Summary of the Week
This week the price of oil continued to fall, despite the unprecedented production cut agreed by OPEC+ countries and the end of the price war between the Russian Federation and the Kingdom of Saudi Arabia.
Nevertheless, last Sunday’s announcement of the cut of 9.7 million barrels per day, reached after a previous attempt at the OPEC+ meeting that held place on April 9th failed due to Mexico’s refusal, did not have the expected effect because oil prices have continued to fall.
The cut, which will come into effect on May the 1st and last for two months, has therefore been perceived as insufficient by the global market, since the drop in oil demand exceeds the volume agreed to by OPEC+. From July the 1st , the cut will be lower, going as far down as 7.7 million barrels per day until December 2020. From January 1st , 2021 and until 2022, 5.8 million barrels per day will be cut.
However, the production cut is a sacrifice that was only made by OPEC+ countries. Neither the US, nor the rest of the G-20 oil producing countries seem to be willing to take any voluntary action to cut their own production. Thus, the meeting of the G-20 Energy Ministers, held on the same day, Friday, April 10th , concluded without any commitment to cut, although some OPEC+ ministers had expected, and declared, that they would cut their production to 5 million barrels of oil per day to accompany this effort.
In the meantime, oil demand continues to show an unprecedented drop, on par with the impact which COVID-19 and the relative massive restrictions on movement and on various business activities in the world’s major economies, such as the USA, Europe, and Asia have had on the world economy.
This week, both the OPEC Monthly Market Monitoring Report, issued 15 days late in anticipation of some agreement in OPEC+, and the International Energy Agency Report agreed in estimating an abrupt fall in oil demand in 2020 of 6.9 million and 9 million barrels of oil per day respectively – a drop of 7% and 10% with respect to the 99 million barrels produced in March of this same year. Even OPEC estimates that, by the second quarter of this year, the drop will be of 20 million barrels of oil per day.
On the other hand, all the agencies warn that the commercial and strategic oil stocks or inventories of the most developed countries grouped in the OECD (Organization for Economic Cooperation and Development) and China are reaching maximum levels, and could reach overcapacity by mid-year.
Such a high amount of oil inventory only indicates that there is no demand to absorb oil production at this time and that, on the contrary, its production will have no way of being allocated, and as a consequence, it will suffer an abrupt cut.
Still, high oil inventories give consuming countries a very high margin of coverage; the «drainage» of these inventories will take time to reach the average of the last five years. This, added to the uncertainty about the recovery of the world economy, makes a prolonged period of low prices a real possibility.
The disagreement at the OPEC+ meeting, coupled with the price war between Saudi Arabia and Russia, was not only unfortunate, but also inappropriate for the oil market. The whole months of March and April have been flooded with cheap oil that no one consumes, thus merely filling the inventories. Because of this situation, and the uncertainty about the development of the world economy during and after COVID-19, prices will not rebound for some time, which could be up to 2022.
Under these circumstances, a close monitoring of the market by OPEC+ seems to be necessary: a forthcoming meeting on July the 1st, as suggested, may be a long way off. Therefore, the producing countries grouped in OPEC+ should press for other major producers, such as the US, Canada, Brazil, and Mexico, to effectively accompany the OPEC+ cut. It is time to make this effort and demand greater commitment, on the part of the US, Canada, and Brazil; otherwise, the effect on their own production will be devastating, as these countries have the highest oil production costs.
Strategic Look.
Several elements are evident in this oil market crisis.
- The weakness of OPEC as an organization is evident. Many of its founding member countries have lost influence or decision-making capacity or are outside the organization. Iraq, Libya, Iran, and Algeria have been subjected to invasions, wars, sanctions, and political destabilization. The case of Venezuela is a process of self-destruction of capacities, and on his side, Qatar withdrew from the organization. Despite the fact that new actors have arrived, they do not have the weight, nor do they replace the shortcomings of the countries mentioned.
OPEC is today the sounding board of the monarchies of the Persian Gulf and, in particular, of the Kingdom of Saudi Arabia. This situation takes away from the organization its original strength: a body of developing oil-producing countries where oil policy was discussed and decisions were taken that corresponded with the interest of all its members and not to the particular strategy of any particular one.
The level of political discussion within OPEC+ has fallen to a minimum, with the interests of the companies increasingly prevailing, which are of course different in nature from those of the States represented there.
