Venezuela is stuck in an economic and political crisis, and its rapidly dwindling fiscal resources could start cutting into the country’s oil production.
The country is also suffering through a brutal electricity crisis as water levels run low at the massive Guri dam, which generates about three-fourths of the nation’s electricity. The Venezuelan government has put in place painful rationing rules, limiting the work week to four days in early April. A few weeks later the work week was compressed to just two days in order to conserve increasingly scarce electricity.
Falling water levels at the dam are leading to more blackouts, making life in Caracas, one of the world’s most dangerous cities, a nightmare. Riots, protests, and looting hit the city one night in late April as the city was blanketed in darkness. Chronic shortages of basic goods, including food and medicine, are routine. Inflation is nearing 500 percent and the country’s currency, the bolivar, is rapidly losing value.
The problems are starting to affect the lifeblood of the economy: Oil production. The combined effect of the economic collapse, lack of maintenance at oilfields and refineries, and power shortages could cut off at least a quarter of a million barrels per day of oil production this year.
Maduro running out of time
Venezuela has fallen into an economic depression that won’t be quick or easy to escape from. The IMF estimates that Venezuela’s GDP will contract by 8 percent this year, which could turn out to be the worst performance in the world.
The shortage of basic consumer goods and the latest electricity crisis are testing the nerves of the populace. President Nicolas Maduro, having inherited a powerful state apparatus from the hugely popular late President Hugo Chavez, has held a strong grip over the country despite not being particularly charismatic himself. However, he is ruling from a shrinking support base as the country’s economy is in tatters.
The political opposition has been neutered for some time, but they are mounting a recall campaign, collecting thousands of signatures to remove President Maduro from office. “This [petition] is our last chance of getting out of this democratically,” Antonio Gomez, a 45-year old bus driver in the city of Maracaibo, told The Wall Street Journal in an interview. “We are reaching desperation.”
The campaign will not be easy: First the opposition must collect signatures from 1 percent of the electorate, or 200,000 people. Election officials then have a few weeks to certify the results. After that, another 4 million signatures must be collected before the matter can even reach a ballot. In the short run, the nation appears to be stuck with the Maduro government.
Oil production from the South American OPEC country has steadily declined from 3.4 million barrels per day (mbd) in 2000 to just 2.78 mbd in 2015. Despite having the world’s largest oil reserves, the state-owned oil company PDVSA has failed to halt the decline.
However, Venezuela’s economic crisis could accelerate the erosion of its oil sector. According to consulting firm IPD Latin America, Venezuela could see oil production fall to just 2.35 mbd this year. That would amount to a loss of nearly 250,000 barrels per day from Venezuela’s first quarter production levels. And output for the first quarter—at 2.59 mbd—was down 6.8 percent compared to the same period a year earlier.
The loss of Schlumberger alone could lead to the disruption of 150,000 barrels of daily oil production by the end of the year.
IPD also said that the first quarter saw output fall in all districts of the country, the first time that has occurred since the third quarter of 2008. The consultancy had originally projected that Venezuela would produce 2.62 mbd on average in 2016, but has sharply downgraded its assessment as the country has run into electricity shortages and a shrinking pile of cash with which it can use for investments. Bank of America Merill Lynch Global Research noted that IPD’s downward revision is especially concerning given that it is an average for the entire year, which means huge production losses could be coming in the latter half of 2016. In a darker scenario constructed by IPD, Venezuela’s oil production could actually fall to 2.1 mbd by the end of the year, down more than .5 mbd from 2015 levels.
“They have not kept up on maintenance and it is showing everywhere: Oil production, electricity problems,” Ray Zucaro, the chief investment officer at Miami-based RVX Asset Management, told Bloomberg. “The place is falling apart. There’s no beer for god’s sake!”
There is a long list of problems that Venezuela’s state-owned oil company PDVSA has to contend with. Instead of using natural gas to help pressurize oil fields, it is being diverted for power generation as water levels run low at the nation’s large hydro dams. No cash means deferred maintenance. A scarcity of diluents is making it difficult to process heavy crude. And theft is also cutting into the country’s take.
Oilfield services giant Schlumberger began shutting down operations in Venezuela because the company said it had not been paid. FGE, an energy consultancy, estimates that the loss of Schlumberger alone could lead to the disruption of 150,000 barrels of daily oil production by the end of the year. IPD says that the time it takes to complete a well has ballooned from 15 to 60 days on average.
The shortfall in electricity is being felt much more downstream than it is upstream, since PDVSA generates most of its electricity itself. In the last week of April, Venezuela’s Amuay oil refinery saw production cut in half because of a shortage of electricity, according to Reuters, slashing output from 645,000 barrels per day to just 360,000 barrels per day. “At the weekend we were producing at around 25 percent, nothing more,” a worker at Amuay said in an interview with Reuters.
Glimmers of hope
Rains have recently arrived in Venezuela, which could allow it to avoid shutting down the Guri dam entirely. IPD says the Guri reservoir is showing signs of recovery. The country may yet avert a total catastrophe.
Also, it is not an inevitability that the government or PDVSA will default on its debt in the near-term. While neither has the resources to pay its large pile of debt, there are no major payments due until the fourth quarter. Also, IPD says that PDVSA is hoping to obtain some leniency from its Chinese lenders, suspending some of its debt payments, which could help it avoid default.
PDVSA is hoping to obtain some leniency from its Chinese lenders, suspending some of its debt payments, which could help it avoid default.
As for oil production, IPD believes Venezuela could still hit the consultancy’s original production target of 2.62 mbd in 2016 if oil prices surge to $70 to $80 per barrel in the second half of the year. But, of course, that would mean a price rise of 50 to 75 percent from today’s levels, which is not exactly a sure bet.