Venezuelan Oil and Natural Gas Production Cut Down After Pipeline Explosion

Mérida, March 27, 2021 (venezuelanalysis.com) – Venezuelan state oil company PDVSA has slashed production at several projects in the wake of a pipeline explosion.

On March 20, a tract of the 36-inch natural gas pipeline that supplies the Pigap II reinjection plant in El Tejero, Monagas state, exploded and went up in flames, forcing the facilities to be shut down while nearby areas were evacuated. There were no reported injuries.

The incident has meant a 560 million cubic feet per day (cfpd) drop in PDVSA’s natural gas output, roughly 19 percent of its 3 billion cfpd output, according to senior industry officials quoted by Argus Media.

Venezuelan authorities blamed the explosion on a terrorist attack.

“We want to denounce a new terrorist attack against PDVSA,” Oil Minister Tareck El Aissami said on state broadcaster VTV. He offered no further details and pledged to restore operational capacity as soon as possible.

In contrast, anonymous sources cited by Argus Media blamed the incident on corrosion, lack of maintenance and a recent increase in the volume of gas transported in the pipeline.

Natural gas production was reportedly stopped in the mature Furrial and Quiriquire fields but it also affected some 85 light crude wells where the gas is reinjected.

Reuters reported that oil output has been reduced by some 30,000 barrels per day (bpd) in the past week. More importantly, the so-called Santa Barbara crude produced at the paralyzed wells is required to blend the extra-heavy oil extracted from the Orinoco Oil Belt into the Merey 16 grade. Merey 16 is Venezuela’s main export and the blend favored by Asian customers.

While blending facilities allegedly have Santa Barbara inventories, it is not clear how long they will last, as pipeline repair works could take weeks.

The halted wells and consequent shortage of diluent could endanger the recent oil production recovery. February’s output stood at 521,000 bpd, according to OPEC secondary sources, having recovered from decades lows in the second half of 2020.

Venezuela’s most important industry has suffered from mismanagement, corruption, a brain drain and has been severely hit by US sanctions. After the first financial sanctions against PDVSA in August 2017, the Trump administration imposed an oil embargo and secondary sanctions before targeting shipping companies and clamping down on swap agreements.

Output fell from an average of 1.911 million bpd in 2017 to 1.354 million, 796,000 and 500,000 bpd over 2018, 2019, and 2020, respectively. Washington’s unilateral measures likewise barred companies from exporting diluents such as heavy naphtha to the Caribbean nation, forcing PDVSA to turn to alternatives such as Santa Barbara and Iran-supplied condensate.

The Nicolás Maduro government has set the recovery of oil production as a priority, with the Alí Rodríguez Araque presidential commission setting a 1.5 million bpd target by the end of 2021.

As US sanctions and threats have increasingly driven multinational corporations away from doing business with PDVSA, the executive has looked to offer ever more favorable conditions for foreign investment.

President Maduro has urged the new National Assembly, which has an overwhelming pro-government majority, to create “new business models” in the oil sector. The reforms would include allowing foreign corporations to hold majority stakes in joint ventures as well as operate oilfields themselves, something that is the exclusive purview of PDVSA under the current legislation.

The prospect of wholesale changes has reportedly drawn oil executives to Caracas to hold discussions with government figures. However, companies are reluctant to consider large-scale investments before sanctions are lifted.

The proposed reforms have also sparked fierce debate amidst Chavista ranks as they represent a reversal of Hugo Chávez’s policies to increase state participation in the oil industry.