Today’s OPEC, for example, looks diminished in the face of OPEC 2008, which faced a drop in demand due to the economic crisis, which dragged the entire world economy down and brought the price down from $130 per barrel to $35 per barrel in just 3 months. At an extraordinary meeting held in December of that same year in the city of Oran, Algeria, with the presence of President Bouteflika, a massive production cut of 4.5 million barrels per day was agreed upon without stopping to wait for support from any other country, sacrificing its production. Then, in permanent meetings and consultations among the ministers, showing unity and determination before the markets, we were able to raise the price from 35 dollars per barrel in January 2009 to 91 dollars per barrel in December of the same year. - OPEC+, although it is an initiative that adds to the coordination effort in defense of the price of oil of a large producer such as the Russian Federation, at the same time, turns its meetings into a permanent pulse between the interests and points of view of the Heads of State of Russia and Saudi Arabia, two of the three largest oil producers in the world. The agreement is between them. The rest of the countries do nothing more than bend to their strategies.
The Russian Federation, a powerful country, the second largest oil producer in the world, a nuclear power with clear geopolitical interests, puts it on the table at the time of the agreements. On the other hand, the weight of the Russian oil producing companies is very important in the country, so most of the times they achieve that their commercial or market interests are the ones that prevail in the government’s decisions.
For its part, the Kingdom of Saudi Arabia has always tried to tackle Russia in its deployment strategy in the areas of the Middle East conflict, so from 2014, they have taken the policy of making any agreement on stabilizing the oil market and cutting production conditional on Russia also cutting its own production.
The price war between these two big countries is not new. It has its precedent in 2014 when, at the behest of Venezuela, an effort was made to reach agreements between the two big countries to stabilize the market. We were then able to witness the clash between the Saudi minister Ali al Naimi and the president of Rosneft Igor Sechin, who was leading the Russian delegation, where Mexico’s Energy Secretary Pedro Joaquín Coldwell was also present. This clash made it clear to us that the decision of both countries was not to give in and, on the contrary, that they were willing to go to a price war in order to weaken the position of the other. - The United States has become the world’s largest oil producer thanks to the exploitation of shale oil but not so much a large exporter due to its high consumption. But its 13 million barrels of oil per day give it belligerence in the market, a condition that has been taken in advantage of by President D. Trump.
This American Administration, unlike the one of Barack Obama or the Democratic Party program, is committed to developing its economy by using all the fossil fuels at its disposal: oil, gas, and coal. Having no commitment to the environmental goals of her predecessors, it has proclaimed that it will do everything it must do to defend American oil producers.
For the Trump Administration, jobs in the oil sector in his country, 1.1 million jobs, and the strategic and geopolitical advantage of gaining a high degree of energy independence from oil supply, is a fundamental pillar of its political bid for re-election of President Trump.
Therefore, beyond his position in favor of the free market and against State intervention in the economy, Trump has taken the lead in defending oil prices by demanding that Russia and Saudi Arabia stop their price war and achieve a production cut of at least 10 million barrels of oil per day, a goal he has achieved.
But as we have already mentioned, this cut will not be enough to recover the price and defend United States’ own national production. The Department of Energy has estimated that, towards the end of this year or during 2021, the United States will once again be a net oil importer due to the fall in its production of shale oil.
Therefore, Trump Administration, through its Secretary of Energy, D. Brouillette, is evaluating the possibility of opening its capacities in the strategic reserves to acquire the North American production and to leave it stored until the recovery of the price. The Federal Government has the power to acquire up to 1 billion barrels of oil for the strategic reserve (an average of 3 million barrels per month).
However, in order to cover its excess production and ask its producers not to extract their oil, leaving it underground and paying compensation for it, the government is going to require more funds. This is why the Federal Government has tried an agreement in Congress, an agreement that has been blocked by the Democrats, to obtain a $3 billion aid package to acquire millions of barrels of national oil, an unprecedented measure that makes clear President Trump’s commitment to defend his oil production.
On the other hand, Trump Administration continues to threaten the possibility of imposing tariffs on imported oil, if the U.S. were to return to its status as a net importer.
