Oil Production Weighs Heavy on Venezuela
Friday 24th April 2015
Few countries have been hit harder by falling crude oil prices in recent months than Venezuela; an OPEC member and the holder of the world’s largest volume of oil reserves. Hostile nationalisation, spiralling national debt, soaring inflation and an under-developed downstream sector have all contributed to an increasingly unattractive environment for IOC investment.
2007 was a bumper year for the South American country’s onshore drilling market, with a total of 1,544 wells drilled. The same year, the government began the process of forcibly seizing foreign-owned upstream assets. This resulted in annual drilling activity falling 80% to 2014. Venezuela’s NOC, PDVSA, has since been hit by arbitration filings by a number of companies, with rulings already in place to repay $1.6bn to ExxonMobil – funds it simply does not have.
Optimism arose in 2011 with claims the reserves of the heavy oil Orinoco Belt were double that of Saudi Arabia. However, despite various projects being brought onstream in 2013, the Orinoco Belt production has failed to reverse the national output decline. A lack of investment in the necessary downstream infrastructure for the heavy crude has resulted in Venezuela being forced to market low-value crude oil, leading to severe financial problems for PDVSA. Therefore, DW expects onshore crude production to continue to decline at around 1% per year over 2015-2021.
Spiralling debt for both PDVSA and the government has become increasingly problematic, particularly in addressing the shortfall in Venezuelan downstream facilities. In January, Moody’s downgraded Venezuela’s to the third lowest rating, making it both extremely difficult and expensive to access international lending markets. As of 26th March 2015, total external debt in the country stands at $95.1bn (a quarter of GDP), $38.3bn and $36.2bn of which is attributable to the government and PDVSA respectively.
Falling oil prices have further compounded Venezuela’s situation; as around 95% of the country’s exports are made up by crude oil.
However, Venezuela’s offshore plays offer hope, DW expect offshore production to increase from 149 kboe/d in 2014 to 473 kboe/d in 2019. The majority of the production increase is expected to come from the Perla and Mariscal Sucre gas projects, which will contribute to a rise in offshore drilling over the next four years. Given that gas prices have not fallen by the same degree as oil prices, a quick ramp up of production could come to PDVSA’s rescue. However, DW are not expecting levels of production in coming years to be sufficient to turn around PDVSA’s or Venezuela’s fortunes in the short term, with a weathering of the storm the most optimistic scenario.