PRICES
This week, oil prices showed a downward trend. On Friday, June 12, the Brent and WTI markers closed at $38.73 and $26.26 a barrel, respectively, showing a drop of 7.7% and 32.51% compared with their values on June 5, when they were quoted at $41.97 and $38.91 a barrel, respectively -their highest values since the beginning of the crisis in March.
BRENT AND WTI PRICE VARIATION
The downward trend of the oil price observed this week responds, on the one hand, to the uncertainty of the market due to the effects on the world economy of the COVID-19 pandemic, which, far from being controlled, continues to expand, especially in the US.
On the other hand, the market is adjusting after the positive impact that the OPEC+ cuts had on prices during the month of May and the first week of June, as they helped reduce the oil surplus that characterized the oil market during the months of March and April. However, prices reacted positively to the successive demonstrations of cohesion and commitment shown by OPEC and OPEC+ ministers, who extended the 9.7 million barrel per day cut for an additional month, until the end of July.
That is why the fluctuation of the prices was the result of a «rebound» from their minimum levels of $17.36 and – $36.98 for the Brent and WTI on 20 and 21 April, to the highest levels reached on June 5: $41.97 and $38.91, respectively.
OIL PRICES-JUNE 2020
Now, the oil price is going to show a trend that is typical in situations of instability and uncertainty; it will have ups and downs until its foundations and indicators –supply, demand, and inventories- reach a balance.
The recovery in oil prices will continue as long as production cuts are strictly adhered to, supply is reduced, and demand progressively recovers, and as long as the COVID-19 pandemic is brought under control and economic activity in industrialized and major consumer countries –such as China, the USA and India- is restored.
The issue in this case is to estimate when this recovery will happen and up to what price levels will go. If we consider the prices of the Brent and WTI markers at the beginning of this year, before the crisis in March, we could say that a first target price level could be 67.05 and 61.17 for Brent and WTI, respectively, levels at which these markers were quoted at the beginning of the year. When compared with these levels, the current price is still 43% and 57% below, respectively.
Regarding the price levels of a year ago (June 2019) when the Brent and WTI trading was quoted at $64.22 and $54.66 per barrel, respectively, and with an oil demand set at 99.77 million barrels per day, we note that nowadays, despite recovering in May and June, the markers are still well below their 2019 quotations, at 40% and 35% respectively. This is reflected in the graph published by the Organization of Petroleum Exporting Countries (OPEC) illustrating the oil market prices fluctuations between April 2019 and the end of May 2020:
OIL MARKET PRICE HISTORY
April 2019 – May 2020
All the specialized organizations and agencies estimate that the oil price will show better results towards the end of this year, provided that the OPEC+ cuts are implemented, the over-supply is reduced, and the world economy is reactivated in order to recover the world demand for oil and drain the excess of full inventories of «cheap oil».
The Energy Information Administration’s (EIA) estimates suggest that prices will gradually recover as world oil stocks decline in the second half of the year. The progressive reduction of inventories will lead to higher oil prices in 2021.
In its report «Economic Perspectives», published on Monday, June 8, the World Bank estimates that the average oil price in 2020 will be reduced by $47 per barrel, (-42%) compared with the average price in 2019; therefore, it forecasts a recovery of $18 per barrel in 2021.
BRENT CRUDE OIL PRICES
It is important to take into account the always convergent trend of the BRENT and WTI markers, but in this situation –as we pointed out in the Oil Newsletter dated April 2, when the differential of spot cargo prices compared to the future prices of Brent crude oil in May and November reached a record figure of $13.45 per barrel-this trend has been corrected. The Brent has had a more pronounced recovery than the WTI, as it is less exposed to the fall of the U.S. economy and the problems caused by the storage restrictions that have affected the country. As we said in our April Oil Newsletter, this is a fundamental factor for the price of WTI and the crudes indexed to its price, especially crudes from Latin America.
BRENT –WTI PRICE VARIATION (JANUARY-JUNE 2020)
According to estimates by the US Energy Information Administration (EIA), in its monthly report dated June 9, the average price of the Brent for the second half of 2020 will be approximately $37 per barrel. Also, they estimate that the average price of this marker for 2021 could be set at $48 dollars per barrel, approximately.
The average price of the Brent in the last four weeks was 38 dollars per barrel, a recovery of 53% compared with the average price of 25 dollars per barrel it had in the previous four weeks.