It is interesting, in the midst of this reality that affects the most liberal economy in the world, that the discussion of the need to intervene in the market to regulate production and defend the price is opened. This is the reason for the existence of OPEC. In the State of Texas, there is a debate among oil producers about the possibility that the State’s Regulatory Body, the legendary Rail Road Commission, will regulate oil production, cutting back up to a million barrels per day to defend price and production. - Three major oil producers are the new «swift producers» or market regulators: USA, Russia, and Saudi Arabia. They are showing that, beyond their geopolitical differences, they can agree on the formation of oil prices. It is interesting to see if this is a sustainable situation in time given the level of permanent confrontation in various geopolitical scenarios worldwide.
- We have always said that if OPEC did not exist, someone else would regulate the market. But it is not the same at all that it is regulated by OPEC, poor or underdeveloped countries, as it is by a group of industrialized or rich countries. They have and represent different interests. OPEC has to rethink a scenario for the future in order to recover its strength in the oil market and, therefore, in the international political arena with its own organization, South-South.
- On the other hand, this situation of low oil prices brings back to the table the discussion on «alternative» energies vs. fossil fuels. With such a low cost of oil, it will remain for the foreseeable future the cheapest and most affordable energy for all countries in their efforts to revive the economy, whether they are industrialized countries or poor and underdeveloped ones. Fossil fuels will continue to be the most readily available, cheapest energy and act as a lever to revive their respective industrial complexes, manufacturing, transport, and trade.
Prices
OPEC’s monthly report on April 15th states that prices in March recorded the deepest monthly decline since the 2008 global financial crisis.
According to the OPEC Report in April, the main crude oil references collapsed in March. The OPEC basket fell by 38.9%, as did Brent and WTI, which were down 39%, for an average price in March of 33.73 and 30.45 dollars per barrel respectively.
On Friday, April 17th the average price references of OPEC Basket (19 d/b) and WTI (20 d/b) decreased by 17% and 21%, respectively, compared to the prices on Monday, April 6th . Brent, on the other hand, has been less affected with an average price during the week of $29 d/b, a decrease of $3 d/b from the previous week’s average price of $32 d/b, a drop of 14%.
At the close of the European markets today, Brent and WTI were trading at $28.62 and $18.34 per barrel, down 0.18% and 8.43%, respectively, from the previous day’s close.
This week the WTI has fallen below the psychological barrier of $20 per barrel, closing at $18.26 per barrel on Friday, after China reported that its economy had shrunk by 6.8% in the first quarter, the latest sign that the coronavirus is disrupting economies around the world and decimating global demand for oil, raising fears that this marker’s most pessimistic price predictions will be met with values closer to $10 per barrel.
The Brent and WTI declined significantly after the OPEC+ meeting on April 6, 2020, falling by 45% and 55%, the OPEC Basket reflecting an even greater decline of 66%.
Inventory and Demand
The fall in prices during the month of March, and the behavior of the futures contracts, indicate that the market is in «super contango» , as indicated by OPEC in its report.
“Contango” is when futures contracts are priced higher than current prices because market players expect the price to improve. That is also why some are looking to store crude oil now, even if they have to pay storage costs, since the low price differential is very high.
This market situation has motivated speculators to buy cheap oil and pay the cost of storage, onshore or floating, while waiting for a price recovery. Similarly, large companies and some producing countries are hedging their production. This hedging strategy allows companies to obtain financing, considering the expectations of better future prices, based on which they can negotiate with the financiers future contracts based on their current production, as Mexico has done in the past.
The market is flooded after two months of price wars between Russia and Saudi Arabia and the collapse of demand, with millions of barrels of cheap oil fulling into world inventories in the U.S., Europe, India, and China. Some analysts estimate that these will reach their maximum capacity by the middle of this year.
In the April OPEC Report, it is estimated that by 2020 world oil demand is revised downwards by 6.9 mb/d. The contraction in the second quarter will reach about 12 mb/d, and in April a contraction of about 20 mb/d.
Oil demand growth in non-OECD countries is adjusted downwards by 3.2 mb/d to contract by 2.9 mb/d for the year. The impact of COVID-19 is affecting demand growth in almost all regions of the world with a reduction in oil consumption, particularly, transport fuel.
In the rest of the year, USA, Europe, countries in Asia, the Middle East, and other regions are expected to substantially reduce mobility which will further affect fuel demand. OPEC estimates total world oil demand at 92.82 mb/d by 2020, with consumption expected to be higher in the second half of the year than in the first.
