Summary of the week.
The week closes with a modest recovery in the price of oil after the impact suffered by the oil market on Monday, April 20th , when the price of WTI, the US oil reference, traded at negative values for the first time in history, at -$36.98 per barrel. This represents a reduction of 259% compared to Monday, April 13th. The Brent, the European oil marker, also suffered a significant drop. Although it did not reach negative values, it was quoted at $17.36 per barrel, 46% with respect to the previous week.
As we explained in our Special Bulletin on April 21th , «the fundamental reason for this phenomenon is linked to the fact that traders left their contracts early in May because there was not enough demand or storage capacity for oil.» We also pointed out that this unusual fall that the WTI suffered was originated «basically because there is no storage capacity in Cushing, Oklahoma, a U.S. oil storage «hub» whose inventories influence the price of WTI, which is then quoted on NYMEX.»
Likewise, we point out about the market’s «short-term outlook» that «although futures prices for May are in negative values, for June and July prices are being estimated for the WTI at 15.55 dollars per barrel and 23.3 dollars per barrel, respectively, and for the Brent at 20.46 dollars a barrel and 24.93 dollars per barrel, respectively.»
The market and the price have been behaving in the way we expected. Today we will review the effects that the collapse of the prices has had on the market fundamentals: price, supply, demand, and inventories of crude oil and products, as well as the implications this situation is having on the market and its fundamental players.
Likewise, we will make our usual review of the oil situation in Venezuela, where the sector already affected by a severe crisis of governance and destruction of operational capacities, reflects the collapse of the refining system and oil production, which is now greatly affected by the fall in the price of the main export segregation, “Merey crude”, and by the new restrictions of the U.S. Administration and OFAC on U.S. companies operating in the country.
The price
As of today, Friday, the WTI closed trading at $15.89 per barrel, showing a 142% recovery from its opening value on Monday, when it suffered the historical collapse. The average price for the week was $3.52 per barrel. The WTI is, thus, close to the values of $18 per barrel that mark the futures for June.
Brent crude oil closed at $20.85 per barrel showing a recovery of 20%, compared to its price on Monday, April 20th. The average price this week was $17.36 per barrel.
The performance of oil markers has been downward since the OPEC+ agreement of April 9th , 2020, when a 9.7 million barrels a day production cut was agreed on. The market reaction has been downward, showing a 27% drop for the WTI and a 35% drop for the Brent, relative to that day’s price.
Concerning the prices at the beginning of March, before the OPEC+ meeting, both references, the WTI and the Brent, have experienced a 59% fall in value.
Demand
Oil demand continues to be severely affected by the global economic downturn and by the massive restrictions on travel, transportation, and movement in the world’s largest economies due to COVID-19.
Major market monitoring sources such as OPEC, the International Energy Agency (IEA), as well as the US Energy Information Administration (EIA) agree that demand by 2020 will drop by as much as 9 million barrels per day.
Both OPEC and the IEA agree that the April demand fall will be the most severe. Some analysts estimate that this decrease in demand will be about 20 to 30 million barrels a day.This would cause a collapse in the price for the second quarter oh the year.
This behavior would leave only a margin for demand recovery for the third and fourth quarters of the year. This scenario will depend fundamentally on the lifting of restrictions on movement and transport in the large industrialized economies of Europe, the United States, and Asia, affected by the Covid-19.
Oil production
As we have already pointed out in our previous reports, the production cut agreed by OPEC+ has been insufficient and late.
It has been insufficient because the drop in oil demand, at least in the second quarter, far exceeds the 9.7 million barrel oil cut.
It has been late because March and April have had an overproduction of oil that has flooded the market with cheap oil that has no demand, so those volumes go to commercial inventories and strategic reserves in consuming countries around the world.
In other words, the second quarter of the year, which has seen the greatest drop in demand for oil, coincides with the period of production of greater volumes, especially due to the so-called «price war» announced by Saudi Arabia and other countries of the Persian Gulf.
