Of all the Petro States potentially sliding into the abyss, Venezuela looks like it’s holding the lead. An already divided country has split even wider apart after President Nicolas Maduro swore in the Constituent Assembly in August, where government loyalists plan to rewrite the constitution. Now that the fuse has been lit, it’s only a question of which hotspots flare up and further fray—or snap—Venezuela’s oil lifeline.
The economy is in tatters, with inflation running at more than 70% and significant parts of the population unable to procure food and medicine. As protests against the government continue, the death toll has reached 120. Dwindling foreign currency reserves pose a real risk Venezuela could default when its debt obligations come due. Some say labor at state-owned PDVSA may strike to protest sporadic pay and safety issues.
Oil exports are Venezuela’s lifeline, accounting for more than 90% of its foreign exchange earnings. Going forward, reliance on exports looks like it will become increasingly complicated after the U.S. ratcheted up sanctions in the wake of Maduro’s move to tighten his grip on power. As of early August, financial sanctions by the U.S. were limited to those imposed on Maduro and a growing number of officials with ties to the president. But harsher sanctions could follow.
One measure would be to impose sanctions prohibiting any transaction in U.S. currency by PDVSA, a move similar to that used against Iran. Another would be to ban imports of Venezuelan crude, although this would have to be measured against its adverse impact on U.S. refiners—and their employees and customers—that traditionally have relied on heavy Venezuelan crudes. A ban could also be placed on exports to Venezuela of U.S. naphtha and light crudes needed for blending with heavy crudes.
If any such measures were taken, they would add powerful headwinds to a profile of already steadily declining production in Venezuela. Much of its exports—one estimate is as much as 40%—is already pledged as collateral for loans Venezuela has arranged with China and Russia. Russia’s Rosneft has also accepted a 49.9% interest in U.S. refiner Citgo, related to loans made to PDVSA.
At press-time, Rosneft disclosed it has made prepayments totaling around $6 billion to PDVSA, with repayment due to be made in oil and oil product deliveries. “No new prepayments are planned,” it said, according to Reuters.
Production data is increasingly opaque, but Venezuela’s production is estimated to be declining at a monthly rate approaching 30,000 barrels of oil per day (bbl/d), according to a report by Citi. The Citi analysts cite secondary sources as estimating June 2017 output at 1.94 million barrels of oil per day (MMbbl/d), below Venezuelan data showing June output at 2.16 MMbbl/d. The Citi analysts forecast declines to 1.65 MMbbl/d and 1.3 MMbbl/d by the end of 2017 and 2018, respectively.
Crude imports from Venezuela to the U.S. peaked at about 1.6 MMbbl/d in late 1997, but have since fallen to around 750,00 Bbl/d. A U.S. import ban would spur demand and tighten spreads for competing heavy grades, mainly coming from Canada and Mexico, plus Colombia. Finding alternative outlets for its displaced crude, Venezuela would likely require steeper discounts and be impeded by the its more limited ability to load supertankers.
“The average 770,000 bbl/d imported [into the U.S.] from the country cannot be easily replaced in any other country’s refining system,” noted the Citi report.
If the U.S were to implement sweeping sanctions such as applied earlier against Iran, Venezuela would “face economic ruin unless China rides to the rescue with a massive assistance package,” according to RBC Capital Markets’ global head of commodity strategy, Helima Croft. “Faced with a severe shortage of hard currency, PDVSA will be extremely hard pressed to avoid a disorderly default in the autumn or to continue any semblance of regular salary payments.”
In a telling sign, Repsol SA, Europe’s integrated producer with the largest exposure to Venezuela, was evacuating its expatriate staff in early August. Similar moves were taken by Statoil and Total.
A disorderly default scenario, noted Croft, would in turn raise “the specter of a return to the large-scale production losses last seen in the early 2000s.”
Those with long memories may recall Venezuelan output falling to roughly 1.2 MMbbl/d during a lengthy strike in 2002 that forced PDVSA management to take over operations. But that decline was from a production level of about 2.8 MMbbl/d. Today, output’s just below 2 MMbbl/d.
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