Venezuela Oil Output Strains Under Sanctions

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(S&P Global Platts, 22.Feb.2019) — US sanctions could more than halve Venezuela’s crude production by the end of the year, hitting heavy oil joint ventures in the Orinoco Belt and fields operated solely by state company PDVSA in Lake Maracaibo and the Maturin Basin alike.

PDVSA is partnered with several international oil companies in heavy crude projects in the Orinoco, ranging from the US’ Chevron to Russia’s Rosneft and China National Petroleum Corp. Together, those joint ventures produced just over half of Venezuela’s total oil output of about 1.16 million b/d in January, according to the latest S&P Global Platts OPEC survey.

Output in the Orinoco, which covers roughly 19,000 square miles in central Venezuela and is divided into 36 blocks within four exploration areas, is likely to see an immediate decline of as much as 400,000 b/d due to the US embargo on diluent exports to PDVSA. Diluent, specifically naphtha, is used in the production and transport of heavy oil out of the Orinoco.

Heavy crude upgraders in the region, operated with minority partners Total, Equinor, Chevron and Rosneft, are running at just 334,000 b/d, a nearly 44% decline of the overall 762,000 b/d capacity because of the lack of the diluent, according to a technical report reviewed by Platts.

Amy Myers Jaffe, director of the Council on Foreign Relations’ energy security and climate program, said output in the Orinoco is likely to sink further since foreign companie are unwilling to invest in maintaining the giant upgraders needed to make the tar-like heavy oil marketable.

PDVSA oil production, meanwhile in conventional assets outside the Orinoco is likely to drop to minimal levels, if not shut down completely, as US sanctions take root.

PDVSA-controlled projects at Lake Maracaibo in the country’s northwest and in the Maturin Basin in the east have already been plagued for years by a lack of maintenance and equipment, mismanagement, and a steady deterioration of wells, refineries and ports, said Jose Chalhoub, a Venezuela-based political risks and oil consultant.

Production in conventional fields near Lake Maracaibo require “constant intervention” since they have a natural decline rate of about 25% per year, among the highest in the world, according to Jaffee.

Ed Morse, Citigroup’s global head of commodities research, estimates that $20 billion is needed for repairs to Venezuela’s oil sector, including roughly $10 billion for cokers that can process the country’s heavy crude.

“Where is that capital going to come from?” Morse asked Thursday. “No one knows.”

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