How Venezuela got its oil production out of lethargy

Venezuela It nearly doubled its oil production in 2021 from last year’s record lows after its state-owned company struck deals that allowed it to extract and process more extra-heavy crude into exportable varieties.

The surprising reversal began with the support of small oil service companies that accepted debt repayment agreements with Petróleos de Venezuela (PDVSA), to which was later added a key contract with Iran that assured the country the stabilization of the supply of diluents.

Venezuela raised its production to 824,000 barrels per day (bpd) in November, well above the first three quarters of 2021 and 90% more than the average for the same month of the previous year.

But the performance of 2021, although remarkable after years of lethargy, does not necessarily imply that the state company will be able to continue increasing production.

PDVSA’s recent achievements, including surpassing one million barrels of oil produced in one day for the first time in nearly three years, what Oil Minister Tareck El Aissami described as a “great victory” in a Christmas message. to workers, were not enough to achieve the goal set by its current administration of producing 1.28 million bpd at the end of this fiscal year.

Years of unpaid bills, mismanagement and, most recently, US sanctions have cut off access to specialized drilling equipment and foreign investment. The sanctions have also limited its portfolio of clients, now from companies with no commercial experience.

Workers in several producing regions say the reopening of oil fields continues and they hope that more flow stations will be reactivated. However, experts noted that PDVSA has done everything in its power for now and that its future progress could be limited by the lack of additional drills as well as functional upgraders to process its extra heavy crude.

“Base production in 2021 was well below PDVSA’s production capacity,” said Francisco Monaldi, director of the Latin American Energy Program at Rice University’s Baker Institute in Houston.

“We are reaching that capacity now. To see an increase in production during 2022, investment is needed in new wells and infrastructure available for improvement, “he added.

Helped by allies

The main turning point came from an exchange agreement between the state-owned PDVSA and the National Oil Company of Iran (NIOC) that started in September, proving to be crucial for generating export crude from extra-heavy oil from the main oil-producing region. Venezuela, the Orinoco Belt.

Hard currency income from local fuel sales and increased oil exports to Asia also allowed PDVSA to pay off some debts with service companies and settle past due debts with the promise of future work and the granting of permits for some companies. service personnel could operate equipment in the fields.

Some of those firms also accepted payments in kind, mainly oil by-products and residual fuel that were later sold domestically and abroad, according to people familiar with the matter.

As of mid-December, there were a total of 47 active well service and maintenance drills in the Orinoco Belt and 29 more in other regions, according to an internal PDVSA document seen by Reuters. The same report showed 19 other similar units idle. No active drilling rigs, essential for developing production capacity, were reported.

The US Treasury Department, which administers the PDVSA sanctions regime, did not respond to a request for comment.

Return to lost land

Venezuela reported an annual crude oil production of 569,000 bpd in 2020 and its exports averaged 627,000 bpd due to the fact that PDVSA was able to drain a good part of its accumulated inventories. Official figures do not exclude the portion of imported diluent or water present in each barrel of crude.

But independent analysts and experts agree that production has recovered. Consulting firm IPD Latin America estimates that Venezuela’s crude production will average 640,000 to 660,000 bpd this year, excluding condensates and natural gas liquids.

In eastern Venezuela, two oil projects that partially restored their operations, Petro San Félix and Petrodelta, are seeking financing to continue increasing production, said Antero Alvarado, managing partner of consulting firm Gas Energy.

Service companies have helped rapidly reopen wells in that region, particularly in the Belt and northern Monagas, by using coiled tubing for their conditioning, two sources said.

“PDVSA has repaid debt with suppliers,” added Alvarado. The company also repaired three of its imported 750-horsepower drills from China, with the goal of activating them next year, he said.

In the western region, where equipment theft has been rampant, at least two other projects, in the mature Tía Juana and Cabimas fields, plan to nearly double their production by 2022, people familiar with the plans said.

“A lot of production is starting around here. The ‘goats’ (maintenance drills) have not rested drilling and cleaning, that is walking ”, said a worker from Lake Maracaibo, in northwestern Venezuela. He added that some inoperative flow stations are expected to restart in 2022.

Obstacles persist

Delays in payment compliance by PDVSA are expected to continue to be a key problem. Agreements with oil services firms to resume work are fragile and could be undone if PDVSA does not deliver on its promises.

“The debt continues to mount,” said a contractor executive who asked not to be named out of fear or retaliation. “The companies bill US $ 1 million per month, but receive payments of US $ 50,000 or US $ 100,000 per month.”

A worker from another firm said his company has been working intermittently this year due to payment problems.

In the Orinoco Belt, where diluents are essential to keep production afloat, reaching extraction levels higher than the current ones will require that at least one other oil upgrader enters service, in the Petromonagas or Petro San Félix projects, to take advantage of the maximum diluent supply, experts said.

PDVSA’s infrastructure for unloading and storing imported diluents has also become saturated.

Since shipments began arriving from Iran, there have been delays in the export of crude, according to internal company documents. PDVSA has also had to park part of its fleet of tankers, crucial to its operations, in order to store part of the diluents.