Current conditions are «the perfect storm for demand destruction» according to the April OPEC report which forecasts that 2020 will see negative oil demand, with more room for decline, if current conditions continue to worsen during the rest of the year. However, oil demand is expected to rebound in 2021, an expectation that depends directly on the recovery of the world economy.
The International Energy Agency (EIA) estimates that world oil and fuel consumption averaged 94.4 mb/d in the first quarter of 2020, down 5.6 mb/d from the same period in 2019. Projections for world oil and fuel demand are downward with 5.2 million b/d in 2020, to increase by 6.4 million b/d in 2021.
Both, EIA and OPEC, estimate a collapse in global oil demand in April of close to 20% of the total, about 20-25 million barrels per day, reflecting the significant disruption in global economic activity due to the COVID-19 pandemic.
Coronacrash
As of today, the World Health Organization indicates on its website that in the last 24 hours new countries have been reported with confirmed cases. To date, a total of 2,078,605 cases have been reported worldwide, with Europe accounting for 50% and the Americas for 49%, mainly the United States, which in recent weeks has accounted for 30% of the total number of infections, with 660,000 people infected. In April, China reported 52 new cases, for a total of 83,000 confirmed cases.
- The fight against the coronavirus pandemic is entering into a new phase.
The world’s largest economies are taking interim measures to restart vital industries and allow some people to return to work.
Chancellor Angela Merkel said Wednesday that Germany will gradually ease some restrictions on business starting next week, and Volkswagen announced a phased reopening of its European plants.
Spain, Italy, Austria, Denmark, and the Czech Republic are also lifting some blocking measures. In Asia, where the pandemic was originated, China and South Korea continue to reduce restrictions on public life and work.
IMF
The trauma caused by the pandemic in developed economies has been well documented. Now, the International Monetary Fund is warning of the impact on poorer countries.
More than 100 countries have so far requested emergency assistance, IMF Director-General Kristalina Georgieva said at a meeting of G20 Finance Ministers and Central Bank governors on Wednesday.
Georgieva said the IMF is ready to use its «full toolbox and $1 trillion of lending capacity,» noting that 10 countries have received emergency funds so far and half of the remaining countries should receive their requested financial lifelines by the end of April.
The IMF expects global GDP to contract by 3% by 2020, a recession far worse than the one that followed the 2008 global financial crisis.
Looking ahead to the outcome of the COVID-19 crisis, the IMF envisages three scenarios: the first, a delay in containing the pandemic; the second, a resurgence in 2021; and the third, both a delay and a resurgence that the pandemic dies down in the second half of 2020 and that the containment measures are gradually withdrawn. That scenario envisages confinements being concentrated in the second quarter, with a gradual recovery or de-escalation thereafter.
AMERICA.
On Tuesday, the United States announced that it would suspend its contribution to the WHO, the measure being implemented, while a review of the WHO’s role in the «serious» failures in managing the COVID-19 pandemic, as well as in allegedly «masking» the extent of the infections was conducted. In his remarks, President D. Trump notes that the outbreak could have been contained if WHO had sent experts to China at the time.
- Unemployment approaches 20%.
More than 5 million Americans applied for unemployment benefits last week. That brings the total claims to 22 million since the coronavirus pandemic strangled the U.S. economy and effectively wiped out a decade of job creation.
The latest figures suggest an unemployment rate that is currently at least 17%, well above the 10% reached in the wake of the recession that ended in 2009.
Last week also marked the time when banks began lending to small businesses to keep payrolls intact, part of a $2 trillion stimulus package. The Wage Check Protection Program was about to exhaust its $349 billion in funds this week.
Most economists expect a rebound from the second half of the year, although it could take several years to return to the employment levels observed before the COVID-19 arrived in the United States.
- U.S. economic data shows a deep blow in March, a collapse in April
Sales and production at U.S. factories recorded historic declines in March, comparable only to those recorded after World War II.
The Federal Reserve Bank of New York’s General Business Conditions Index fell 56.7 points to -78.2, the lowest on record in 2001, according to a report released Wednesday.
JPMorgan Chase & Co. said in a note that it continues to expect a 40% annualized decline in gross domestic product in the second quarter.
- The Texas Railroad Commission is back.
