Even the most pessimistic output scenarios could turn out to be too hopeful.
By Nick Cunningham, Oilprice.com:
Venezuela might have to declare force majeure on its oil exports as production plunges and its ports are unable to ship enough crude. The ongoing meltdown in Venezuela’s oil sector could tighten the oil market more than expected.
Reuters reported Tuesday that Venezuela is considering declaring force majeure, a legal declaration made in extraordinary circumstances to basically get out of contractual obligations. In other words, Venezuela’s PDVSA is essentially prepared to say that it can’t supply the oil that it promised.
The utter collapse of the country’s oil production is obviously a big factor in PDVSA’s inability to ship enough oil. Output is down below 1.5 million barrels per day and falling fast.
But the tanker traffic at a handful of its ports has created unexpected bottlenecks, which have slowed loadings. Clogged ports are the direct result of the seizure of operations on several Caribbean islands by ConocoPhillips last month. The American oil major sought to enforce an arbitration award, laying claim to a series of storage facilities on the islands of Bonaire, Curacao and Aruba.
Those assets were crucial to PDVSA’s operations – in fact, they had become even more important as PDVSA’s facilities in Venezuela deteriorated. They had the ability to service very large crude carriers (VLCCs), and were important for storing and blending PDVSA’s oil, and preparing it for export.
Since ConocoPhillips tried to take over those facilities, PDVSA has tried to shift operations back to its ports in Venezuela. But those terminals are in very bad shape, and cannot make up for the loss of the Caribbean facilities. Reuters reported that there are more than 70 tankers sitting off the Venezuelan coast.
Reuters also says that PDVSA told customers that they need to send ships that are able to handle ship-to-ship loadings, since they can’t service enough ships at the ports. If customers fail to do that, or fail to accept those terms, PDVSA could declare force majeure. Reuters says most customers are balking at the demand since there is no third party supervision, plus the added cost of ship-to-ship transfers is also something customers are not willing to take on.
It is no surprise that Venezuela has fallen short on the shipments it has promised, but the figures are staggering. In April, Venezuela only shipped 1.49 million barrels per day of oil and fuels, or 665,000 bpd below what it had contracted, according to Reuters. That means that some customers are missing out on cargo. For instance, in April, PDVSA shorted its subsidiary Citgo nearly all of what it had promised – 273,000 bpd.
The problems for Venezuela continue to mount, and the news that it is considering force majeure points to a more catastrophic decline in production and exports. PDVSA “in the best case only has about 695,000 b/d of crude supply available for export in June,” a marketing division executive within the company told Argus Media.
It seems unlikely that the sudden decline in exports will be resolved in any reasonable timeframe. It isn’t just a matter of easing bottlenecks at the ports. For one, it isn’t clear that PDVSA can handle the necessary volumes from its existing export terminals.
More importantly, upstream oil production continues to plummet, and refining and processing are also in freefall. Venezuela’s heavy oil needs to be upgraded before it can be exported, but at least three PDVSA upgraders are in terrible shape, and the Petropiar upgrader, which PDVSA runs jointly with Chevron, is offline for maintenance. That is also the site overseen by Chevron employees that were detained by Venezuelan security services a few months ago, putting a chill on operations.
“[PDVSA] has a critical structural problem that cannot be fixed in a few weeks or even a few months, because the core problem is that Venezuela’s crude production has dropped far beneath the volumes we are contracted to deliver,” a company executive told Argus. “We simply aren’t producing enough crude, and we don’t have the cash flow to compensate by purchasing crude from third parties to meet our supply commitments. Our greatest operational concern right now is that production continues to fall and our export supply volumes also will continue to decline as a result.”
As a result, the force majeure on shipments seems unavoidable, unless that is, customers simply take a haircut and accept lower volumes. A PDVSA source told Argus Media that companies that don’t accept lower volumes could see all of their shipments suspended. That sounds like a threat, but it is PDVSA that is in the state of crisis, not buyers from China, India or the U.S.
Customers are already reporting problems with shipments. A Japanese trading house told S&P Global Platts this week that it has been unable to load up on Venezuelan oil under a loan-for-oil deal. “There is no cargo made available to lift,” said the source.
Several diplomats from China and India told Argus that refiners from their countries are looking elsewhere for oil shipments in the months ahead, on the expectation that cargoes from Venezuela continue to decline. Independent refiners from China are looking at heavy crude sources such as Mexico’s Maya, Colombia’s Castilla, and Canada’s Cold Lake Blend, according to S&P Global Platts.
PDVSA could cite U.S. sanctions as a justification for force majeure, and while that could potentially provide some legal basis for nixing shipments, from the oil market perspective, it makes no difference one way or another why exports are declining, or who is at fault. All that matters is that supply is falling fast, and to the extent that PDVSA can’t keep up with its obligations, it is a worrying sign that even the most pessimistic scenarios for Venezuelan output could turn out to be too hopeful. By Nick Cunningham, Oilprice.com
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