Venezuela: Oil Production Inches Forward as Prices Recede

Caracas, August 16, 2024 (venezuelanalysis.com) – The Venezuelan oil industry showed a modest output improvement in July.

The latest OPEC monthly report placed the Caribbean nation’s output at 852,000 barrels per day (bpd), up from 845,000 bpd in June, as measured by secondary sources. The figure represents a new five-year production high.

State oil company PDVSA reported an output of 928,000 bpd in July, up from 922,000 the prior month. Venezuelan authorities have repeatedly vowed to surpass the 1 million bpd target.

In contrast to output, exports fell by 26 percent, according to Reuters, with shipments suffering from power outages, reduced stocks and cargo loading delays.

Venezuela’s oil industry has been heavily targeted by US economic coercive measures. Since 2017, the US Treasury Department has levied financial sanctions, an export embargo, secondary sanctions and a raft of other measures designed to choke off the South American country’s main source of revenue.

In October 2023, the Biden administration issued General License 44 (GL44), a six-month waiver that allowed PDVSA to freely sell crude to global customers without the need to offer significant discounts or resort to unreliable intermediaries. 

Washington reimposed wide-reaching sanctions by letting GL44 expire in April, arguing that the Nicolás Maduro government was not fulfilling its end of an electoral agreement with the hardline opposition. Caracas has repeatedly denounced US-led coercive measures, with officials labeling them “economic terrorism.”

In the build-up to Venezuela’s July 28 election, US officials vowed to “calibrate” sanctions depending on the outcome. Venezuelan electoral authorities proclaimed Maduro the winner with 52 percent of the vote, though US-backed candidate Edmundo González and allies have rejected the results and alleged fraud.

The uncertainty and the prospect of new sanctions have hit Venezuelan crude prices, with the Merey flagship blend preferred by Asian customers falling for a fourth straight month. The gap between Merey and the WTI benchmark returned to the range prior to GL44, suggesting PDVSA has been forced to step up discounts in order to place cargoes.

The reimposition of sanctions in April saw the US Treasury call on companies to request permission before dealing with Venezuela under threat of being hit with secondary sanctions. 

Companies such as Chevron, Repsol and Eni have all been allowed to continue and even expand their joint projects with PDVSA, though in many cases proceeds are used to offset debts. 

Indian Refiner Reliance has been the only corporation among dozens of applicants to receive a US green light to import Venezuelan crude. The Indian giant, which operates the world’s largest refinery in Jamnagar, Gujarat state, received a reported 2 million barrels of Venezuelan oil crude in June. According to reports, the Indian giant will provide naphtha shipments as partial payment, a common feature in past dealings with PDVSA.

The Venezuelan state oil company requires naphtha and other diluents to turn its extra-heavy crudes into exportable blends. US sanctions forbid the importing of diluents, with PDVSA mostly relying on condensate supplied as part of a long-term swap deal with the Iranian National Oil Company (NIOC).

With sanctions severely hampering its energy sector, the Maduro government has looked to offer increasingly favorable conditions to corporate actors in a bid to secure much-needed investment.

PDVSA recently struck 30- and 20-year deals with Trinidad and Tobago’s NGC, alongside British multinationals BP and Shell, respectively, to explore offshore natural gas reserves. In both cases, the Venezuelan company does not hold a stake in the projects, with revenues limited to taxes and royalties.

Last week, PDVSA signed an agreement with Nigerian-owned Veneoranto to certify two major gas deposits. Venezuela currently holds the eighth-largest proven natural gas reserves globally.

Apart from the joint ventures with shares fully owned by foreign corporations, Venezuelan authorities have likewise expressed a will to reform legislation so as to boost private sector participation in providing oilfield services.

National Assembly Deputy William Rodríguez, a member of the legislative body’s Energy and Oil Commission, said in an interview that there is “consensus” to reform hydrocarbon legislation to “reestablish a significant part of oil services to the private sector.” He added that the reform could take place before the end of the year.

Former Venezuelan President Hugo Chávez drove a series of legislative projects to assert the country’s sovereignty in the energy sector. The present legal framework requires that PDVSA hold majority stakes in all oil joint ventures as well as run all oilfield operations.