OPEC production for the second quarter
If the production cut of 9.7 million barrels per day agreed upon by the OPEC and non-OPEC countries is strictly implemented, it would mean that the OPEC countries (excluding Iran, Libya, and Venezuela) will be producing 23.4 million barrels per day by May and June. However, it is estimated that during April the OPEC, was producing 3.2 million barrels of oil per day over its March production of 28.6 million barrels per day, mainly due to overproduction by the Gulf monarchies: Saudi Arabia, Kuwait, and the United Arab Emirates. This translates into an OPEC production of 31.8 million barrels per day in April. This would give an average OPEC production for the second quarter of 26.2 million barrels per day.
This indicates that according to estimates made by OPEC and the IEA for the organization’s demand for crude oil, or the so-called «call on OPEC,» for the second quarter of the year, there will be an overproduction of oil in the market of 6.5 million barrels per day according to OPEC and 17.7 million barrels per day according to the IEA, excesses that will go to oil storage, building more inventories in the second quarter of the year.
Russian production
The Russian Federation’s oil production has remained stable at March production levels of 11.5 million barrels of oil per day, according to information provided by the Russian Energy Ministry.
According to the OPEC report of April 15th , 2020, Russian oil supplies are expected to decline by 1.38 million barrels per day to an average of 10.14 million barrels, revised downward from the March assessment. Russia will make a cut of 2.5 million barrels per day of oil, the bulk of the non-OPEC production adjustments.
Russia’s crude oil production, which has been free to pump at will since April 1st after the collapse of the previous OPEC+ agreement, has remained stable in April. Russia sees no point in increasing production given the global oil surplus, as Energy Minister Alexander Novak said earlier this month
Oil production in Russia appears to have been stable for some time now, especially in its already developed fields. According to accounting information of the main producing companies presented to the IFRS for 2019, the average production cost in Rosneft was US$ 3.80 per oil, in Lukoil US$ 3.59 and in Gazprom Neft US$3.78.
One element that may strike Russia in the medium term is its relatively small storage capacity, with only an eight day-cover in oil tanks. However, Russia has many more alternative storage options, such as pipelines, ships, trains, as well as commercial storage rented from other parts of the world.
Production in the USA
In our previous oil reports, we stated that the United States has taken the place of the first oil-producing country in the world, with a production of 13 million barrels per day.This gives the country an extraordinary strategic advantage, not only because of its energy independence but also because of the possibility of influencing the international oil market with its capacities. We also pointed out the weaknesses of this advantage, above all, because of the high production costs of North American oil, Shale Oil in particular.
The U.S. capabilities to sustain that strategic advantage is in dispute at the moment. The Americans, the Russians, and the Saudis are aware of this situation.
This is why President Trump has been determined to demand an end to the price war between Russia and Saudi Arabia, pressing for an OPEC+ production cut agreement and intervining directly, as in the case of Mexico, to get other countries to cut back on their production. All this without the U.S. having to make any sacrifices.
However, the collapse of the WTI price, which is the U.S. oil marker, has hit the U.S. production tremendously. It has also serve as evidence that the impact of the collapse of the oil market was either not anticipated or it was underestimated. An example of this is that the request made by some producers in Texas to Railroad Commission to reduce the U.S domestic production was not approvaed at the time. The request was made in order to reduce excess supply or to provide additional storage capacity before the collapse of the Cushing Oklahoma’s operational storage capacity. This caused the WTI to fall to negative levels.
The U.S. Energy Information Administration had already estimated in its report on April 22nd that the U.S. would lose 2.9 million barrels per day of oil production. This decrease in production is a consequence of the downfall of the price, making the country a net energy importer again by 2022.
U.S. production is being impacted with prices below $15 per barrel, which is causing a massive shutdown of production wells and a drop in drilling activity.
Some estimates such as Evercore ISI’s indicate that we could see a temporary shutdown of up to five million barrels per day of U.S. production by the end of June. Operators in the U.S. are abandoning «fracking» withdrawing an average of 30% of the drills in operation.
The characteristics of Shale Oil production and the use of fracking complicate the picture for North American production as they are declining at a rate of 60% per year. This indicates that the loss in production must be replaced by new wells drilled.
