Debt Crisis Undercutting Venezuelan Production

Rystad Energy analysis shows that the Venezuelan debt crisis has caused structural changes in the country's oil and gas sector which significantly undercut its capability to produce oil. As production falls, the country's ability to service its debt decreases which in turn increases the risk of default and accelerated production decline.

“Venezuelan oil production is locked in a downward spiral which will take an overhaul of their liabilities to reverse,” says Artyom Tchen, an Analyst at Rystad Energy.

PDVSA, the state oil company, has $35.5 billion in liabilities due between now and 2025. Just in 2018, $840 million in bond principal payments will come due with another $1.6 billion in 2019.

These debts are one of the reasons output from mature fields has been falling; PDVSA can't pay service companies to drill. Schlumberger and Halliburton curtailed activity midway through 2016 because they weren't being paid. This helped drive down the current active rig count to about half of what it was during its peak in 2011.

“With less rigs available for infill drilling, mature fields will decline faster than previously expected. Some fields' annual decline could hit as much as 30% in 2018,” says Tchen.

In the two scenarios in Figure 1, Rystad Energy now sees more risk towards the low case. Rystad Energy's base case crude supply outlook for Venezuela is already quite bearish, but further deterioration in the country could remove as much as 800 kbbl/d from the market between 2018 and 2021.

Production from extra-heavy projects in the Orinoco belt, considered the backbone of the country's crude production and where 21% of current production originates from, has also been undercut by the debt crisis. Crude from these projects has to be partially upgraded and partially diluted in order to meet export requirements.

Venezuela relies on imports for diluents like naphtha, pentanes plus, and light crude. PDVSA is behind on import invoices and so faces an acute shortage. Notably, naphtha imports from the United States have dropped from 375 thousand metric tons in May 2016 to almost zero as of April 2017.

“The lack of diluents puts a ceiling on the output from Orinoco projects bringing their output capacity far lower than what the fields have historically produced,” says Tchen.

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