PRICE ESTIMATES FOR BRENT CRUDE OIL
(2020-2021)
WTI’s behavior has been more erratic, even suffering a collapse at negative prices of -37 dollars a barrel, due to the problems regarding lack of storage capacity in Cushing, Oklahoma.
WTI CRUDE OIL PRICE VARIATION
(2019-2020)
However, WTI has also shown after its collapse a sustained recovery, enhanced by the implementation of OPEC+ cuts and the drainage of the inventories in Cushing, Oklahoma.
WTI recovered 99% between May and June 2020. On Friday, June 12, at the closing of the European markets, it stood at $36.21 per barrel, a reduction of 4% compared with Monday’s prices, when it stood at $38.18 per barrel.
The Energy Information Administration (EIA) shows a sustained increase in future prices; as of May 6, NYMEX future prices reached $37.20 per barrel, a $22 recovery from May 1st.
However, concerns persist in the market about the increase of inventories in the United States, since inventories have reached 538 million barrels of oil, causing concerns about a further fall in the price of WTI; adding to that, there is also the uncertainty about the ability of the US administration to control the COVID-19 pandemic, which continues to expand in the country.
Furthermore, the price reference of the OPEC Oil Basket, in its last report dated June 11, showed a fall to $36.55 per barrel, after having reached $38.89 per barrel on Monday, June 8.
OIL BASKET OPEP
PRODUCTION
In terms of supply, the OPEC+ production cuts, between May-June and their extension until the end of July have been crucial to start balancing the oil market. The end of the «price war» between Russia and Saudi Arabia, as well as the commitment of both countries to lead an unprecedented effort of production cuts, has sent a clear signal to the market about the political will of the main oil producers to reduce the over-supply. This has also exerted pressure on the rest of the 23 countries that accompany them in OPEC+, so that they comply with their commitments of production cuts.
PRODUCTION QUOTAS PER COUNTRY ACCORDING TO THE OPEC+ CUTS AGREEMENTS
The clearest sign of this determination was the advance of the OPEC and OPEC+ meeting last Saturday, June 6, to put pressure on the big producers –especially Iraq and Nigeria- to fully comply with their cut quota, as well as obtain from them their commitment to compensate the lack of compliance with cuts until September.
Moreover, the additional cuts agreed by Saudi Arabia and Oman, along with the reduction in production announced by Norway for June 2020, are meant to drain approximately 1.4 million barrels of oil per day. However, Abdulaziz bin Salman Al-Saud, Saudi Arabia’s Energy Minister, reported on June 8 that his country does not intend to make additional cuts in July and that it will increase its production in that month to meet the needs of its domestic market. Similarly, Norway reiterated on June 8 that they would not modify the cuts announced on April 30 by Energy Minister Tina Bru (250,000 barrels a day in June and 134,000 barrels a day, for the second half of this year).
Mexico’s exit from the OPEC+ agreements was a significant drop in political terms, but not in volume terms, as Mexico was only cutting 100 MBD. After the exit of this Latin American country from the OPEC agreements, there is no longer any country in the region making efforts to cut production in order to contribute to the recovery of the price. Thus, the weight of the effort to recover the price falls is on the countries of the Persian Gulf, Africa and Russia.
Pending the OPEC’s monitoring meeting scheduled for June 18 and the issuing of the OPEC Oil Market Monitoring Report, right now there are only estimates and predictions from private agencies on the level of compliance with the production cut by OPEC+ countries.
According to estimates from S&P Global Platts, OPEC+ compliance was generally satisfactory (with an average of 85%), although member countries Iraq, Nigeria and Gabon, and non-OPEC Brunei and South Sudan were less than 50% compliant; Kazakhstan barely exceeded this percentage:
ESTIMATE OF THE LEVEL OF COMPLIANCE WITH OPEP+ CUTS (MAY 2020)
With regard to the world oil supply, the Energy Information Administration (EIA) report of June 9 estimates that oil supply stood at 92.6 million barrels a day in the second quarter of 2020, which represents a 7.9 million barrels a day reduction over the same period in 2019. The US agency credits this decline mainly to the voluntary cuts agreed at the OPEC+ meeting.
The EIA also considers that the reduction of drilling activities in the United States will affect the supply of oil worldwide.