Some analysts, such as the IHS Markit Energy Expert, indicate that U.S. production could fall even more than what the EIA estimates, with a decline to 10 million by the end of this year, and about 8.5 million by 2022 based on the latest PumpingIQ report.
On the other hand, the debt of the North American energy sector has grown enormously, rising to $190 billion. This represents an increase of $11 billion in one week. Therefore, some companies have made budget cuts that together reach $31 billion in drilling activities.
In general, the oil and energy production sector in the country is key to the U.S. economy. This is not only in terms of employment, which provides about 1.1 million, but also in terms of the benefits of having domestic production, safe supplies, and low cost for the revival of the U.S. economy.
In this scenario, oil producers have the advantage of having an Administration in the White House that has no commitment to reducing emissions into the environment, nor to seek alternatives to fossil fuels, oil, gas, and coal.
President Trump has not only applied pressure internationally in order to see further production cuts by OPEC+ countries but has also threatened Saudi Arabia and other oil exporters to impose tariffs on oil imported into the U.S.
The U.S. Administration has developed initiatives to try to stop the decline in U.S. oil production through the Department of Energy and the Treasury. President Trump announced the decision to purchase up to 75 million barrels of U.S. oil to be stored in his strategic reserves during the week.
At the same time, President Trump promised to make funds available to the country’s oil companies with a plan being considered by Treasury Secretary Steven Mnuchin. This plan could create conflict with Democrats in Congress who have warned that they are against any financial aid to oil producers.
On the other hand, the Independent Petroleum Association of America wants the Federal Reserve to allow oil companies to use loans under the Main Street program to pay off existing expiring debt during the crisis.
Storage
As we have stated previously, the excess in oil together with the drop in demand has caused inventories to rise to record levels, restricting the ability to continue to receive oil at the rate it has in this second quarter.Traders are not taking any more contracts as a result, causing prices to drop even to the historic levels we saw this week.
As storage capacities are reaching their limits, physical deliveries in the US have been severely restricted, and the pipeline or Cushing storage facility does not have the capacity to lease or store uncommitted oil. The EIA reported that the Cushing storage facility reached 60 million barrels (79% of its capacity) in the week ending on April 17th. It also reported that US refinery operations dropped to 12.8 million barrels per day, 4.1 million barrels per day less than the same date last year.
U.S. refineries could lose up to $3 per barrel of gasoline processed in March and April, according to Rystad’s report, in light of the collapse in demand and the overflowing in storage of this fuel. The agency reported that gasoline storage will reach its limit by the end of May.
The same situation happens worldwide. The world’s oil storage companies, such as Royal Vopak NV in Rotterdam are almost out of storage capacity.
The storage of countries, in this scenario of collapsing demand and overproduction of oil, tests the capacities and flexibilities of the large economies to manage in this situation. In the case of large oil consumers, such as India, the collapse of oil demand has caused inventories to be at maximum levels.
The shortage of storage capacity has led operators and traders to use oil ships as floating storage facilities, pipelines, trains, and everything else that is available to store oil and products. The use of floating storage has triggered the cost of shipping, as ships are being used as storage.
The impact on the oil market of the collapse in demand and the overproduction of oil in the second quarter of the year will depend, among other factors, on the national storage capacity of each of the major oil-consuming or oil-producing countries. Those with longer days of coverage will be able to take advantage of cheap oil or have greater flexibility so as not to affect their oil production to any great extent, while the market disruption lasts.
Source: IHS Markit
Coronacrash
The World Trade Organization (WTO) reported in its Situation Report – 95 published on April 24, 2020, that the number of confirmed cases worldwide reached a total of 2,626,321, resulting in 181,938 confirmed deaths. Europe remains the region with the most confirmed cases, with a total of 1,284,216. The number of cases in the United States continues to rise rapidly, with a total of 830,053 confirmed cases and 50,000 deaths, figures that are hitting the country, especially, in New York City.
World economy
According to the International Monetary Fund’s April 2020 Report, the world economy will be in recession by 2020, which continues to make it unlikely that oil demand will be restored to the levels it had before March.
