Venezuela: Foreign oil companies in Venezuela feel the strain
As Venezuela’s oil industry crumbled over the past decade, there was one sector that remained standing: the country’s joint ventures with foreign companies, particularly the ones extracting heavy oil from the reserves of the Orinoco Belt.
Those deposits of sludgy extra-heavy oil give Venezuela the world’s largest proved reserves, and foreign companies including Chevron, Total, Eni and Statoil have decided it is worth continuing to work there in spite of the country’s mounting problems.
As Venezuela’s financial crisis deepens, however, and with a new set of US sanctions adding to the pressure, even the foreign joint ventures are feeling the strain. As conditions deteriorate, European and US companies will face tough questions about the future of their operations.
Foreign oil companies’ continued presence in Venezuela is already the result of their willingness to compromise.
In 2006-07, President Hugo Chávez moved to take control of the industry, which had received large-scale investment from companies including ExxonMobil, Chevron, ConocoPhillips and BP.
The sector’s “crown jewels” were four projects in the Orinoco Belt for extracting extra-heavy oil, which has the consistency of peanut butter, and upgrading it into a lighter form of crude that can be more easily processed by refineries.
Mr Chávez issued a decree to give PDVSA, the national oil company, a 60 per cent stake in those projects, and then sent troops to enforce the order at the point of a gun if necessary.
Two US companies, Exxon and Conoco, chose to walk away, subsequently suing to recover the value of the assets they had lost. The others mostly remained, deciding that retaining minority stakes was a better bet than a long and uncertain legal battle.
For years, that seemed like the wiser decision. Extra heavy oil in Venezuela has been a long-running success story: production rose from 200,000 barrels a day in 2000 to 900,000 b/d in 2016, according to the International Energy Agency, and that success continued even after PDVSA was put in charge.
Chevron, for example, was able to hold its production in Venezuela steady over 2010-16, at about 56,000 b/d of oil.
BP, which also accepted Mr Chavez’s terms, was able to sell its minority stakes in its Venezuelan joint ventures, along with some assets in Vietnam, to its Russian affiliate TNK-BP for an attractive-looking price of $1.8bn in 2010.
When the oil price slumped in 2014, however, PDVSA was plunged into crisis. Desperate for cash to service its debt burden, it has been starving its operations of funds.
“It has become very difficult to invest in the facilities or even to maintain them properly,” said an industry executive familiar with Venezuela. “Which is why production keeps declining.”
Estimates of Venezuela’s production vary, but the figures the government provides to Opec show a decline from an average of 2.65m b/d in 2015 to 1.96m b/d in October. Francisco Monaldi, a Venezuelan energy economist at Rice University in Houston, argues that PDVSA faces a “death spiral” of falling output and deeper financial crisis.
The effect of the cash drain is compounded by mismanagement at PDVSA, foreign executives and analysts say. The state-owned company had already had an exodus of talent under Mr Chávez — there are skilled Venezuelan oil engineers scattered around the world — and a squeeze on spending and political infighting have degraded its capabilities still further.
“PDVSA has no control or management,” Mr Monaldi said. “It’s not a company, it’s a set of fiefdoms.”
Dozens of PDVSA executives have been detained on charges of sabotage and corruption, paralysing decision-making. Last week, President Nicolás Maduro, elected after Mr Chávez died of cancer in 2013, appointed Major General Manuel Quevedo, a career soldier with no apparent oil industry experience, as the new chairman of PDVSA and petroleum minister. Risa Grais-Targow, a Venezuela analyst at Eurasia Group, wrote that his lack of experience would “cloud an already bleak outlook for PDVSA”.
Another problem is that the deepening recession is making it harder to import essential supplies, including fuel and light oil to dilute Venezuela’s own heavy crude. The country’s imports dropped from $37bn in 2015 to $18bn last year, according to the government and central bank, and have fallen again this year.
This already difficult situation has been exacerbated by the latest round of US sanctions imposed by the Trump administration this year.