. At this moment the oil sector does not pay taxes, our oil is sold with discounts of up to 30%; it is not known who sells it, nor how much royalty it pays, nor where that money goes. There is no accountability, no laws, everything is secret; it is the business of Maduro and his people.
If we do not stop it in time, this genuflecting and anti-national government will end up handing over the little that remains of the country’s sovereignty. They will modify the laws, they will pass over the constitution, to finally hand over the oil to the transnationals. It will be the plundering, the surrender of the country, that will be Maduro’s legacy.