Venezuela’s Oil Meltdown Defies Belief

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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  40 comments for “Venezuela’s Oil Meltdown Defies Belief

  1. Mike Earussi
    Jun 6, 2018 at 11:01 pm

    Watching Venezuela’s collapse is like reading Atlas Shrugged.

    • BoyfromTottenham
      Jun 7, 2018 at 12:00 am

      Except that there is no John Galt mastermind behind it, only a feckless government.

      • Mike Earussi
        Jun 7, 2018 at 1:02 pm

        That’s all it takes.

  2. Paulo
    Jun 6, 2018 at 11:05 pm

    Time to invite the Chinese in.

    • raxadian
      Jun 7, 2018 at 1:01 am

      A Chinese takeover of Venezuela would probably make the current Us president really want to nuke it from orbit since Venezuela is in the “US backyard.” So at minimum there would be US troops invading.

      • lenert
        Jun 7, 2018 at 10:53 am

        “…we should have kept the oil, but, OK, maybe we’ll have another chance,” – Jan 21, 2017.

    • MC01
      Jun 7, 2018 at 1:48 am

      Chinese banks and companies have lent Venezuela a lot of money, either in cash or nature. The oil-for-loans deal with the Chinese government is but the better known, chiefly due to its enormous size and compliated nature.

      While tracking down loans extended by SOE’s and private companies is not exactly easy, the Chinese government has lent Caracas over $50 billion from 2009 to 2015 through the China Development Bank. The Chinese government has since officially stopped lending money to Venezuela, but SOE’s and private entities have taken over, albeit in much reduced fashion.
      Lately the Chinese government has shown some signs of “impatience” with Venezuela: the “grace period” on $19 billion worth of debt has expired without renewal in April and Sinopec has joined ConocoPhillips, ENI and other PDVSA creditors in suing the cash-strapped oil company. As Sinopec is 75% State-owned there’s no need to tell where the orders to proceed with the lawsuit came from.

      PDVSA and by extension the Venezuelan government have very few, if any, friends left worldwide. As an ENI spokesman said “their payments have effectively stopped in April” and they will go to incredible lengths to deliver less oil than contracted so to have more to sell through spot transactions.
      Even the Chinese government, which obviously extended those loans for purely political reasons, is aghast at how Maduro and the Venezuelan establishment are behaving: while Beijing obviously did not expect their loans to be ever repaid in full, they did expect Caracas to show some effort in keeping up with interest payments and to care more about their only remaining cash cow (Hugo Chavez ate the others, almost literally: blame him for devastating the once flourishing Venezuelan cattle industry).
      Oh well, it means that China and India will just buy all the oil from Iran Europe cannot buy anymore because Israel and Saudi Arabia threw a temper tantrum.

      Now if you’ll excuse me, I’ll go look for an arepa in this God-forsaken place.

      • Javert Chip
        Jun 7, 2018 at 8:11 pm

        Translation: even the Chinese communists are surprised at how criminally the Venzezualean socialists are behaving,

        We now have a case of the crooks stealing from the thugs.

        • d
          Jun 7, 2018 at 8:21 pm

          “We now have a case of the crooks stealing from the thugs.”

          More like two groups of thugs ripping each other off. Which will end badly for at least one of them.

    • Nicko2
      Jun 7, 2018 at 5:12 am

      China aren’t idiots, they won’t touch Venezuela until they have a competent government.

      • d
        Jun 7, 2018 at 5:52 am

        That the CCP has not done in Venezuela what it has in Ecuador speaks volumes about how bad the situation in Venezuela really is.

        Capitalism,

        Turns Luxuries into necessities.

        Socialism.

        Turns necessities (Like Bread) into Luxuries. Whilst making some of the worst in that society, who are in charge of it, wealthier than imaginable.

        • Umang
          Jun 7, 2018 at 8:21 am

          Venezuala’s problems stem directly from corruption. Not socialism. Plenty of socialist countries like Sweden that do very well.

          Corruption by an autocratic strongman is the problem in VZ. Hopefully the US can get rid of its corrupt autocratic strongman.

        • Gandalf
          Jun 7, 2018 at 12:34 pm

          As a corollary, it also needs to be pointed out that the most extreme and dysfunctional socialist/communist systems have almost always arisen because of a long history of a society being sharply divided into an extremely wealthy few with all the political power, and a politically disenfranchised and very large population of poor people.

          The solution to alleviating this vast income inequality and political disenfranchisement is democratic socialism, which is the model of government in most Western industrialized countries, including even our own (if you don’t think that’s what we have, then you forgot about Social Security, Medicare, Medicaid, SNAP, WIC, etc., and did you ever realize that our Armed Forces and its YUGE supporting military industrial complex is actually just one gigantic government funded socialist jobs program?)