Global economic growth is projected to be -3% in 2020, a much worse outcome than that of the 2009 global financial crisis. The growth forecast is down by more than six percentage points in relation to the October 2019 update of the World Economic Outlook and the January 2020 update.
Growth in the group of industrialized economies that have experienced widespread COVID-19 outbreaks and deployed containment measures is projected to be -6.1% in 2020. Most economies in the group will contract this year, including the United States (-5.9%), Japan (-5.2%), the United Kingdom (-6.5%), Germany (-7%), France (-7.2%), Italy (-9.1%) and Spain (-8%).
China faces a drastic fall in its GDP of 6,8% in the first quarter.
On the other hand, the severe decline in oil prices since the beginning of the year, has affected the short-term economic prospects of oil-exporting countries, where the group’s growth rate is expected to fall to -4.4% in 2020.
The depth of the economic damage caused to countries highly dependent on oil revenues will have to be assessed. This damage could compromise, not only the economic and social stability but also the political and governance stability of many of them that have already been experiencing severe problems before this price crisis.
Europe
Europe is finally making more determined progress in supporting the the most affected countries in the group that were hit by the economic impact of the COVID-19.
After strong questioning of the European Union’s lack of solidarity and agility in dealing with the pandemic, it seems that obstacles are being overcome to take decisions more broadly and faster, during a global crisis that requires it. We are in an unprecedented situation that tests leaderships around the world. This situation will produce a major redefinition of the importance and weight of the various geopolitical blocs.
European Union leaders have agreed to set up a fund that could raise at least 1 trillion euros to rebuild regional economies devastated by the coronavirus pandemic.
The EU is planning to expand its budget from around 1.2% to 2% of GDP and then to use these additional funds as guarantees for low-interest loans on the financial markets.
European leaders signed a $540 billion plan to support businesses and economies from the immediate consequences of the coronavirus on Thursday, they also signed an immediate rescue package worth at least 500 billion euros that was drawn up earlier this month by finance ministers.
The International Monetary Fund expects the EU’s GDP to fall by 7% this year, and the latest data suggest that economic activity in March and April may have plummeted by 20-30%.
The European Central Bank will increase the purchase of emergency bonds in the coming months to increase support for the region’s economy which ECB President Christine Lagarde sees reduced by up to 15% this year.
United States
The American Administration of President D. Trump, in what has been the exercise of a Keynesian policy to intervene in the country’s economy during this severe crisis and recession, has approved massive economic aid for both companies and the population in an attempt to keep productive capacities afloat, prevent business failures, protect jobs and provide the public with some capacity to demand products.
It has been a process of intense pressure and negotiations with Congress, which at some point seems like a race by President Trump to maintain his chances of being re-elected for a new term in the coming elections. It has also been an attempt to keep the country in a position to continue leading the in global economy. This is taking into consideration that China is recovering at a rater quick pace from the effects of COVID-19 compared to other countries and that Europe is currently paralyzed by the pandemic.
The Trump Administration has allocated approximately $881 billion of the major components of the pandemic aid package signed a month ago. He signed on Friday an additional $484 billion dollars approved by Congress for the economy.
The Federal Reserve could keep interest rates near zero for three years or more, and its balance sheet will soar above $10 trillion as policymakers try to revive the U.S. economy from recession.
These massive economic and financial aid packages come closer to trying to moderate the impact of the crisis on the U.S. economy, unemployment continues to rise.
Last week, more than 4 million people applied for unemployment benefits, bringing the total to 26.5 million unemployed in five weeks during the coronavirus pandemic.
Applications could continue at an extraordinary pace for several more weeks, although the latest figures suggest a potential unemployment rate in April of around 20%, as Thursday’s data reflects the reference week for the monthly employment report. This level of unemployment had been pointed out by President Trump as a «catastrophic and denied scenario» for the country.
That’s twice the 10% peak reached after the last recession in 2009 and it is approaching Great Depression levels.
China
The second economy in the world, and the first oil importer, begins to recover slowly from the effects of the COVID-19 with the lifting of restrictions on movement and the reactivation of its economic apparatus.