This agency states that US oil production fell from record levels of 12.9 million barrels a day in November 2019 to 11.4 million barrels a day in May 2020. In this regard, the EIA forecasts an average production of 11.6 million barrels a day for 2020, highlighting that with this reduction in production the United States goes back to the same levels of 1987. The agency argue that the current decline is due to the closure of active extraction wells, the fall in prices and the market instability, which in turn reduces the drilling of wells that are fundamental to the production level of this country. The EIA estimates that production will continue to decline until March 2021 and also considers that adjustment will begin at the end of that year.
OIL PRODUCTION IN THE USA
(2018-2021)
According to the EIA, oil production from shale oil has declined by about 1 million barrels per day in the last two months, affected primarily by the decline in drilling activity in the country, the characteristics and geological behavior of the sands from where shale oil is extracted, as well as the financial problems of the shale oil producers in the USA.
DROP IN PRODUCTION OF SHALE OIL IN THE US
Additionally, the EIA confirms for the month of June the decreasing trend in drilling activity in the US, a situation that we have pointed out in previous Newsletters. The agency cites Baker Hughes’ assessment of the current number of active drills, which is the lowest since records are kept. Active drills have dropped from 222 in May to 206 by June 5 and 199 drills per day by June 7.
DROP IN DRILLING ACTIVITY IN THE U.S.
(March-June 2020)
ECONOMY
Despite the drastic cut in oil production by OPEC+ during May-June, and its extension to July, in addition to voluntary and involuntary production cuts such as those in Norway, Canada, USA and Brazil, the oil price had a week of setbacks due to the uncertainties and negative forecasts regarding the performance of the world economy for this year 2020.
OECD
On Monday, June 8, the Organization for Economic Cooperation and Development (OECD) published its report «OECD Economic Outlook, June 2020», where it forecasts a global economic recession for this year in the order of 7.6%, if a second wave of COVID-19 spreads, or 6% if the pandemic remains under control.
The organization describes the economic recession generated by the COVID-19 health crisis as the most serious in a century. In the scenarios predicted by the OECD, the Euro Zone would be the region with the greatest economic recession, with a reduction in GDP of between 9.3% and 11.7%.
WORLD ECONOMIC SCENARIOS
ACCORDING TO OECD
Even though the movement restriction measures have proved effective in preventing the spread of the virus, the OECD nevertheless qualifies this period with a high degree of uncertainty, considering that the abrupt fall of the economy in such an imprecise scenario, makes it even more difficult to configure an effective strategy for the recovery of the economy. In its forecasts, the organization indicates that both scenarios suggest that the recovery of the economy to levels equal to those of April 2019 will not be possible for another two years.
In relation to the effects on the unemployment rate for 2020 at the global level, estimated by the OECD, it doubles in the best case scenario to 5.4%, but brings it up to 9.2% in the event of a second outbreak.
Although the OECD report estimates a recovery of 5.2% by 2021 if the pandemic and its spread are brought under acceptable control or 2.8% if the so-called second wave occurs, the OECD is categorical when stating that, “…by the end of 2021, the loss of income exceeds that of any previous recession in the last 100 years outside of wartime, with dire and lasting consequences for individuals, businesses and governments.”
In addition to this scenario set out by the OECD, there was a statement by the Chairman of the US Federal Reserve, Jerome Powell, on June 10, saying that the Federal Reserve was not planning to change interest rates, whilst forecasting a fall in the US GDP of around 6.5% this year and a possible growth of the economy of up to 5% in 2021.
Global stock markets reacted nervously to these statements and mostly closed down. As for the oil market, these gloomy forecasts led to a drop in prices that reversed the abovementioned rally over $40 a barrel at the start of the week.
Additionally, the World Bank, in its report «Global Economic Outlook» published on Monday, June 8, estimates that in the context of the economic contraction of 5.2% by 2020, Latin America would be the most affected area, with a 7.2% decrease, followed by Europe, with 4.7%, considering that virtually the entire Euro Zone will be in recession.
The coronavirus crisis continues to have an economic impact in a significant number of countries. Registered confirmed cases of COVID-19 have reached 7.27 million, with 413,000 deaths as of today, Saturday 13 June.
USA
COVID-19 cases continue to increase rapidly in the United States. The number of confirmed cases has reached 2.09 million with 116,000 deaths. Analysts estimate that the relaxation of restrictions in the states and the mass gatherings resulting from the protests against the death of George Floyd at the hands of the police could have an impact on the increase in contagion and cases in the United States.
