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South America's desperados

Latin America's two Opec members needed the deal to cut and Venezuela will probably shed even more output than it agreed

Perhaps no Opec member went into the group's November meeting needing a deal as badly as Venezuela. After years of economic mismanagement, only higher crude prices will help to alleviate a cash crunch that has crippled Venezuela's economy and almost pushed its state oil company to the brink of financial ruin (see our longer report on Venezuela). Eulogio del Pino, the head of state company PdV and the country's oil minister at the time, relentlessly toured oil capitals over the past two years, trying to make the most of his country's dwindling influence within Opec to piece together a deal. In the end, Vienna was a victory lap.

Venezuela's contribution to the deal will be a 95,000-barrel-day reduction in output, to 1.972m b/d. Yet given the country's downward production trajectory, Venezuela would struggle to stop output from falling below this voluntary quota. Production fell by 285,000 b/d from October 2015 to October 2016, thanks to a sharp decline in investment and a host of other ills-power outages and sabotage among them-that have struck Venezuela's oil patch. Similar declines are expected this year. Raymond James, an investment bank, forecasts a 220,000-b/d drop in average yearly output in 2017.

In short, Venezuela might end up doing far more than its agreed share of cutting, though not by choice.

Venezuela hasn't said where its cuts will come from, but the most likely candidates are the light- and medium-oil producing mature oilfields in Maracaibo, in the west, as well as fields like el Furrial in the northeast. They are all in natural decline anyway. PdV has prioritised investment in the vast Orinoco heavy oilfields, and will continue to focus on advancing its joint-venture projects there.

Del Pino has been replaced as minister, but has been buoyant since the deal, saying he expects it to rebalance the market, draw down bloated inventories and fuel a 2017 price rally. If the agreement holds together, del Pino told a Venezuelan TV network in late December, he thinks, "Brent will be $60 to $65 a barrel, which would mean between $45 and $55/b for Venezuelan crude". That may prove optimistic after the post-Opec rally fizzled in the mid-$50s, but any price rise will come as sweet relief to Caracas.

Latin America's other Opec producer, Ecuador, also strongly backed production cuts. It has committed to lop around 26,000 b/d from its output-the same roughly 4.5% agreed by other members-0.52m b/d. As one of Opec's smallest members, Ecuador might be tempted to skirt its commitment out of the spotlight. Ecuador hasn't detailed the production cuts, but the burden will surely fall on state-owned PetroAmazonas, which is responsible for most of the country's output, while foreign companies maintain output. PetroAmazonas will likely continue to invest in the new 1bn-barrel Ishpingo-Tambococha-Tiputini complex of fields, while allowing natural declines to continue from mature fields.

The country's foreign minister Guillaume Long pitched the deal to Ecuadorians in a local radio appearance by arguing that his country's commitment to reduce output by around 4.5% would pay off because he expected a 20-25% rise in crude prices from the Opec deal.

 This article is part of a report series on Opec. Next article: Reshuffle in Caracas

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