In the face of collapsing prices and falling production in the U.S., some producers have called for the State of Texas to issue a cutback in oil production, a step that has not been taken since the 1970s. The Railroads Commission, which oversees the Texas oil and gas industry, discussed the proposal earlier this week and is expected to reach a decision by the end of the month.
The producers requesting the intervention of the regulatory committee argue that the failure to apply production limits could jeopardize jobs, stressing that the United States must protect its workers, while sending a unified message to the world.
At the end of March, United States crude oil reached prices below $8 per barrel. The most affected are spot sales near production centers and reduced consumption by refineries. According to the latest survey by the Dallas Fed Energy Survey, reported by the EIA in its weekly report, WTI prices need an average of between 23 and 36 dollars per barrel to cover the operating costs of existing wells in the USA.
Depressed oil prices have forced many producers to cut back on dividends and capital expenditures to protect their balance sheets from growing financial losses.
Oil giant Exxon cut $10 billion from its 2020 capital spending plan, while 11 other major oil companies cut nearly $34 billion from their plans, according to data collected by S&P Global Market Intelligence.
U.S. oil companies are laying off thousands of workers as oil prices plummet, leading regulators in the largest U.S. oil-producing State to enter into global oil policy and consider calls for cuts. U.S. crude oil prices fell during the hearing to less than $20 per barrel, the lowest in 18 years.
The industry faces a historic economic collapse at $3 to $10 per barrel of oil in the coming weeks, Pioneer CEO Scott Sheffield warned commissioners Tuesday.
The commissioners are expected to vote on the oil companies’ motion on April 21st .
Some of the largest and most influential oil companies in the State (Exxon Mobil Corp, Chevron Corp and Occidental Petroleum Corp) have opposed the imposition of limits, along with some of the largest commercial organizations.
However, the idea has gained followers elsewhere. A group of Oklahoma oil producers submitted a request to that State for a hearing to consider production restrictions. It is scheduled to take place on May 11th .
- The Rescue Fund will run out today, leaving small businesses closed.
A $349 billion federal aid program for U.S. small businesses is expected to run out of money this afternoon, and many still hope to get a lifeline, according to officials familiar with the situation.
Government-guaranteed loans are granted on a first-come, first-serve basis. Without more funding, many small businesses that have flooded banks with applications will not get help, advocates said.
Republicans sought to approve an additional $250 billion for the program last week, but the effort stalled with Democrats who also wanted changes in the program and more help for other groups.
The program, which was enacted last month as part of a $2.2 trillion aid package in response to the coronavirus pandemic, offers loans of up to $10 million.
- Trump Administration issued guidelines that could allow states and employers to abandon most social distancing practices within one month.
President Trump issued guidelines Thursday for states to consider when deciding to relax the stay-at-home order and other social distancing measures enacted to curb the spread of the virus. The short document sets out a three-stage process and leaves many difficult decisions to states.
The President did not set deadlines, did not demand any particular action, and offered little federal assistance. One page of the document says that states embarking on the resumption of normal life should plan to «independently» secure protective equipment and medical equipment for their hospitals.
«A national shutdown is not a sustainable long-term solution,» Trump said Thursday at his daily White House press conference. «Now that we’ve passed the top on new cases, we’re starting our lives over.»
The White House outlined a plan to reopen the U.S. economy in a three-phase, phased approach. Not all states will follow the same timeline on this, with the northeast corridor expected to reopen later, after New York was the epicenter of the outbreak for weeks.
The current federal guidelines on social distancing are not expected to be renewed when they expire on April 30th . U.S. officials said the White House will work closely with states to ensure that reopening efforts are made safely and only when local outbreaks are deemed contained.
Many states are not ready to reopen. Some have already extended their own patterns of social distancing beyond May 1st .
CHINA:
The coronavirus led China’s economy to its first contraction in decades in the first quarter. Gross domestic product was down 6.8% from a year ago. The economy had not contracted in a full year since the 1970s.
Hours after the report, the country’s leaders pledged to offer more stimulus, including interest rate cuts to boost domestic demand. The authorities will maintain «reasonably ample» liquidity by cutting the amount of reserves that banks need to maintain.
Both retail trade and factory output showed an improvement over the first two months, suggesting a stabilization of economic activity. But overall, the data indicated that an uphill struggle awaits the world’s second largest economy.