As for the labor issue in the United States, one of the key countries in boosting oil demand, unemployment claims continue to decline this week, with the Labor Department reporting 1.5 million claims this week for a total of 44.2 million unemployed in the country, according to a June 11 report.
DECREASE IN US UNEMPLOYMENT CLAIMS
On the US consumer front, as more states began to reopen their economies and employers restored jobs, an increase in early June to peak levels since 2016 is becoming apparent.
The rate of this movement in consumption, according to a preliminary study by the University of Michigan, rose 6.6 points, bringing the indicator of the «consumer sentiment» to 78.9, according to data from Friday. The median projection in a Bloomberg survey of a group of economists showed a gain of 75. It should be noted that even with the improvement, the indicator remains well below pre-pandemic levels.
CHINA and INDIA
As we mentioned in the previous Newsletter, the world’s second largest economy is generating high expectations of contributing to the recovery of the global economy, after overcoming the period of greatest virulence of COVID-19 in the country, with demand for oil returning to pre-pandemic levels.
However, today, Saturday June 13, the country’s authorities announced the establishment of new containment measures in several sections of Beijing, after a major outbreak of COVID-19 was detected in the Xinfadi market in the Chinese capital. This episode confirms one of the greatest concerns and uncertainties in all forecasts regarding the performance of the world economy: the expected second wave of the coronavirus, its impact and scope.
Despite the fact that different agencies and the government itself estimate that, unlike the rest of the industrialized economies, China will have a modest growth of 1.8% this year, the reports of the Trading Economics website about the process of normalization of the economy, indicate that this relative recovery faces challenges: on the one hand, in May exports of Chinese products fell by 3.3% compared to the same period in 2019, a fall that analysts attribute to foreign markets still weakened by the global health crisis.
On the other hand, the World Bank, in its June 2020 Global Economic Outlook Report, projects a 1% slowdown in China’s economy this year, the lowest growth rate the country has seen in more than four decades.
While in India, the world’s third largest oil importer, Fitch Ratings reported on 10 June that after the contraction of GDP by 5% due to the pandemic in 2020, estimates of the country’s growth rate would be 9.5% next year, provided that the health situation does not deteriorate further due to COVID-19.
DEMAND
With regard to estimates of global oil demand, predictions continue to agree on a significant loss of close to 10% before the onset of the economic crisis due to the COVID-19 pandemic.
The President of the 179th OPEC Ministerial Conference, Algerian Energy Minister Arkab Mohamed, stated that the organization estimates a drop in global oil demand of 9.07 million barrels per day, as reported by the organization in its latest Monthly Oil Market Report (MOMR) of May 13, 2020.
For its part, the U.S. Energy Information Administration (EIA) forecasts that oil demand for 2020 will be at 92.5 million barrels per day, which represents a decrease in demand of 8.3 million barrels per day compared with year 2019. Similarly, the EIA’s last report in May, estimated a drop in oil demand for 2020, on the order of 9.3 million barrels a day.
DROP IN GLOBAL OIL DEMAND
2020
OIL DEMAND and COVID-19
Until now, the behavior of the oil demand has had a direct correlation with the expansion of COVID-19, in what we could call a first stage of the expansion of the coronavirus and its effect on the demand for oil.
This stage developed as follows: COVID-19 started in China –the second largest economy in the world and first in oil imports- and then moved to the large industrialized or oil-consuming economies of Europe, the United Kingdom, Asia and the USA.
After the impact of this first stage of the COVID-19 pandemic, with strong effects on the oil demand, especially in the first half of the year, a gradual recovery is expected towards the second half of this year.
Thus, as we have pointed out in previous Newsletters, the recovery of global oil demand is being led by China and the rest of the Asian economies, as their economies continue to recover.
RECOVERY OF CHINA’S OIL IMPORTS (MAY)
In this second half of the year, after the initial impacts, the economies of Europe and the United Kingdom have begun to reactivate and restrictions on movement and confinement are being lifted; a process that has had greater setbacks in the USA, wherein COVID-19 is rapidly moving from previous epicenters, such as New York and California, to the rest of the states of the Union, without the authorities being able to stop its spread, which causes the estimates of economic recovery to remain surrounded by uncertainty in the largest economy on the planet and the world’s leading consumer.
However, and despite the expected second wave of the pandemic, all economic institutions and specialized agencies tend to agree that the economy of industrialized countries will suffer the impacts of the pandemic until the end of this year, to experience a significant recovery by 2021, and a rebound in terms of growth and recovery of oil demand.