According to official data from China’s National Bureau of Statistics (NBS), the country’s economy suffered a historic contraction in the first quarter, with gross domestic product falling by 6.8% compared to the same period a year ago, while investment fell by 16% in March, the industrial contraction in March stood at 1.1%.
This year’s GDP expansion is considered the slowest since 1976, according to the National Statistics Office.
To help mitigate the coronavirus crisis, China is resorting to monetary policy changes and financial stimulation.
The Central Bank of China refinanced some of the funds planned for Friday and cut interest rates on loans, the latest in a series of measures aimed at ensuring sufficient liquidity.
A series of measures in recent months have kept liquidity plentiful to support China’s weakened economy, and last week’s data shows the first contraction in decades in the first quarter.
This economic crisis is testing the leadership and responsiveness of the Chinese government, which has strong decision-making capabilities and discipline of its workforce. Additionally, the COVID-19 was very localized to certain regions of China, so there was no need to impose restrictions on manufacturing and on industrial activity in the rest of the country, as has happened in Europe and the United States.
VENEZUELA
The country continues to be shaken by the collapse of the economy and the oil industry.Other factors such as political and social destabilization, shortages of fuel, gas and petrol, electricity, water, medicines, and food are part of the country`s daily situation. The appearance of Covid-19 and the collapse of the oil price make the condition of the country even more catastrophic.
The country is in a pre-conflict situation, with rising social tension and no possibilities of activating political mechanisms to resolve the crisis. Venezuela could be the first oil country to be immersed in a deep process of destabilization.
The government has imposed a total quarantine, as a way of keeping the movements of the population restricted in the face of an acute shortage of fuel for internal consumption. A set of economic factors aggravate the crisis in the country. Some of those factors are the economic recession in the country, an accumulated fall of 63% of the GDP, hyperinflation, the unprecedented devaluation of the bolivar and a minimum wage of 1.25 dollars/month.
There have been acts of violence in the interior of the country throughout the week. Riots have taken place in the areas most affected by food and fuel shortages. The government’s response has been violent, using both the police and military forces, as well as armed civilian groups.
How the drop in the price affects Venezuelan crude oil
The price of Venezuelan crude is indexed to both WTI and Mexican “Maya crude” (the benchmark index for heavy crude). This is because Venezuelan crude oil is produced in the Atlantic basin, where its natural markets are located, and because heavy crude oil, such as “Merey crude”, is the only crude oil being exported.
This has always happened. When Venezuelan oil has other markets, such as the Asian or European markets, then the markers become Brent or Singapore, with the appropriate quality adjustments.
Regardless of the fact that the government has eliminated pricing for the sale of Venezuelan oil using WTI-referenced price formulas, the market will continue to take the “Maya” crude oil, Mexican heavy crude oil. This is the main price reference in the Latin American region, which is in turn referenced to WTI in order to price our heavy crude oil.
Therefore, given the lack of information from the government and the lack of control over the sale prices of our oil, a good estimate to know the quotation price of our Merey segregation will be the quotation of “Maya crude” after the closing of the price control office of the Ministry of Oil in Vienna.
This week, the Mexican basket is quoted at $7.19 per barrel, a decrease of 68% over the previous week’s prices of $22 per barrel, on April 21st it reached its lowest price with -2 dollars, at the same time that the WTI collapsed.
These values place the price of Venezuelan crude below the production costs of the most expensive segregations of production such as the traditional areas in both the west and the east of the country, the latter inflated by the over-costs of the oil service contracts. This assuming that the massive price discounts that have been referred to by analysts and traders are not taking place.
This indicates that Venezuela’s future and possibilities of sustaining or even increasing its oil production are concentrated in the Orinoco Oil Belt. This is as long as the diluent for well injection and transportation can be guaranteed, as well as the operability of the oil improvers in Jose, in order to produce improved oil segregations of better quality and price.
Otherwise, the oil produced in the Orinoco Oil Belt would be sold as crude oil mixed with naphtha, called Decom. This type of crude mixed with naphtha is marketed at a much lower price than the market price, which would make its production equally unviable.
