Venezuela's oil production on the brink of collapse

Venezuela's oil production on the brink of collapse
Published time: 18 May, 2017 10:20

Desperation is spreading in Venezuela as violent protests continue to
paralyze the country, further damaging the country's shattered economy.
Venezuela's already-decrepit oil industry is deteriorating by the day,
and an outright implosion is no longer out of the question.

The inflation rate, according to the IMF, will balloon to 720 percent
this year. Food shortages have been common for quite some time, but are
deepening and wearing down the population. Three out of four people
surveyed by the WSJ reported involuntary weight loss last year.
Hospitals have completely broken down.

Venezuela has been crippled by protests since late March, with more than
three dozen people having been killed over the past two months, and
there is no sign of improvement. This meltdown is taking a toll on
Venezuela's oil production, the last thing keeping the country from
becoming a failed state. Venezuela's oil production has been declining
for more than a decade, mainly because oil revenues are used to finance
the government, leaving little for state-owned PDVSA to reinvest in its
operations.

But things are getting worse. The cash shortage is accelerating the
decline. As of April, oil production stood at 1.956 million barrels per
day (mb/d), down 10 percent from last year, and down more than 17
percent from 2015 levels - and output continues to trend downward. James
Williams, energy economist at WTRG Economics, told Marketwatch in March
that he expects Venezuela to lose another 200,000 to 300,000 bpd this
year, another 10 to 15 percent decline from 1Q2017 levels.

The problem is downstream as well, as the shortage of refined products
worsens. Three out of Venezuela's four oil refineries are operating
significantly below capacity because of the inability to find spare
parts for maintenance, according to Reuters. The Paraguana Refining
Center, for example, is only producing 409,000 bpd compared to its
nameplate capacity of 955,000 bpd. PDVSA's third largest refinery, which
has a capacity of 187,000 bpd, is operating "at minimum levels due to
problems at two of its three distillation units," Reuters says.

With cash drying up, PDVSA is also struggling to import lighter fuels
that are necessary to blend with the country's heavy oil. Some ships are
sitting off the Venezuelan coast because of unpaid bills. Meanwhile,
because of obligations to creditors, PDVSA is sending crude abroad,
leaving little for domestic refining.

But PDVSA's financial and operational problems have a compounding
effect. Falling production at refineries mean more gasoline needs to be
imported from abroad, putting a tighter squeeze on state finances, which
in turn leaves even less for everything else the country needs, from
food to healthcare.

The possibility of all hell breaking loose is not zero. The WSJ reports
that Venezuelan security forces are at their breaking point. Young,
underpaid members of the national police are often not given food or
water while on duty, and are asked to constantly beat back rapidly
escalating protests in scorching heat, around the clock. Also, police
and soldiers are not immune to the food shortages and economic collapse
that the rest of the country is suffering through. The loyalty of the
security services to the President no longer appears rock solid.

PDVSA and the national government avoided a debt default a few weeks
ago, but with obligations looming later this year and a dwindling pile
of cash with which to draw upon, the problem is not going away.

As far as the oil sector goes, the best case scenario for Venezuela is
steady, if rapid, decline in production – a loss of 200,000 to 300,000
bpd this year. But the darker scenario is a much more sudden disruption
if the country implodes. There is no way of knowing if this will happen,
but analysts are growing increasingly concerned about the possibility.

"Oil production continues its downward drift due to service provider
cuts, power shortages, inability to obtain imports and irregular salary
payments," Helima Croft, commodities strategist at RBC Capital Markets,
wrote in a recent report. "The oil question is whether current
conditions could set the stage for the type of industrial action that
cut exports by nearly 80 percent in the early 2000s."

This article was originally published on Oilprice.com"

https://www.rt.com/business/388793-venezuelas-oil-production-on-brink/