However, COVID-19 continues to expand, but now within the poorer countries and less developed economies of Africa and Latin America. It is from this moment that we can begin to describe a behavior of the oil demand that is not linearly proportional to the expansion of the coronavirus, since the countries that will be affected in this second stage are neither large industrialized economies, nor are they large oil consumers.
From this second stage that we are describing with respect to oil demand, the effect of COVID-19 is moving from the richest, industrialized and largest consumer countries to the poorest, less industrialized and consequently less oil demanding countries, but also where most of the oil producing countries are located.
In the case of the oil-producing countries, located in Africa, Latin America and, to a lesser extent, the countries of the Persian Gulf, the economic difficulties resulting from the collapse of oil prices are compounded by the adverse economic, social and public health effects of the impact of COVID-19 on their countries, which, given the particular characteristics and situations (in countries such as Venezuela, Mexico, Brazil, Algeria, Angola, Nigeria, Libya, Iraq and Iran, among others), could have political consequences or initiate periods of economic and social destabilization affecting their capacity and that of their national companies to resume or restore full oil production capacities.
In this second stage of the impact of COVID-19 on poor countries, the impact of the pandemic may be reflected not on the demand side, but on the supply side. It will depend on the capacity of the leadership of the oil-producing countries to manage this extraordinary situation in terms of the economy impact and the collapse of the oil market, while maintaining production capacities and position on the international oil scene.
INVENTORIES
Regarding world oil inventories, in its report at the end of the second quarter 2020, the US Energy Information Administration (EIA) estimates that world liquid fuel inventories will increase by 2.2 million barrels per day on average in 2020, a decrease of 76% in relation to the increase rate in the January-May period (which reached an average rate of 9,4 million barrels a day when overproduction of oil and the price war between Russia and Saudi Arabia coincided with the collapse of global oil demand due to global measures taken to demobilize and reduce economic activity, to combat the spread of COVID-19).
At the same time, the EIA considers that inventories will begin to decline and that, from June onward, they will begin to fall to normal levels, with an average rate of 2.5 million barrels per day until the end of 2021.
This forecast is in line with our approach in our previous Newsletter, in that the decline in inventories would be the result of OPEC+’s «shifting price curve» strategy to force the drain on inventories by consumers.
As for inventories in the United States, this week, according to the EIA report, there was an increase in storage of 6 million barrels to 538 million barrels, which represents a rise from the levels registered on Friday, June 6. These levels correspond to 40 days of supply, 12 days of coverage above 28-day of supply level registered in 2019.
OIL INVENTORIES IN THE US
This is the fourth consecutive week of increased storage, reaching 1982 levels. Some oil analysts ascribe last week’s increase to oil imports from Saudi Arabia, which was sending VLCCs of oil to the US during the beginning of the production cut, using the ships en route as a «floating, mobile storage.»
VENEZUELA
As we have mentioned in previous Newsletters, Venezuela is currently the oil producing country most exposed to a process of political and social destabilization. This is not only because of the adverse effects of the collapse of oil prices, but also because the country –unlike most OPEC countries- faced a severe economic, political and social crisis, long before the emergence of Covid-19.
This situation of permanent convulsion that has characterized the period of nicolás maduro government, –marked by a serious institutional crisis and violations of the laws and the constitution, as well as a severe leadership and legitimacy crisis in the political direction of the country- stems from the incapacity of the current Venezuelan political leadership and a severe economic crisis caused by the government’s toxic intervention in the national oil company PDVSA, with the subsequent operational collapse of the entire national oil industry.
Thus, it is very worrying that in the context of the critical situation of the country –plunged into the worst economic crisis in the last 100 years, with shortages of food, medicines, basic services and fuel- Venezuela should address the expanding COVID-19 pandemic in the region. Currently, there are only 2,879 active cases and 23 deaths, according to data published by the Government.
The figures have been refuted by international organizations and institutions, such as Johns Hopkins University, which in May published an official document rebutting the outliers presented by Venezuela. Unfortunately, in recent weeks the national media have denounced the detention of health officials, who reported figures of deaths related to COVID-19 different to the ones issued by maduro’s government. The United Nations is one of the main international organizations that have denounced this lack of information, in addition to managing multiple actions to collaborate in providing what is necessary to attend to the health crisis. The increase in cases is mainly attributed to the entry of Venezuelans from abroad, who have entered illegally or by improvised means.