Gasoline shortage
The country continues to suffer from a severe shortage of fuel, gasoline, diesel, and gas. This shortage is mainly due to the collapse of our refinery system caused by government mismanagement, politically motivated persecution of managers and workers, and the diversion of resources for operations, maintenance, and expansion of the refinery system. Our fuel production capacities of 13 million barrels per day of our national circuit have collapsed, with the subsequent fuel shortages that have affected the country for two years. These shortages have become more severe since the beginning of the sanctions against Rosneft Trading, which prevented the government from continuing to import fuel shipments as it had been doing.
The government will continue to import fuels using traders and all kinds of intermediaries, but the problem will be solved as our national refinery complex is reactivated.
As we mentioned in our April 10th oil report , the problem of fuel shortages is not only of the national refining system, but it is a consequence of the collapse of the whole PDVSA and the national oil sector.
The government has been trying since last week, erratically, to advance in the recovery of some capacity in our refineries. The networks announce the possible reactivation of the Catalytic Cracking Unit of the El Palito refinery, which could produce at least 35 thousand barrels a day of gasoline for the national market, using spare parts and equipment extracted from the Paraguaná refinery complex. This operation, as we have mentioned, has its risks associated with the disparity of technologies and operations of our refineries.
However, during the whole week, when the refinery was supposed to be in operation, in the face of the silence of the authorities, the workers finally reported that the unit could not go into operation due to technical problems.
On the other hand, it is rumored that aircraft from the Islamic Republic of Iran have arrived at the airport “Las Piedras” in the Paraguaná Peninsula to support the reactivation of operational units of the Paraguaná Refinery Complex, providing equipment, technicians, and catalysts for the production of gasoline.
Once again, in the face of the silence of the authorities, all kinds of rumors have been spread about the objective of these flights. The Vice Minister of Refining, Erling Rojas, touted his gratitude to the Islamic Republic of Iran for the support it is giving PDVSA, in its attempt to put into operation the units of the Paraguaná Refining Complex, “the PRC’s Colossus” to produce fuel in the country.
The vice minister of refining was dismissed by Maduro on April the 23rd, most probably for breaking the government’s secrecy regarding management that should of public information for the country.
The government brings technicians, equipment, and chemical inputs that can be obtained in any oil-producing or industrialized country such as Russia, China, India, or Iran itself, as long as they are compatible with the technology handled by our process units in the refineries.
The government imprisoned or persecuted the best Venezuelan technicians and managers who have experience and knowledge in handling the technologies and operations of our Refining Complexes, the CRP, the largest in the world. The same government now seeks help from foreign technical teams in absolute secrecy.
The collapse of oil production
As we indicated in our last oil report on April 18th, oil production in the country has collapsed from 3,011 million barrels at the end of 2013 to 660 thousand barrels per day in March 2020, as reported by OPEC in its last report of the 15th of this month.
There has been a drop of 2.4 million barrels per day of production in seven years of poor management of the sector in addition to a diversion of the company’s resources. This is reflected in an operational collapse of the industry and a drecrease in oil, gas, and fuel production, as well as drilling and oil service activities.
In the last seven years of its administration, the government has carried out a “de facto” privatization of the oil activities. These activities are reserved to the State through PDVSA by the Constitution of the Bolivarian Republic of Venezuelan, in its article 302 and in the Organic Hydrocarbons Law.
However, in a series of decrees and sales decisions, PDVSA’s oil production has been transferred to Oil Services operators, as well as through the Empresas Mixtas, to which PDVSA has transferred its operations.
Thus, by March 2020, 84% of the country’s production, located in 660 thousand barrels a day of oil is in private hands and only 16% is operated directly by PDVSA.
The OFAC licenses.
On April 21, the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury extended the operating licenses of U.S. oil companies operating in the country.
An extension conditioned on not participating in any way in operations that allow the production of oil in Venezuela, nor the commercialization or lifting of oil barrels in the country. Basically, the license allows these companies to stay in the country, but without operating, just maintaining their presence and preserving their investments.
The U.S. companies subject to these restrictions are Chevron Corporation, Halliburton, Baker Hughes GE Company, and Weatherford International Public Limited Company. One production company and three drilling and service companies remained in the country.
