Venezuela’s oil industry achieves unexpected recovery

Just over a year ago, the international oil markets dismissed Venezuela as a catastrophe too badly hit and badly managed to be relevant again. It turned out that the announcement of his death was quite premature.

The founding member of OPEC — which is home to the world’s largest oil reserves — has more than doubled production since the end of 2020, and there is still room for output to grow. With global economies recovering from the worst of the pandemic and the market on edge over the potential impact of Ukraine-Russia tensions, hungry buyers are snapping up all the fuel they can get their hands on.

It is a lift that until recently seemed almost unthinkable. The state-owned Petróleos de Venezuela SA, already in dire straits after decades of mismanagement, was dealt blow after blow: US financial sanctions in 2017; another round two years later that disrupted sales of its oil and forced contractors to withdraw from the country; an electrical blackout that put production out of commission for a week; the loss of oil storage in the Caribbean; and a global pandemic that sent down prices for its heavy crude.

The petrostate’s foreign exchange earnings fell 99% in the six years ending in early 2021, dealing a major blow to the economy.

But Venezuela has recently worked out a new formula: import light oil from Iran to help dilute its thick crude, work with local contractors to keep the oil flowing, and sell it to China through middlemen. As a result, PDVSA is now producing some 800,000 barrels a day, about 60% of what it was pumping before US oil sanctions took effect in January 2019.

It’s not the three million barrels a day that made Venezuela a global energy force in the 1990s, but it’s also not the 374,000 barrels a day it reached when the country bottomed out in June 2020. With prices hovering around $100 per barrel and some local contractors who perceive that the Biden Administration is less strict in applying economic sanctions, many analysts believe that it is a level of production that the country can maintain.

To be sure, 800,000 barrels per day is less than 10% of Saudi Arabia’s output and wouldn’t even make Venezuela a top producer in the Organization of the Petroleum Exporting Countries. But while it will hardly have any international impact, it is an important lifeline for President Nicolás Maduro, providing oxygen to an economy that has just grown for the first time in seven years.

PDVSA does not publish financial data, but Asdrúbal Oliveros of the Caracas-based consultancy Ecoanalítica estimates that the government received $11 billion in oil revenue last year, a 38% increase from the year before. He sees revenue rising to about $15 billion this year. The company did not respond to messages requesting comment.

Venezuela’s offer does notIt will move the markets, but with the increase in oil prices, it represents an unexpected income for Maduro”, David Voght, managing director of IPD Latin America, said in an interview.

A key factor driving the turnaround is the help of powerful allies. China buys most of Venezuela’s production and Iran provides the condensate the country needs to mix with its heavy crude. The diluent is key for the Orinoco Belt. The tar-like crude that is extracted from the broad plains of eastern Venezuela, similar to tar, represents about 70% of the country’s production; without condensate to mix it, it cannot be pumped to PDVSA’s export port, 300 kilometers away, as it clogs pipelines.

“Access to Iranian diluents is key to keep production risingsaid Jacques Rousseau, managing director of Clearview Energy Partners LLC. “With oil prices so high and supplies of the kind of heavy oil that Venezuela produces dwindling, it is certainly worth paying closer attention to what they are doing.”. This same week, Caracas and Tehran expanded their oil cooperation with a new agreement in Doha, during the Forum of Gas Exporting Countries, without detailing its content.

PDVSA has also weathered the exodus of large international service and maintenance companies such as Halliburton Co., Schlumberger and Baker Hughes Co., which pulled out of the country because U.S. sanctions barred them from drilling wells or selling, buying or transporting oil.

Instead, local contractors are increasingly filling the void, quietly stepping in for repairs and maintenance. The willingness of these companies to accept contracts is due, in part, to the Biden Administration’s hands-off approach to sanctions, according to contractors operating in the country. Under this softer approach, they say the US is not closing off its access to financial institutions with the same voracity as the Trump Administration.

The Treasury Department did not respond to a request for comment.

For now, production is holding up, even as many facilities are in shambles, Voght said. PDVSA has so much excess capacity that it can focus on plants that are in better shape to keep pumping close to current levels. At the same time, many of the fields that have been closed may quickly reopen, meaning there could be room to grow.

Despite the sanctions and the quality of Venezuelan crude, “it is operating with great effort and to the best of its ability and with great effort to maintain production in the worst conditions”, said the economist Tamara Herrera, managing director of the consultancy firm Síntesis Financiera.

Still, that doesn’t mean Maduro’s ambitious goal of 1.5 million barrels a day is within reach. “After years of lack of investment”, said Rousseau of Clearview Energy“it is unlikely that production will return to what it was before”.

Herrera agrees. “Touching them and keeping them are two different things.” said about the high levels of production. “The main challenge for the sector is that the levels achieved are sustainable”.