Venezuelan oil sector grows more wobbly as US economic stranglehold tightens

Gerd Knutsen, a tanker with a 950000-barrel oil cargo returns to Venezuela after a year at sea
Gerd Knutsen, a tanker with a 950000-barrel oil cargo returns to Venezuela after a year at sea

If high inventories of oil and continually declining prices are providing huge headaches for even the most powerful companies in the global oil & gas sector, these days, this applies doubly for Guyana’s western neighbour, Venezuela, believed to possess the single largest oil reserves in the world. However that country is being humiliatingly ground down by the twin forces of a domestic socio-political crisis that has created varying degrees of refugee challenges for its neighbours, on the one hand, and on the other, the relentless economic pressure being applied by the United States to force the incumbent president in Caracas, Nicholas aduro, out of office. 

Washington’s prolonged offensive against Maduro has mostly taken aim at the heart of the country’s economy, its oil industry (the Stabroek Business has been publishing occasional periodic reports on aspects of the US/Venezuela oil-driven political confrontation). Essentially, what Washington has done is to brandish sanctions as a threat that has scared all but a handful of oil and shipping companies away from doing business with Venezuela’s oil industry. The Russians and the Chinese have provided some measure of pushback against those threats, whilst the US administration, recognising that its own giant oil company, Chevron, which has been long embedded in Venezuela and stands to lose possibly billions by quitting the country, has agreed to have the company stay on in Caracas, courtesy of a series of waivers to exit deadlines, the most recent and rumoured to be the final one, ending this month.

But the evidence that the pressures have transformed the once powerful South American giant into a shadow of its former self is clear.  Its oil industry had had the energy sucked out of it, resulting in an inevitable knock-on to the country’s economy and its standard of living. The pressures on the poor have, in some instances, become so unbearable, that the flight of those who can no longer bear it continues unchecked.

Now we are being told that global high inventories of unsold oil and continually sinking prices are nudging Venezuela to the once unthinkable position of shutting down its wells. This, against the backdrop of a circumstance in which, long before the advent of COVID-19, managing the country’s economy had already been a precarious balancing act for the Maduro administration.

Reports earlier this week, not confirmed by the government in Caracas, state that overall oil production in Venezuela had tumbled to 464,000 barrels of oil per day, as of last week. Compare that with the fact that last year Venezuela reported to the Organization of Petroleum Exporting Countries (OPEC), an average crude production of about 1 million barrels per day and that amount, at the time, had been considered its lowest level of production in about 75 years. But that is not all. There are reports that inventories exceeding 30 million barrels of Vene-zuelan oil are, at this time, sitting off the coasts of Asia and Africa, unsold. It is this, reports say, which could now compel Venezuela to close some of its wells. 

It has to be said that the geo-political dimension to Venezuela’s current crisis may render some of the information being disseminated about its economy and more particularly, its oil production, not necessarily, verifiable. Much of the reporting emanates from western news sources and the overwhelming majority bears an anti-Maduro bias. To make matters worse Caracas itself is not, these days, inclined to comment on such reports, particularly when they concern its oil industry.

That being said, evidence of prevailing social conditions in the country as reflected in the unchecked flight of refugees offer alternative and compelling clues to the extent of the country’s crisis. Venezuela, accordingly, has become a ‘victim’ of what, frequently, is the daily diet of bad news that gets disseminated about its circumstances. Last week, information originating with an unnamed source but published in an article that appeared on several international news sites, asserted that the “state-controlled Petroleos de Venezuela S.A. and Chevron Corp’s Petropiar was at 50,000 barrels a day last week, down from 120,000 in January while Rosneft PJSC’s main venture, Petromonagas, dropped to 20,000 barrels a day last week, a quarter of their January production.” It has not been the disposition of the authorities in Caracas to respond to assertions like these.

On the back of what the Reuters News Agency said was an order from Maduro that businesses close and Venezuelans remain in their homes under a “social quarantine” exercise affecting six states and the capital in response to the coronavirus outbreak, it had been reported the both expatriate and local employees at various oil companies, including Chevron and Repsol had reportedly been sent home.

One of the more recent assessments of the state of the Venezuelan economy provided by Focus Economics, a regular provider of economic analysis and forecasts for 130 countries in Africa, Asia, Europe and the Americas, and a price forecaster for a number of important commodities asserts that the country’s economic depression “likely deepened in the first quarter of 2020.” Interestingly, it alluded to “encouraging signs for economic activity, going forward,” arising out of what it said was the Maduro administration’s initiative to privatize part of PDVSA, the state-owned oil company and “improvements in commercial activity thanks to partial dollarization” of the country’s economy. On the downside, however, Focus Economics noted that the escalation of US sanctions coupled with the plummeting of oil prices in during the first quarter of this year are set to hamper the economy in the short-term. Focus Economics noted as well that the continued decline in oil prices which had slipped over into March was “set to further stifle badly-needed state revenues and will likely obstruct the government’s efforts to retool PDVSA.” This year, for the seventh year in a row, it sees the country’s economy contracting and sees the ongoing collapse in oil prices as a compelling reason why foreign investors could be discouraged from going anywhere near the country’s oil industry. These factors aside, there is, as well, the altogether ‘unknown quantity’ of the currently globally rampaging coronavirus.

The headaches of the Maduro administration are unlikely to be eased, going forward, with the Trump administration determined to step up the pressure on the Venezuelan President. On March 26, yesterday, the US Department of Justice issued a lengthy media release in which it disclosed that Maduro, whom it addressed as the “former President of Venezuela”   and “14 current and former Venezuelan officials” had been “charged with narco-terrorism, corruption, drug trafficking” and other unstated “criminal charges.”  The specific allegation was that “Maduro and other high ranking Venezuelan officials had “allegedly partnered with the Fuerzas Armadas Revolucionarias de Colombia (FARC) to use cocaine as a weapon to “flood” the United States. The release names, by designation, “Venezuela’s Vice President for the Economy, Venezuela’s Minister of Defense, and Venezuela’s Chief Supreme Court Justice” as being among those charged with the offences.

 Given that, according to the US Department of Justice media release, President Maduro and the other officials had been involved in moving cocaine to the US for the past twenty years, the timing of the announcement that criminal charges were now being brought against him is an unmistakable sign that the US is determined to persist with its pressure to remove him from office.