          Poor people in society really only have two choices – turn to crime, or turn to revolution. Revolutions more often than not result in extremist and incompetent governments. So, for all the people out there who think that socialism is some sort of Satanic ritual, the truth is that modern societies all need a dose of socialism to take care of the less fortunate in society well enough so that a revolution does not break out. The alternative to dispensing a dose of socialism is to just lock everybody up, as they turn to crime or revolution, and we do also have some of that also, with our vast Gulag of a prison system. Gulags are expensive, and could be considered a twisted and highly ineffective sort of socialist jobs program also, btw. What you are doing is basically giving people free food and shelter, and they don’t have to work for any of that.

          Venezuela’s descent into chaos was the result of years of pent up frustration at the inequality of the society, which was entirely controlled by an oligarch class. Chavez was elected, and then proceeded to milk the country’s biggest and only cash cow, PDVSA, to reward his supporters with jobs and subsidies.

          Oil companies need constant maintenance and upgrading, new fields need to be drilled as old ones dry up, and so good management even with huge amounts of money flowing in is necessary or the oil company will quickly fall apart. Chavez and Maduro instead gave jobs across the board in PDVSA and other sectors of the economy based on loyalty to them, not competence. This included generals in the military, who were paid off with lucrative sectors of the economy.

          So really, Venezuela’s decline was not the fault of socialism, it was the fault of the CAPITALIST OLIGARCHS who failed to see what would happen if they didn’t bend a little and start taking care of their own countrymen better, to inoculate Venezuela from somebody like Chavez coming to power.

          In the US, during the early 1900s and through the Great Depression, there were similar extremist political movements developing that hoped to overthrow the capitalist oligarchs in control – the Anarchists, and the Communists.

          FDR, lambasted by his conservative opponents at the time, did manage to deliver some of that democratic socialism, enough to inoculate the US from ever falling into more extreme ideologies.

        • d
          Jun 7, 2018 at 3:24 pm

          “(if you don’t think that’s what we have, then you forgot about Social Security, Medicare, Medicaid, SNAP, WIC, etc., and did you ever realize that our Armed Forces and its YUGE supporting military industrial complex is actually just one gigantic government funded socialist jobs program?)”

          You dont have a functioning Social safety net only disjointed bits of one. as you named them. No country with teh healthcare scams and cost America has can claim to have a functioning Social safety net.

          The “New deal and the caring society ” wore both good and important steps forwards. The programs of both have almost been destroyed by Corprate Americas control of the Duopoly.

          The military is not a Socialist program, its an Economic stimulus program.

          The rest is not far from reality.

          The biggest problem with Democracy is that since WW II it has been stagnant and kept there the ability of the left to buy the electorate with untenable handouts from the taxpayers wallet.

          This problem must be resolved or Democracy will die.

          If Democracy dies the autocrats and plutocrats will raise hell over heaven to ensure it is never resurrected

  3. Álvaro (from Spain)
    Jun 7, 2018 at 1:05 am

    “How did you go bankrupt?” Bill asked.

    “Two ways,” Mike said. “Gradually and then suddenly.”

    — Ernest Hemingway’s 1926 novel, The Sun Also Rises. —

  4. steve
    Jun 7, 2018 at 4:27 am

    jim rickards, charlatan

    • Jun 7, 2018 at 7:15 am

      Steve, why do you keep posting the name “jim rickards?” If you see his name here, it’s because of an ad that you’re seeing. I have no idea what ads you’re seeing, and other people might not see the same ad either. So get over jim rickards and get on with life :-]

      • d
        Jun 7, 2018 at 7:48 am

  5. Gershon
    Jun 7, 2018 at 7:26 am

    Venezuelans voted for socialism. They’re getting exactly what they voted for, good and hard.

    • Umang
      Jun 7, 2018 at 8:24 am

      VZ voted for an incompetent corrupt autocratic strongman who made ludicrous promises about “greatness”. Sounds like anyone else you know?

      Socialism is like what Sweden and Canada have. Last I checked they were pretty happy with their socialist healthcare.

      • d
        Jun 7, 2018 at 12:20 pm

        “Socialism is like what Sweden and Canada have. Last I checked they were pretty happy with their socialist healthcare.”

        Is that Socialism, or it it an intelligent social safety net, and a huge investment, in the capitalist society.

        As the wealth taken, is not being used in “Handout Subsidies” but Invested in the society’s needs, and all can use it.

        Canada is also staring to face, what Sweden is, and England has. Unskilled Economic migrants deliberately coming to milk their social safety nets.

        Which it has managed very badly, for a long time.