Although exports fell by less than expected in March as production capacity was gradually restored, with a smaller-than-expected contraction in industrial production in March of 1.1% as factories returned to operation amid declining closures, economists warn that headwinds are coming as the rest of the world closes and external demand declines.
The unemployment rate declined in March to 5.9% from February’s record of 6.2%. That suggests that China is so far avoiding the kind of job destruction seen in the US, where more than 5 million Americans applied for unemployment benefits last week.
Although the IMF expects the world economy to contract by 3% this year, China is nevertheless expected to grow by 1.2% in 2020 and by 9.2% next year, making it the best performing economy.
If the IMF’s predictions come true, China will have an average growth of 5% in the next two years, Mao Sheng Yong, spokesman for the National Bureau of Statistics of China, said Friday.
This would strengthen the country’s position in the world economy, as China continues to close the gap with the West in terms of GDP per person
EUROPE:
- The EU sees its trade with the world fall by $570 billion this year.
Exports of EU goods and services will fall by 285 billion euros, or 9.2%, while imports will be reduced by 240 billion euros, or 8.8%, the European Commission said on Friday.
The forecast is based on the Commission projection that world trade will fall by 9.7% by 2020. The World Trade Organization predicted last week that world trade in goods would fall by between 13% and 32% this year.
VENEZUELA
The country continues to be affected by the collapse of the economy, which has been falling steadily since 2015, as indicated by its macroeconomic indicators. This has its origin in the destruction of oil production and in the erratic management of the economy by the government, which has promoted a program of monetarist and liberal adjustments that has only worsened the economic and social situation of the country.
With an accumulated fall of 63% in the GDP, hyperinflation of 145% between January and March of this year, the mega devaluation of the “bolívar” that has taken its quotation to an exchange parity of 1 dollar = 130 and with a minimum wage of $2.3 per month and poverty estimated at over 90% of the population, and the collapse of PDVSA resulting in a drop in oil production, a lack of gasoline and gas, as well as failures in fundamental services such as electricity, water, and transportation in a large part of the country, the government is facing the COVID-19 pandemic by calling for a total restriction of movement, with a quarantine of the entire national territory.
This information only confirms what we have been denouncing for more than three years: The collapse of oil production in Venezuela has its reason and origin in the violent intervention of the government in PDVSA since mid-2014 and the militarization of the company since December 2017, with the appointment of General Manuel Quevedo as head of PDVSA.
During this period, more than 7 Boards of Directors have been appointed at the head of PDVSA, whose executives respond more to political biases within the government than to their technical knowledge or skills. In the same period, not only have more than 100 workers and senior managers been persecuted and imprisoned, but the resources budgeted for their operations, costs, expenses, maintenance, and investments have been diverted. The government, from the Palace of Government “Miraflores”, has made budgetary and operational decisions that have resulted in the operational collapse of PDVSA.
The collapse of the company’s operational enterprise has been complete, not only in oil production but also in gas and fuel production. The effects of this collapse are felt by the Venezuelan citizen, both because of the economic crisis marked by the drop in the country’s foreign currency income, inflation and the fall in purchasing power, as well as the lack of gas, gasoline, and other fuels.
Oil production in Venezuela remained stable at an average of 3 million barrels of oil per day between 2004-2013 after the effects of the oil sabotage that took our production to only 25 thousand barrels per day in January 2003 were overcome.
As a consequence of the defense policy of price against the volume policy that prevailed before 1999, our production volumes began to conform to the production cut agreements reached within OPEC.
Thus, by mid-2008, our production reached 3.4 million barrels of oil per day. After the OPEC cut of 4.5 million barrels taken in December of that year, Venezuela was entitled to a cut of 364 MBD, so our quota remained at 3 million barrels per day.
The following graph shows the behavior of our oil production between the years 2000-2020. These are production numbers reported to the different control bodies of the Venezuelan State between 2004-2013 and reflected in the Financial Statements of PDVSA audited by the international firm KPMG, numbers that are available for review and analysis.
Average 2004-2013 3 million barrels per day
Average 2014-2020 1,5 million barrels per day
drop in production -78%
We are seeing a permanent drop in oil production, which in the period of 2014-2020 has been 2.34 billion barrels of oil per day, a drop of 78% in our production.
The fall deepens, precisely from the militarization of the company, with the appointment of General Manuel Quevedo as president of the company from December 2017 and with the subsequent displacement of managers and workers who operated the company in the period 2003-2014. It is estimated that more than 30,000 workers have left PDVSA since 2016.