The latest report published this week by the Coordination Platform for Refugees and Migrants from Venezuela (R4V, headed by the UNHCR and the International Organization for Migration), shows that there are 5 million people who left Venezuela, of which only 60 thousand have returned. R4V attends to approximately 40 thousand who are on return routes and who suffer great needs, some of them even making the long journey on foot. On instructions of maduro’s government, the border has been closed since Tuesday.
Collapse of the fuel production system
The collapse of the production of fuels, gasoline, diesel, lubricants and liquefied petroleum gas is the most palpable expression for the Venezuelan people of the consequences of the government’s mismanagement of PDVSA. For the Venezuelans in general, the crisis in the oil market and the collapse of oil production in the country remain distant and unknown issues, which can be sensed in the dramatic deterioration of the economic situation but is not seen directly. Instead, the collapse of the production and distribution of fuel to the country’s domestic market is bluntly felt by the population: there is no gas, and it is something that cannot be hidden.
The government and its precarious teams at the head of PDVSA have not been able to restart operations in the country’s refineries. Despite repeated failed announcements and the fact that the current president of PDVSA spent ten years at the head of PDVSA’s vice-presidency of Refining and Trade and Supply, the company’s new authorities have not been able to activate the fuel production units at the El Palito refinery, the Paraguaná refinery complex or the Puerto La Cruz refinery.
The government has been managing the volume of fuel imported from Iran, which has allowed the government to increase the price of gasoline on the domestic market. They have handed over the distribution and sale of fuel to the private sector, in a flagrant violation of the Organic Law for the Reorganization of the Liquid Fuels’ Domestic Market, enacted in September 2008. This Law reserves to the Venezuelan State, through national oil company PDVSA, the control and operation of the domestic fuel market in the country.
By extending the COVID-19 quarantine for another month, the government is trying to buy time for handling the fuel shortage and for keeping trying to activate the production of the national refining system, but no success has been achieved yet.
A similar situation occurs in the production and distribution of Liquefied Petroleum Gas (LPG), which is used by more than 80% of the population as cooking fuel. As we explained in our April 3 Newsletter, the country’s gas fractionation plants, mostly located in the eastern region, have operationally collapsed due to poor management, lack of knowledge and scarcity of associated rich gas oil production, , both in the east and the west parts of the country, as a result of the collapse of oil production.
The Jose Fractionation Plant, located on the east of the country and responsible for the production of 50% of the Liquefied Petroleum Gas, has completely stopped, as reported by the workers’ union leaders.
Furthermore, the scarce volumes of LPG produced are commercialized by the governments of the different federal states of the country, to which the government handed over the management and operations of the natural gas company PDVSA Gas Comunal, which was dismantled and is in minimum operational condition. The sale price of LPG cylinders or gas bottles (known in Venezuela as “bombonas”) are well above the official price, which, when added to cooking gas being a scarce product nowadays, has made the citizens resort to using firewood for cooking. Government spokesmen have already announced the intention to privatize LPG production and distribution, placing the selling price at international prices in US dollars, as has been done with gasoline in the country.
The government has been developing the strategy of using the current situation of failure and absence of public utilities and the lack of supply of fuels in the internal market, to promote a privatization plan in the oil sector, as it was announced by the PDVSA restructuring commission chaired by the vice-president of economy, Tareck El-Aissami; a damaging plan for the country that we denounced on May 1st.
Oil Production
In June, Venezuelan oil production experienced the most terrible situation the country has seen in the entire 21st century and a large part of the 20th century. The production of oil dropped by about 200 MBD, in addition to the already reduced production in May. In the days of June that have passed so far, the oil production average volume reached about 360 MBD, as a result of the high inventories in land and floating storage facilities; such high levels in the inventories can be attributed to the government’s inability to dispatch the volumes destined for export, which is explained basically for two reasons:
- Fear of the shipping companies to be subject to sanctions by OFAC;
- Inability to place off-spec crudes in the international market due to a high percentage of cracking and very high volumes of water and sediments.
This situation of saturation in the storage yards and the possibility of overflowing tanks have led PDVSA’s current management to close more than 500 wells, with the Orinoco Oil Belt being the most affected area. With an average production of 95,000 barrels per day, this is an unprecedented event in the country’s oil history of the 21st century; not even during the Oil Sabotage in 2002-2003 were production levels lower than 100 MBD.As a reference to show the decline, in 2012 the Belt area produced more than 1,300,000 barrels per day.