        England did not need Windrush Labour. English corporates wanted CHEAP WINDRUSH Labour. Big difference, as at the time England was exporting English Labour to, Australian, Canada, and New Zealand.

        It will be interesting to watch how various states deal with these, economic migrants, and colonist. Who come with the deliberate intention of milking and changing the societies they are colonising, whilst claiming to be refugees/asylum seekers.

      • nick kelly
        Jun 7, 2018 at 5:53 pm

        I don’t know about Sweden but I can assure you Canada is not socialist country. Having a one- payer medical insurance system does not create what socialists mean by socialism (ask one)

        The US is the outlier here, the rest of the world has a public medical insurance system ( Japan, Germany etc. )
        In Canada your doctor is not a state employee (most are incorporated) He bills a state insurance plan.

        From the view point of the US, the entire rest of the G 7 is socialist.

        The NDP which could be described as democratic socialist has never achieved federal power in Canada. The closest it came was propping up Pierre Trudeau’s Liberal govt in the 70’s. At the end of this period the country was in such bad shape financially it looked like it might have to approach the IMF. (When Trudeau took power the country had close to zero debt)

        BTW: people who describe themselves as ‘real socialists’ will often privately express contempt for ‘democratic socialists’
        And an old school ‘real communist’ i.e., a Bolshevik would openly express contempt for both.
        There are many shades of ‘Left’

        A euro- communist is very likely to refer to himself as a socialist.
        After the fall of the USSR, visiting members of Canada’s NDP were told not to use the word ‘socialist’, especially in former bloc countries not part of the USSR, but controlled by it. ( Poland, Czech etc. )

        One litmus test: a self- described ‘real socialist’ is likely to disapprove of privately held real estate, period.

        In this they differ from democratic socialists who want rent control etc.
        Ironically, Americans living in New York have more experience with rent control than Canadians.

        Canada at present has a completely unfettered real estate market with some of the highest prices relative to income in the world.

    • Winston
      Jun 7, 2018 at 8:45 am

      “Venezuelans voted for socialism.”

      Oh, but it’s not REAL socialism. They’re just not doing it right. [/sarc]

      • Winston
        Jun 7, 2018 at 8:46 am

        Just ask Bernie.

      • Gandalf
        Jun 7, 2018 at 1:00 pm

        Read my treatise above about democratic socialism, once it gets past the moderation filter.

        You guys obviously don’t realize it, but the United States is already a democratic socialist society. Throwing around labels like “socialism” means nothing, you need to look at the details of what is going on.

        All oil companies throw off excess amounts of cash flow which it can’t use for maintenance or expansion. In a capitalism society, that money typically go to shareholders as dividends.

        So Chavez, in taking money from PDVSA to give to his supporters and to subsidize food and gasoline (in his early years), was not doing anything that different from what happens to the excess cash of other oil companies.

        The problem was that Chavez/Maduro took too much money, and starved PDVSA of the funds it needed to continue to operate as an oil company. They appointed their cronies into management all over Venezuela, and this led to further corruption and mismanagement.

        These are all not fundamental features of socialism this is just sheer greed, idiocy, and incompetence to not realize that if you kill the goose that’s laying the golden eggs, you are not going to get any more golden eggs.

        Capitalist oligarchs are just as capable of succumbing to greed, idiocy, and incompetence and destroy once perfectly good companies

        • Emanon
          Jun 7, 2018 at 5:44 pm

          “Democratic socialism” is one of the code phrases used by extreme leftists and Communists to hide their true intent and make their schemes seem more palatable to the mass media.

          “Democratic socialism” is just barely inside the MSM Overton window, “Communism” is not, so all of the leftists call themselves “democratic socialists” to stay within the bounds of polite discourse.

          https://en.wikipedia.org/wiki/Overton_window

          When you use that code phrase, it signals that the ideas that you espouse are more likely to be extreme than moderate.

          Whatever you call it, “the way things are done in Venezuela” is a good example of what other nations should avoid like the plague.

        • Gandalf
          Jun 7, 2018 at 9:24 pm

          Emanon,
          The book “Overton Window” was written by Glenn Beck, and using that as your point of reference, plus the overtly political nature of your post means that it will be useless to attempt to engage with you in a fact based debate, since you are not dealing with facts or reality, and really Wolf should just delete your post.

      • Setarcos
        Jun 7, 2018 at 9:23 pm

        “…not doing it right.” Reminds me of Gary Kasparov, former world chess champ from the USSR. His grandfather was a card carrying revolutionary. Wait in line for bread. Wait years for a car. Kasparov said they always believed the problems the country experienced were simply poor execution, not systemic.

        Actually, it is both ….a bad system has symptoms including poor execution.