From 2017, the militarization of the company coincides with the imposition of U.S. sanctions on PDVSA, which limits its possibilities of financing and operations of buying and selling oil and supplies. But at that time, the damage to the company was already deep, since by that time they had already lost 1 million barrels of oil compared to 2013 and had paralyzed the processes of procurement and contracts essential to sustain drilling operations and oil production.
● Results of the change in the oil contract regime.
Since the militarization of the oil sector, the Venezuelan government has, in practice, modified the fiscal and contractual regime for hydrocarbons in the country.
On the one hand, the Supreme Tribunal of Justice (TSJ) issued a sentence, number 156, on March 21th,2017, from which the creation or modification of the mixed companies passed directly from the National Executive to the Constitutional Chamber of the TSJ for its approval. This decision contravenes the provisions of the Organic Law on Hydrocarbons where these contracts, being of public interest, must be discussed and approved in the National Assembly, as well as their terms and conditions published in the National Gazette.
On the other hand, on April 12, 2018, the government issued the Decree 3,368 from which PDVSA’s production operations were handed over to private contractors under the form of Petroleum Service Contracts, again contravening the Organic Law on Hydrocarbons with respect to mixed companies. In this way, the government was returning, in the worst possible way, to the old Operating Agreements, which were repealed in 2006 in accordance with the provisions of the Organic Law on Hydrocarbons.
The government has privatized PDVSA and ceded its participation in the mixed companies of the Orinoco Oil Belt, both to the Chinese CNPC in “Petro Sinovensa”, and to the Russian Rosneft in “Petromonagas”, in contravention of the provisions of the Nationalization Law issued in 2006 with the Decree 5200, which granted PDVSA the participation of at least 60% in the joint ventures of the Oil Belt, assuming control of the operations and exploitation of the largest reserve of crude oil on the planet, 316 billion barrels of oil certified according to the API methodology by Canada’s Ryder Scott.
The oil production in PDVSA is organized in four major Executive Directorates: Orinoco Oil Belt, East, West, and Offshore, which include the production of joint ventures, as well as PDVSA’s own production, now delivered to the Oil Service Contracts signed under the above mentioned Decree 3,368.
Orinoco Oil Belt
The drop in production in Venezuela has dramatically affected the growth that had been achieved in the production of the Orinoco Oil Belt; the resource base needed for the expansion of production in Venezuela.
The Orinoco Oil Belt maintained its production growth throughout the period between 2001 and 2014, mainly due to PDVSA’s own production in the “Morichal Division”, as well as the start of operations under the Association Agreements with international private partners.
However, as of 2007, with the enactment of the Decree 5,200 and the nationalization of the Orinoco Oil Belt, it were created the Mixed Companies of the Belt with PDVSA holding at least 60% of the shares. As of 2007, the production in the Oil Belt increased by 58% from 698 MBD to 1,274 million barrels per day at the end of 2013.
Nationalization of the Orinoco Belt
May 1th , 2007,
Increase in production +58%
However, over the period 2015-2020, the Orinoco Oil Belt has fallen from 1,274 million barrels per day to 352 MBD, representing a decline of 922 MBD, or 71% over the period.
Of this production, the joint ventures “PetroSinovensa” (CNPC), “Petromonagas” (Rosneft), and “Petropiar” (Chevron), contribute 250 MBD, representing 69.4% of the FPO production.
This is where the impact of Rosneft’s recent decisions to withdraw from Venezuela, transferring its rights and participation to a Russian entity, as yet unknown, but 100% owned by the Russian government, can best be appreciated. This transfer has not been approved by the Venezuelan authorities, nor by the Executive, nor by the National Assembly, as established by the Constitution and by the Organic Law of Hydrocarbons, as well as the impact of Chevron’s announcement to cancel its oil service contracts in the country, which would affect the operations of both “PetroPiar” in the Belt, as well as “PetroBoquerón” in the west of the country.
Traditional areas. East, West, PDVSA Gas, and Offshore.
The graph shows the disruption in the traditional areas of oil production, PDVSA-Gas and the Offshore.