After the Orinoco Oil Belt, the second most affected area in the country is the western region, which shows an average production in the month of 135 MBD, a difference of more than 70 MBD with respect to the tepid plan that PDVSA had for this area in June.
Finally, Northern of Monagas State has an average production of 160 MBD, far from the 200,000 barrels per day goal set for this month in this area.
It is a truly devastating scenario, in that –in addition to the inability to export and generate income for the country- the production of potential segregations that would go to the refineries is being reduced on a daily basis. With the Iranian help, PDVSA is trying to start up these refineries, which would lead us to the most ironic of the scenarios of oil inability in the world: to partially recover refineries that will not have crude oil to feed them, while the crisis of fuel shortage continues to affect the entire country.
According to a report published this week by Baker Hughes, only one drill is active in the country, estimating that Venezuela’s production is below 500,000 barrels per day.
In his report, Baker Hughes attributes this drop in production firstly to the gradual closure of the oil fields, as well as the fall in prices, the absence of personnel and the technical difficulties of the industry due to lack of investment; adding to this situation the fact that inventories have risen to the point where the collapsed PDVSA system cannot manage them.
These appalling numbers of drilling activity in the country contrast sharply with the drilling activity in 2013, when we had 322 active drills in the country and a production of 3 million barrels of oil per day, as we pointed out in our Newsletter of April 24.
DROP IN THE NUMBER OF ACTIVE DRILLS IN THE COUNTRY
(2014-2020)
As a result of the impossibility of exporting oil, due to the deterioration of their own tanker fleet that was operated by the subsidiary PDV-Marina and the US sanctions, the country is presenting severe restrictions to its storage capacity, having to stop production.
Reuters reports that production in the mixed company Petrozamora, which operates in the west of the country, has fallen to 28 MBD, due to oil storage problems and the impossibility of exporting.
The same fate has befallen the production of the mixed companies located in the east of the country, in particular PetroPiar and Petromonagas, where production has fallen to minimum levels because PDVSA’s minority partners Chevron and Rosneft left the country due to US sanctions and pressure.
Some internal estimates speak of production levels below 500 MBD, closer to 300 MBD of oil, levels that would be catastrophic for the country. We are waiting for this week’s OPEC report so that we can verify this information with the data reflected by the organization.
Where are PDVSA’s ships?
This situation of restrictions on Venezuelan crude oil exports was similar, although on a lesser scale, to that experienced by the country during the Oil Sabotage, when PDVSA’s exports were paralyzed, due to which we were forced to declare «force majeure», given the impossibility of exporting.
On that occasion, between 2002-2003, PDVSA’s management and directorial sectors, gathered in the so-called «gente del petroleo» («oil people») group and involved in the destabilizing action to sabotage the oil industry, issued all kinds of alerts and warnings of danger and lack of security conditions related to oil loading and unloading operations in the country, alleging a «state of commotion» and chaos in PDVSA. The owners and insurers of the oil tankers did not want to operate with PDVSA anymore, making impossible for the country to export its oil exports, leading to the complete blockade of our coasts, and causing the collapse of the oil storage; in consequence, we were forced to stop our oil production. In January 2003, we only produced 23,000 barrels of oil per day.
The experience of the 2002-2003 Oil Sabotage made it evident for us that the industry had a weakness in the private management of its hydrocarbon supply logistics, on both national and international levels, which compromised our exporting possibilities. Thus, between 2004 and 2013 we developed from the Board of Directors of the new PDVSA, a strategic plan to obtain full sovereignty over the management of our exports, establishing alliances with our strategic partners and building our own marine transport fleet operated by our subsidiary, PDV Marina, capable of handling and exporting a high percentage of our oil production.
With this strategic plan, the fleet controlled by PDVSA increased from 33 vessels in 2002 to 76 vessels in 2014. During this period, we invested in the acquisition of large vessels, VLCCs, and the renewal of our fleet, with the removal of 7 vessels that were in poor conditions (in the period 2007-2012) and the incorporation of 11 vessels (in 2011-2013).
EVOLUTION OF PDVSA FLEET (2002-2013)
PDVSA’s transport was increased by 38%, from 48 vessels to a total of 77 own-operated vessels in 2007, and with a further addition of 29 vessels by 2014. This number of vessels was the highest recorded in this period.
