PETROANALYSIS || ARTICLE

Venezuela: Can PDVSA recover its oil production this year?

Published on

January 13, 2019

in

Article by

Carlos García

The purpose of increasing PDVSA’s oil and gas production in 2019 may seem obvious, but there has been such a fall in production of that there must be a forceful rectification within a Production Recovery Plan (PRP).

The corporation is about to experience a definitive collapse in a few months’ time due to breaches in its financial commitments that will close down any possibility of external financing… and this will lead to the possibility of losing CITGO, which is both its main buyer in the United States and an indispensable source of external resources.

The lack of resources would accentuate the fall in oil production, pushing down to one million barrels per day and making cash flow collapse, given that much of the decrease in production is committed to payments that are due to China and Russia in barrels of oil.

It must be mentioned that this PRP, if it occurs, must face the pitfall of the high volatility that has characterized the price of oil since 2016 and that conspires against an optimistic scenario of recovery of export earnings.

The PRP should be based on a central scenario of moderate oil price behavior due to the strong resistance experienced in 2018 to establish a firm price trend above US$ 70 for WTI and US$ 80 for Brent.

The pulse of the market reveals that a price band between US$ 50 and US $70 is being strongly influenced by the values that make the increasing production of shale oil in the United States profitable and the prices agreed in the coverage contracts of a large part of the producers of this type of crude.

To this we must add the apparent decrease in the incidence that OPEC used to have on the defense of a desired price trend, although now that there is a common interest between OPEC and other oil producers to pursue the same objective without contests, greater effectiveness has been added.

The impact on the market of the huge growth of US oil production in 2018 above 2 million barrels per day has conspired against the success of the objectives set by the OPEC+ tandem.

To this we must add the geopolitical factor that this market power has meant within the context of a very aggressive US president in his confrontation with important players such as Russia, Iran, Venezuela and Saudi Arabia. Here he has diluted or impaired the price defense policy raised by OPEC+ with hostile rhetoric using the new power of social networks to demand lower prices whilst accompanying this with specific threats against Saudi Arabia and the conditions that imply being its military protector.

A PRP based on an optimistic scenario of sustained price recovery would have a weak base for supporting a flow of external resources that guarantees the necessary investment to ensure its realization.

In this context of doubts about rising prices, any PRP that contemplates an aggressive plan of incorporation of new drills or proposes increasing the level of operability of those who are active, looks towards an uphill climb.

PDVSA proposes its recovery plan based on the incorporation of new business models such as the Joint Services Agreements (ASC) and associations such as the Operational Socialist Production Brigades (BOPS), as well as new opportunities through its own efforts. With this it is estimated to recover a volume of more than one million barrels per day in 32 fields.

This ambitious plan to increase production must correspond to the investment that is proposed to be disbursed. In addition, one must check their chances of successful completion with the operational and financial capacity of the companies that would participate in such service agreements, and even more so in the so-called Operational Brigades of Socialist Production.

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