Venezuela crude production decline accelerating

Venezuela's crude production decline is accelerating as state-owned PdV's acute financial problems thwart efforts to maintain infrastructure and check natural depletion in mature reservoirs.

The energy ministry and PdV acknowledge that output is declining but deny that the trend is speeding up.

Upstream officials in PdV's western and eastern divisions who warned as recently as last month that Venezuela's production could fall by up to 200,000 b/d in 2016 now anticipate that crude output could decline by up to 300,000 b/d this year.

This revised estimate would push Venezuela's crude production to below 1.9mn b/d for the first time since 1989 when the country produced 1.91mn b/d.

Venezuela reported to Opec crude production of 2.370mn b/d in May 2016, compared with 2.515mn b/d in the first quarter. Argus estimates the current figure at around 2.1mn b/d.

Most of the decline is coming from aging reservoirs, outside of the vast Orinoco extra-heavy oil belt where PdV has long targeted significant growth. But Orinoco production is vulnerable as well.

Orinoco crude production requires around a 30pc blend with naphtha as a diluent for transport to upgrading or blending facilities on the coast, plus light crude in the case of blending. Four upgraders at Jose are subject to breakdowns because of a lack of maintenance. And supply of 32°API Mesa crude that PdV blends with Orinoco crude to make 16°API Merey for export is dwindling, and PdV is struggling to pay for imports. Even when the domestic or imported light crude can be obtained, PdV import and export infrastructure poses a frequent bottleneck.

The decline trend is not new. PdV produced 3.17mn b/d of oil in 1998, the year before late President Hugo Chavez was sworn into power in January 1999. But restoring production to those levels would now require a massive capital injection and technical expertise that escape PdV's capabilities.

The energy ministry blames PdV's officially reported crude output decline of more than 200,000 b/d since the fourth quarter of 2015 on power cuts caused by a three-year drought that depleted the strategic Guri hydropower reservoir. Heavy rainfall is now starting to replenish the reservoir, but rationing and blackouts are still commonplace.

PdV relies almost exclusively on the country's deteriorated power grid, rendering its upstream and downstream operations vulnerable to outages.

Energy ministry, PdV and private-sector oil officials told Argus this week that PdV's crude production decline is gaining velocity because of a combination of factors, including the country's power supply deficit, that escape the company's control.

These factors include the oil price collapse in 2014 that forced PdV to make steep cuts of up to 40pc in budgeted capital expenditures on core upstream operations.

PdV has been "obliged for financial reasons this year to reduce drilling activities nationally and shut down hundreds of marginally productive oil wells that require extensive wellhead maintenance that the company currently cannot pay for," a western division official tells Argus.

The energy ministry said recent data on active and inactive oil wells is not currently available.

But annual ministry reports through 2013 suggest that up to 12,000 potentially productive oil wells capable of producing up to 1.5mn b/d of crude were off-stream as of three years ago because the company lacked the financial and technical resources to operate the wells.

Maintenance of enhanced recovery infrastructure including gas/water compression and injection systems also has plunged because of budget cuts this year, the energy ministry says.

The environmental impact of these cutbacks has been particularly pronounced in Lake Maracaibo, where years of insufficient maintenance on lake-bottom wells and pipelines have seen a proliferation of crude and gas leaks, a Maracaibo-based PdV official says.

Significant reductions since April in critical oil well services provided by third-party contractors have also impacted PdV's crude output.

PdV has tried to offset reductions in oil services provided by foreign companies by relying increasingly on its own PdV Services subsidiary.

"PdV Services, qualitatively and technically, is a poor substitute for companies like Schlumberger and Halliburton," a PdV western division official said.

Energy minister and PdV chief executive Eulogio Del Pino said last week that Schlumberger and other oil services providers remain committed to maintaining decades-old relationships with Venezuela.

PdV and Schlumberger currently are in negotiations to fully resume activities curtailed since April due to non-payment of over $1bn in past-due invoices, Del Pino added last week.

Schlumberger has said it expects to continue in Venezuela. But an energy ministry official familiar with the discussions tells Argus that the full resumption of Schlumberger's services hinges on an agreement guaranteeing PdV's payment of its past-due debt.

Other services companies including Halliburton, Weatherford International and Baker Hughes also are seeking overdue payment.

PdV has proposed paying its past due debts with promissory notes (IOUs) and discounted bonds. PdV also has offered some companies including BP and India's ONGC Videsh crude in lieu of cash to pay for light crude imports to Venezuela and cover past due dividends on upstream joint ventures.

But the energy ministry said that "only a handful" of companies so far have shown any interest in the proposal.