While PDVSA-Gas and “Costa Afuera” (Offshore) have practically disappeared in their oil production in the period 2014-2020, the former has fallen from 31 MBD in 2013 to 5.9 MBD in 2020, losing 78% of its production, while the latter went from 40 MBD in 2013 to 0 barrels in 2020, a drop of 100%, which indicates that “Plataforma 4 de Febrero”, the first platform built in Venezuela, which operated in the Gulf of Paria, in the east of the country, is out of operation.
In the East of the country, production has fallen from 825 MBD at the end of 2013 to 170 MBD in 2020, a loss of 655 MBD, or 79.4%, despite the fact that production has been delivered there to the private sector of the Service Contracts.
The Oil Service Contracts have fallen by 100 MBD between January and March 2020, from 201 MBD to 106 MBD, a fall of 50% in the production delivered by PDVSA. The Oil Service Contract model is not only contrary to the Constitution, to the law and extremely costly, but it also means a worse operational performance for PDVSA.
In the West, the drop has been from 776 MBD at the end of 2013 to 138 MBD in 2020, a drop of 638 MBD, equivalent to 82.2 %. This is despite the fact that the production of “PetroBoscán” (Chevron) and “PetroZamora” (Gazprombank, Russia) are located there. These produce 68 MBD and 60 MBD respectively, which represents 128 MBD, equivalent to 92.75% of the production in the West.
The Joint Venture, “PetroZamora”, has changed its shareholding composition and has obtained extension of its areas with respect to the shareholding composition and areas approved by the National Assembly and the Ministry of Petroleum in Gazette 39,877 of March 6, 2012, what it is also unconstitutional and illegal.
Today, this company, according to the Official Gazette 40,663 of May 19, 2015, is made up of Russian capital (Gazprombank) and Venezuelan capital (Alejandro Betancourt, Convit, etc.) and has obtained exploitation rights in “Bachaquero/Lago”, “Centro Lago/ Ceuta”, “Lagunillas”, “Bachaquero” and “Block VII/Area 8”, all of these changes without being approved in the terms established by the Organic Law on Hydrocarbons.
On the other hand, they have obtained operational advantages throughout the Western Executive Directorate, once its shareholders accused PDVSA Western management of «obstructing its operations», which is why these managers were put in prison by the government.
Who produces in Venezuela?
In the period of management between 2015-2020, it can be seen that a strategic change has been generated in the country’s oil production since the government’s intervention in 2015.
PDVSA is facing a “de facto” privatization, a process that is illegal and contrary to the interests of the Republic as established by the Constitution in Article 202 and the Organic Law on Hydrocarbons and the Decree 5,200 on the Nationalization of the Orinoco Oil Belt.
While in 2013, oil production was 100% under PDVSA’s operational control, through its 100% PDVSA-owned Production Units, called “own effort,” as well as with the Mixed Companies, where PDVSA had a majority share of at least 60% and control of operations.
In 2013, the country’s production closed at 3,011 million barrels of oil per day, of which 1,881 million were “own effort” (100% PDVSA) and 1,130 million with the Mixed Companies (60-70% PDVSA).
In other words, by 2013, the proportion of oil production in Venezuela, according to the only legal contractual model in the country was:
Total country: 3,011 million barrels per day.
“Own effort “production: 1,881 million barrels per day, 63%
Production with Mixed Companies: 1,130 million barrels per day, 37%
Today, as of March 2020, the country’s production closed at 660,000 barrels per day, a drop of 2.4 million barrels compared to 2013, which represents a 78% decrease.
Of the current production 105 MBD our “own effort” (100% PDVSA), 106.8 MBD Oil Service Contracts (100% operated by private companies) and 448 MBD with the Joint Venture Companies (operated by the private partner).
In other words, by 2020, based on the government-driven model, which is contrary to Venezuela’s legal system, the proportion of production in the country is as follows:
Total country: 660,000 barrels per day
“Own effort” production: 105 thousand barrels per day, 16%.
Production of Oil Service Contracts: 106 thousand barrels per day, 16%
Mixed Company Production: 449 thousand barrels per day, 68%.
Currently, PDVSA’s operational capacities are more limited than ever, in a process of handing over its exploitation rights to private operators, all of which is done in contrast to the constitutional and so, also, legal framework in force in the country.
Venezuela, in order to emerge from the terrible crisis that is overwhelming it is going to need to recover PDVSA, its oil industry, oil income, and the sovereign management of its main natural resource: oil.