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Venezuela suffering under the falling oil price

Venezuela's oil industry, like its economy, is still in a mess. Falling oil prices could not have come at a worse time

When Venezuela was the first Opec country to call for an emergency meeting in early October no one should have been surprised. The country has been a leading price hawk within the cartel for years and high oil prices have been about the only thing propping up its crumbling economy.

For Venezuela, the oil price decline this autumn could hardly have come at a worse time. While Opec's Middle East producers' finances are generally strong enough to weather a period of lower oil prices, Venezuela is enduring a prolonged economic crisis. Inflation is running at well over 50%. Exchange rate distortions have led to shortages of critical goods from medicine to toilet paper. As Harvard economists Carmen Reinhart and Kenneth Rogoff pointed out in a recent op-ed, the country's inflation-adjusted per capita GDP is 2% lower today than in 1970. 

President Nicolas Maduro, fearing the political backlash, has been loath to make the painful economic adjustment needed to right the country's economy. As a result, Venezuela's break-even oil price is $121 a barrel, one of the highest in Opec, according to Deutsche Bank.

Some see it even higher. Francisco Monaldi, a Venezuelan oil expert, said in a recent speech at the Baker Institute that the government needs an oil price of close to $200/b to balance its books. Meanwhile, the Venezuelan basket price, which typically trades at about a $10/b discount to Brent, was threatening to drop below $80/b as Petroleum Economist went to press. "We have to stop the fall in oil prices," Rafael Rama­rez, the foreign minister and former head of state oil company PdV, said in calling for the emergency Opec meeting. "There should not be a price war or a price below $100/b." He put some of the blame on other group members: "There is a significant overreaching, about 2 million barrels a day (b/d). There are countries that are overproducing, well above their production quotas, so we must review those volumes."

But Venezuela is in no position to be dictating terms to its fellow Opec members. For one, the country's economic woes mean that it can't cut back its own production to help support prices.
Moreover a decade of declining oil output and exports has seen Venezuela's voice largely marginalised within the cartel, even as oil has been a crucial diplomatic tool for Caracas to win friends from the Caribbean to Beijing. Oil output has fallen from 3.3m b/d to around 2.5m b/d over the past decade because of underinvestment in the industry.

As a founding member, Venezuela was once a powerhouse in Opec. In the 1960s it accounted for as much as a quarter of the group's production. As recently as the late 1990s, the country accounted for around 12% of Opec production, but today it makes up barely 7% of total output, behind Middle Eastern producers Saudi Arabia, Kuwait, the UAE, Iran and Iraq.  

Venezuela has ambitious plans to turnaround its declining output. But they hinge on rapidly developing several multi-billion dollar Orinoco Belt heavy-oil projects that have so far shown little progress. PdV and Venezuelan policymakers continue to stick to an improbable target for the country's output of 6m b/d by 2019, about 3m b/d higher than today.

Few expect Venezuelan oil to reach those heights. But the recent oil price decline and flood of new production from the US raises difficult questions for the country. Will the market need the Orinoco's barrels, so critical to the future of the oil industry and economy, anytime soon? And can its expansion plans be accommodated within Opec at a time of relative oil abundance?

Rising production

Venezuela has long argued that its implied output target should be raised to make room for new Orinoco production, but it is in a long queue of Opec producers hoping for the same.

Iran, for its part, hopes to bring about 1m b/d of new production to the market in the next couple of years if progress is made in talks over the country's nuclear programme. Iraq's oil exports have reached a record high, but the country is still rebuilding its war-torn economy and hopes to continue expanding exports through the end of the decade. It is likely to add at least another 1.5m b/d of exports by then, and even more if some level of peace can be restored to the country. Then there's Libya. The country's production is still around 700,000 b/d lower than pre-2011 levels.

Taken together that is more than 3m b/d of new production just from three crisis-hit fellow Opec members. It leaves little room for Venezuela, especially given the slumping demand for the group's crude.

That poses a new problem for the oil industry's new guard. After losing a battle within Maduro's cabinet over economic policy, Rama­rez was ousted as the head of PdV and energy minister in September this year. His duties have been split between two people. Stanford-trained engineer Eulogio del Pino has taken over the top spot at PdV, while Asdrabal Chavez, the late president's cousin, is now running the energy ministry.

What that means for oil policy is not yet clear. Rama­rez was a major force within the ruling Socialist party and enjoyed the clout that came with his long tenure and close relationship with Hugo Chavez. Nobody could doubt Ramarez's Chavista credentials and that gave him a strong hand to guide PdV and energy policy. Neither del Pino nor Asdrabal Chavez has the portfolio of duties, power base or influence to wield that kind of power, so major decisions will likely come from Maduro, who has shown no appetite to deviate from the policy path set by Chavez before his death.

The time for change

Del Pino, though, could bring some important changes to PdV. He was head of the company's upstream business before taking over the top spot and appears to have brought some pragmatism into his new role. In his early speeches he has avoided the sort of charged political rhetoric that peppered Ramarez's speeches, focusing instead on the details of the enormous challenges the company faces.

He has launched a pilot programme to revitalise around 1,000 wells in the mature Maracaibo basin that could quickly lift production by around 65,000 b/d. And there are thousands more similar wells in the area that could also be redeveloped if the pilot programme is successful. The plan will not produce the huge volumes of the Orinoco projects, but it could deliver much quicker and much cheaper at a time when the troubled company badly needs new cash flow.


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