What are the implications of these sanctions for oil production?
Chevron operates in Venezuela as a joint venture between PDVSA and “Petroboscán” in the state of Zulia, in the west of the country, and “Petropiar”, in the Orinoco Oil Belt, in the east of the country. The company is also affiliated with “PetroIndependencia”, but the partnership is not operational.
“Petropiar” and “PetroBoscán” produce 110 thousand barrels per day and 69 thousand barrels per day respectively, representing 31% of the Orinoco Oil Belt’s production (352 thousand barrels per day) and 50% of the western production (138 thousand barrels per day).
That is to say that Chevron alone produces 179,000 barrels of oil per day in the country, which represents 27% of Venezuela’s total production (660,000 barrels per day).
OFAC’s sanctions on Chevron are total, so PDVSA would need to take charge of Venezuelan oil production, which is contemplated in the contracts signed by the Empresas Mixtas and approved by our National Assembly at the time, precisely to preserve the country’s oil production from any decision or situation that affects the operations of the private sector in Venezuelan territory. The big question is, will PDVSA be able to assume and maintain the oil production envisioned by the Empresas Mixtas solely relying on its own efforts?
However, there is another event that has gone unnoticed but complicates the picture of the situation in addition to the suspension of Chevron’s production in Venezuela.
Russian giant Rosneft announced that it was terminating operations in Venezuela on March 28th, and selling assets linked to its operations to an unidentified Russian company.
However, this sale is illegal under our Organic Hydrocarbons Law, which establishes that any change in the contracts signed by the Empresas Mixtas must be authorized by both the National Executive and the National Assembly. Rosneft’s departure opens up a new debate in our country: what will happen to Rosneft’s production in the Empresas Mixtas “PetroMonagas”, “PetroMiranda”, and “PetroVictoria”?
These mixed companies produce 78.9 thousand barrels per day, 2.1 thousand barrels per day, and 2.1 thousand barrels per day respectively, all in the Orinoco Oil Belt. In other words, Rosneft produces in Venezuela 83.1 thousand barrels per day, which represents 24% of the Orinoco Oil Belt’s production (352 thousand barrels per day).
Again, no authority has explained or said anything about Rosneft’s departure and what will happen to the joint venture’s production in the country, where this Russian company was a partner. Who will maintain that production? PDVSA must step in, as is established in the Joint Venture Agreement approved in April 2009. But we have reasonable doubts that PDVSA can successfully take over these operations.
The departure or suspension of these two international companies has struck a tremendous blow against Venezuela which is severely affecting its oil production, since together they account for 262.1 thousand barrels per day, 40% of the current production.
Drilling activity in Venezuela
The other U.S. companies that must suspend operations in the country because of OFAC’s limited licenses are giant oil drilling and service companies.
The impact of the departure of these drilling and service companies, in addition to Chevron and Rosneft touches on another key aspect of oil production in the country: the drilling activity in the country.
As can be seen from the graph, until 2013-2014, a significant number of drills remained in operation in the country, keeping oil production at levels of 3,011 million barrels per day.
However, the drop in the number of drills operating in the country has been constant since 2015, once the government-controlled Vice Presidency of Finance canceled and diverted the resources required to maintain oil and gas production operations, in addition to drilling, production, and well-services activities.
This indicator is a clear sign of the problems that PDVSA has been facing for its production activities in the country. Drilling, well conditioning and repair (Ra/Rc), and services are vital, fundamental, to maintain oil production operations in the country and the services that prevent the production of what is known as deferred production, that is, volumes of oil that are there but require well-services to produce.
The exit of the companies are decisions that have been made, but it is precisely for this reason that the country must have a national oil company, a PDVSA that is capable of exploiting, producing Venezuelan oil, to use its revenues for the well-being of all its citizens.
In our next oil report we will talk about our oil service subsidiaries that guaranteed PDVSA’s operations with their efforts. These are subsidiaries created within the framework of the Technological Sovereignty Plan. This plan was initiated in PDVSA in order to guarantee our operations in the face of any circumstance that would affect or threaten oil production in the country.