Venezuela: Oil production slowly increases while prices fall

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

OPEC's latest monthly report put the Caribbean country's oil production at 852,000 barrels per day (bpd), up from 845,000 bpd in June, secondary sources said, marking a new five-year high.

State-owned oil company PDVSA reported production of 928,000 bpd in July, up from 922,000 in the previous month. Venezuelan authorities have repeatedly stated that they want to exceed the one million bpd target.

In contrast to production, exports fell by 26 percent, Reuters reported. Transport was affected by power outages, reduced inventories and delays in loading cargo.

Venezuela's oil industry has been severely affected by US economic coercion. Since 2017, the US Treasury Department has imposed financial sanctions, an export embargo, secondary sanctions and a range of other measures aimed at cutting off the South American country's main source of revenue.

In October 2023, the Biden administration issued General License 44 (GL44), a six-month exemption that allowed PDVSA to freely sell crude oil to customers worldwide without having to provide significant discounts or resort to unreliable intermediaries.

Washington reimposed sweeping sanctions in April by allowing GL44 to expire, arguing that the government of Nicolás Maduro was not fulfilling its part of an electoral agreement with the hardline opposition. Caracas has repeatedly condemned the U.S.-led coercive measures, with government officials calling them “economic terror.”

Ahead of Venezuela's July 28 elections, U.S. officials announced that they would “tune” sanctions depending on the outcome of the election. Venezuelan electoral authorities declared Maduro the winner with 52 percent of the vote, although U.S.-backed candidate Edmundo González and his allies rejected the results and accused electoral fraud.

Uncertainty and the prospect of new sanctions have hit Venezuelan crude prices, with the flagship Merey blend preferred by Asian customers falling for the fourth consecutive month. The gap between Merey and the WTI benchmark returned to pre-GL44 range, suggesting PDVSA was forced to increase discounts to be able to place cargoes.

When the sanctions were reinstated in April, the US Treasury Department urged companies to obtain approval before doing business with Venezuela because they risked secondary sanctions.

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

Indian refiner Reliance is the only company among dozens of applicants to receive the green light from the US to import Venezuelan crude. The Indian giant, which operates the world's largest refinery in Jamnagar in Gujarat state, reportedly received 2 million barrels of Venezuelan crude in June. The Indian giant will reportedly make naphtha deliveries as part payment, a common practice in previous deals with PDVSA.

The Venezuelan state oil company needs naphtha and other diluents to convert its extra-heavy crude into exportable blends. US sanctions prohibit the import of diluents, and PDVSA relies mainly on condensate supplied under a long-term swap deal with Iran's National Oil Company (NIOC).

With the country's energy sector severely affected by the sanctions, the Maduro government is trying to offer the economy increasingly more favorable conditions in order to secure much-needed investments.

PDVSA recently signed 30-year and 20-year contracts with NGC of Trinidad and Tobago and British multinationals BP and Shell to explore offshore natural gas reserves. In both cases, the Venezuelan company has no stake in the projects and its income is limited to taxes and royalties.

Last week, PDVSA signed an agreement with Nigerian company Veneoranto to certify two large gas fields. Venezuela currently has the eighth largest proven natural gas reserves in the world.

Apart from the joint ventures whose shares are entirely owned by foreign companies, the Venezuelan authorities have also expressed their willingness to reform legislation to increase private sector participation in the provision of services in the oil fields.

William Rodríguez, a deputy in the National Assembly and member of the legislature's Energy and Oil Commission, said in an interview that there is “consensus” on reforming hydrocarbon legislation to “return a significant part of oil services to the private sector.” He added that the reform could be implemented before the end of the year.

Former Venezuelan President Hugo Chávez pushed a series of legislative proposals to assert the country's sovereignty in the energy sector. The current legal framework requires PDVSA to hold majority shares in all oil joint ventures and to operate all oilfield activities itself.