In 2014, PDV-Marina incorporated 8 ships to the fleet: 1 Aframax (oil tanker with up to 120 thousand tons of capacity), 5 LPG (Liquefied Petroleum Gas) ships, and 2 VLCC (Very Large Crude Carrier with up to 400 thousand tons of capacity), reaching a total of 33 ships of its own.
PDV-Marina‘s fleet growth plan envisioned the incorporation of 15 more vessels between years 2015and 2018: 2 asphalt vessels, 1 Aframax, 2 production vessels, and 8 Panamax, for a total of 48.
With this strategy for a sovereign oil development in mind, we created in 2008 the subsidiary PDV Naval, with a view towards developing shipyards for the construction, repair, and maintenance of ships and platforms, as well as of ports and everything related to the naval infrastructure of PDVSA and its subsidiaries.
The volume transported directly by PDVSA’s hydrocarbon supply logistics increased from 349 million barrels of oil per year in 2003 to 658 million barrels of oil per year in 2013, an increase of 309 million barrels of capacity, or 89% in 10 years, made up of 26 vessels shared among PDVSA’s subsidiaries Marina, Transalba, and CV Shipping, in addition to 40 vessels chartered by PDVSA’s subsidiaries.
VOLUMES OF OIL CARRIED BY PDVSA IN 2002-2013
The largest volume was transported in 2012, thanks to the growth of the coastal operations in the country to meet the demand for diesel for the electricity sector, reaching a volume of 676 million barrels per day per year transported with 72 of PDVSA’s own ships. By 2013, the requirement of the maritime fleet increased by 22%, with 161 vessels with sovereign management, 129 chartered, and 32 own vessels.
In 2014, the volume transported by PDVSA reached 684 million barrels of hydrocarbons per year, with 83 vessels from its own fleet; 28 of them were its own vessels, 29 belonged to mixed and allied companies, and 26 were chartered. In 2013, the vessel «Ayacucho» – a VLCC with a two million capacity and 20 new tugs- was added in order to strengthen the national fleet and eliminate the country’s dependence on third parties.
However, much, if not all, of this operational capacity for transporting crude oil and hydrocarbons with PDVSA’s own vessels has been lost. Since 2014, but particularly while General Quevedo was chairing PDVSA, not only were stopped on its tracks the fleet expansion plans conceived within the framework of the Strategic Plan for Sovereignty in Oil Transport, but also the vessels acquired by PDVSA were abandoned in foreign ports or shipyards and many of them were auctioned off because the PDVSA’s Board of Directors did not honour payment commitments and financial debts or because of embargoes in legal actions taken by private parties to collect PDVSA’s debts.
Today, PDVSA does not have its own capacity for the transportation of hydrocarbons. Had it maintained the capacity that it was able to obtain between years 2004 and 2014, the company would now be able to handle its export volumes regardless of the US sanctions, simply because it would have its own vessels. The incapacity and negligence of PDVSA’s administrators has caused the loss of a strategic advantage for our company and our country.
Under the Commission’s ‘restructuring’ plan for PDVSA, the subsidiary PDV Marina, the remaining vessels and other assets are in the process of being privatized. The workers claim that the vessels are being transferred to INEA (Instituto Nacional de los Espacios Acuaticos- the government’s agency for regulating aquatic transport), changed in name and then handed over to a Russian shipyard. The workers point out that the authorities authorized the name changes of the ships, and that 50% of INEA’s share will be handled by a private Venezuelan company appointed by the president of the institute, who happened to be appointed on March 10 as the President of PDV Marina, after the Military Intelligence Directorate arrested 38 workers belonging to the crew of the ship «Negra Hipólita» for alleged illegal actions, which to date have not been confirmed.
All of this, which is absolutely illegal, is taking place behind the backs of the people of Venezuela, without any compliance with the law or with PDVSA’s statutes, and without being accountable to any control body. These Venezuelan State’s capacities and assets are lost.
Today, we depend on other countries (like Iran, which, even though is a sanctioned country, has ships of its own) or any poacher trader to handle our exports. Faced with the loss of its own vessels, PDVSA is forced to stop production because its storage capacities are overstretched. It is the Oil Sabotage once again, but now it is created by the government’s own inability.
We must ask the government and PDVSA’s administrators: What happened to PDVSA’s vessels in these 7 years?