The Fuse

Venezuela’s Production Losses Could Accelerate as Chevron Becomes a Target

by Nick Cunningham | April 24, 2018

Output will likely continue on its downward trajectory, possibly falling by another few hundred thousand barrels per day before the end of 2018.

The outlook for Venezuela’s oil sector took another turn for the worse in the past week, with the few remaining international companies operating in the country increasingly under pressure.

Venezuela’s oil production has been in decline for years, but the losses have accelerated over the past year. The baseline assumption is that output will continue on its downward trajectory, likely falling by another few hundred thousand barrels per day before the end of 2018. However, the declines could be exacerbated if Caracas forces international companies to scale back operations or leave the country. The Venezuelan government, in its desperate attempt to halt production declines and shift blame for its self-inflicted woes, is turning its sights on its own joint venture partners, a move that does not bode well for the future of the oil industry in the OPEC nation.

Chevron targeted

Venezuelan intelligence arrested two employees of Chevron on April 16 who balked at signing contracts with PDVSA at inflated prices, according to Reuters. The workers handle operations at the Petropiar oil upgrading project, which is jointly owned by PDVSA and Chevron. The project upgrades heavy oil from the Orinoco Belt into a processed product for export. The workers claim that the prices for equipment demanded by PDVSA were offered at double the market price. As a result, they were arrested and may be charged with treason.

Venezuelan intelligence arrested two employees of Chevron who balked at signing contracts with PDVSA at inflated prices.

The move has broader implications beyond the immediate arrest of the two workers. Petropiar is a main source of revenue for both PDVSA and for Chevron’s assets in the country. The arrest of Chevron employees was the first known detainment of workers directly employed by a foreign oil company in Venezuela, and at a minimum, it will slow Chevron’s investment in the country. But, more likely, the Petropiar project will suffer, potentially putting more barrels at risk and ultimately jeopardizing Chevron’s commitment to the country.

“These detentions are going to accelerate the operational crisis,” one source with knowledge of Chevron’s operations told Reuters. “Procurement could end up in paralysis if nobody wants to take the risk of signing or authorizing anything.”

Chevron’s commitment to the country is in jeopardy.

The deteriorating operating environment for Chevron comes a few months after President Nicolas Maduro replaced the head of PDVSA with Major General Manuel Quevedo, who has fired workers ostensibly in a campaign to eradicate corruption. However, the firings are widely seen as a political purge. According to Reuters, more than 80 executives at PDVSA have been removed. Further down the food chain, the crisis is even worse. Lack of pay, lack of food, and dangerous working conditions have led to a worker exodus. Reuters estimates that about 25,000 workers have quit PDVSA between January 2017 and January 2018, and the rate of departures reportedly increased significantly after Quevedo took over in November.

Quevedo has also heightened confrontation with PDVSA’s joint venture partners, including Chevron. When the Petropiar project ran into trouble in February over lack of parts, PDVSA blamed the Chevron employees who were recently arrested. Last year, PDVSA reportedly siphoned off oil from the Petropiar project in order to supply other refineries that were short on refined products, according to Reuters. Chronic fuel shortages prompted the diversion, but it only shifted the pain since siphoning oil from Petropiar resulted in less oil available for export, cutting into the only significant source of cash generation for the country.

Halliburton wrote down its remaining investment in Venezuela, taking a $312 million impairment charge.

Other foreign companies are also seeing myriad problems. On April 23, Halliburton wrote down its remaining investment in Venezuela, taking a $312 million impairment charge. The oilfield services giant cited currency devaluation, U.S. sanctions, and political and economic challenges. Halliburton said it would continue to operate in Venezuela “at a reduced level” but would “carefully manage our go-forward exposure,” Halliburton executives told investors on an earnings call.

The announcement comes after Halliburton wrote off $647 million last year because of lack of payment from PDVSA. At the end of 2017, PDVSA owed $690 million to Chevron, $580 million to Repsol, $1.58 billion to CNPC, and smaller amounts to other joint venture partners.

Joint ventures key to oil production

Venezuela’s recent actions targeting Chevron employees could lead to steeper oil production losses, a crucial threat to a nation already in a major crisis with no end in sight. In fact, even as output has been falling at PDVSA’s operations for nearly two decades, production at projects PDVSA runs jointly with companies such as Chevron increased by 30 percent between 2010 and 2015, according to a March report from the Atlantic Council. Since then, however, production at these joint venture projects has declined, but at a much slower rate compared to those solely run by PDVSA.

Venezuela’s production was already down to 1.49 Mbd as of March, more than 400,000 b/d lower than September 2017 levels.

In other words, Venezuelan authorities are undermining companies that have helped their industry. Oil production was already down to 1.49 million barrels per day (Mbd) as of March, according to OPEC’s secondary sources, which is more than 400,000 barrels per day (b/d) lower than September 2017 levels. Venezuela’s oil production could dip to 1.35 Mbd in the second half of the year, according to a January estimate from Barclays. However, based on the rate of decline since that estimate was published—with monthly losses topping 50,000 b/d—that figure is starting to look conservative. Even if the joint venture partners stay in Venezuela, the losses are likely to mount. And without them, the situation will deteriorate even more.

“Chevron has been one of the more steadfast participants in Venezuela, having stuck around through some of the most challenging times over the past two years,” Mara Roberts Duque, a BMI Research analyst, said in a Bloomberg interview. “These arrests will likely encourage them to turn away from Venezuela in a more definitive manner.”