  6. Dave
    Jun 7, 2018 at 7:46 am

    How rich is Maduro? Don’t blame Venezeulans blame the money people!

  7. Kent
    Jun 7, 2018 at 8:01 am

    I’m assuming this issue is due to a lack of investment in the infrastructure necessary to produce, refine and transport oil in Venezuela. I’d be interested in a story about the finances in the industry in the country and how this really came to a head now.

  8. Charles
    Jun 7, 2018 at 8:05 am

    The fact that China lent Venezuela all that money means they were basically supporting the Maduro administration. This guy Maduro is a ex-bus driver who basically has made doing business in Venezuela a toxic activity. The question is how will China deal with defaulted debt from Venezuela. They can’t just go in and invade. Only way China gets its oil/cash is for a Chinese oil man to come in and take Venezuela over. That probably can’t happen with Trump in office.

  9. mvojy
    Jun 7, 2018 at 8:41 am

    I think China will seize on this opportunity to expand their footprint to another continent. They are aggressively buying up mining in Africa to feed their growing demand for natural resources. It makes sense that they would want to expand to South and Central America at some point to do the same.

  10. JungleJim
    Jun 7, 2018 at 9:09 am

    Venezuela is reputed to have enormous oil reserves.

    Their oil is called heavy crude because it has a high sulfur content and requires more elaborate refining procedures. But if I recall correctly, their oil, especially the oil from around Lake Maracaibo, has a very high silt content as well. That requires special maintenance to keep the wells from silting up. The boneheads that Chavez and later Maduro put in charge don’t seem to have a clue. That silting may be an important part of the fall off in production. If it is, the wells may have to be re-drilled.

    • d
      Jun 7, 2018 at 9:29 am

      Locking up all those Chevron Employees as Chevron would not bow to Murano Extortion demands surely did help to kill National output.

      The biggest killer has been simple Communist/Socalist Extortion of forigen companies, and violation of their contracts.

      Foreign oil companies wont, invest, stay around, or work, if they can not have profit and some degree of stability. And why should they

      If you are going to steal back what you have sold to them, at the least you need to have the people to competently run the facilities.

      The Chavista/Murano administrations have only extorted and stolen more, and more.

      Now they owe the chinese and the russians, and they cant pay.

      Time to order some popcorn.

      Unlike Chevron, Conocphillips Etc the chinese and russian will use other methods than just the courts to get their money, and their tons of fat profits, from Venezuela.

  11. Rob
    Jun 7, 2018 at 9:55 am

    They use 1mmbpd domestically and for Chinese and Russians so the drop from 2mmbpd to 1.45 more than halves the sellable oil
    Hard default coming up in…

  12. Old Codger
    Jun 7, 2018 at 11:41 am

    Vote Socialist komrade, the party will look after you in a workers paradise.

  13. Paulo
    Jun 7, 2018 at 3:16 pm

    I get a kick out of all the socialist comments. Venezualan decline isn’t about socialism, its a story about plain old corruption. The strongmen seize upon a reaction, a visceral rejection of inequality, and arrive into power as a wolf in sheep’s clothing. Venezuala was corrupt before Chavez, was corrupt during Chavez, and now is corrupt under Maduro as it continues its rapid destruction.

    If Venezuala chooses China to help, and invites her in to effect change, there is bugger all the US can do about it. They can try, but it won’t work. It never works. If the people end up with three hots and a cot, they will give thanks for their presence for a good long while. Threats don’t work as a change agent. Iran will simply sell all production to India and China. Plus, I would not be surprised to see Iranian oil traded to NK for nukes after ‘the talks’ fail. No one wants it, but if you keep pushing, people push back.

    “Without a reformation for new politics, and a different way of relating to one another, we will continue with the status quo. And we will have to keep finding countries and asking the question of how our oil got under their sand.”
    (New York Times Best-Selling author, entrepreneur and formerly the host of MSNBC’s The Dylan Ratigan Show)

  14. Javert Chip
    Jun 7, 2018 at 8:23 pm

    You can put a lot of lipstick on this pig, but it’s still socialism.

    That’s what socialism is in the end – chaos, thievery, and the elites living well.

  15. Olivier
    Jun 9, 2018 at 6:36 pm

    Can somebody please define force majeure in this context? I have no idea what is meant.

  16. Dead at 18 buried at 65
    Jun 10, 2018 at 11:36 pm

    I ask everyone here to make a minor correction: Venezuela is no longer a “socialist”country. It has now officially become communist or haven’t you all noticed!

    …And yes it is about socialism! As the fundamental principles of socialism are predicated on “dishonestly”, coercion and McCarthyism.

Comments are closed.