By Nick Cunningham
In a desperate bid to survive its economic meltdown, Venezuela is lobbying other OPEC members to agree to steeper oil production cuts, a move that would likely lead to higher oil prices.
Venezuelan officials have reached out to their counterparts in Iran, Russia and Saudi Arabia to press them on more collective action, according to Argus Media. If there was enough interest, the next step would be an “extraordinary meeting,” which would weigh the option of cutting deeper.
The rumors about deeper OPEC cuts have been floating around since June, when oil prices collapsed into the low-$40s. The markets have grown deeply pessimistic about the health of the oil market, and doubt the OPEC cuts will balance the market by the end of the compliance period in March 2018.
But the behind-the-scenes effort from Venezuelan officials is notable, if only because the South American OPEC members was one of the earliest and most aggressive supporters of the original deal to reduce output. In 2016, for months the more powerful members of the cartel rebuffed Venezuelan pleas, but in the end they agreed to reductions in November after oil prices continued to wallow below $50 per barrel.
The deal pushed prices above $50 for a period of time, but after six months of restraint, the market is back in sub-$50 territory.
However, the urgency for higher prices is more acute now for Venezuela. Protests have spread nationwide in the South American nation as the economy contracts at a torrid rate. Violence is becoming more widespread, and the nation is suffering from political gridlock and economic and social disaster.
Over the weekend, the opposition organized an informal referendum, which attracted more than 7 million votes, to oppose anti-democratic moves by the government. The vote demonstrated widespread anger and opposition towards the government’s upcoming effort to consolidate power in a July 30 vote to rewrite the constitution, a move that would weaken competing institutions like the National Assembly. The referendum opposing the July 30 vote was not recognized by the government, but it was a show of force for the opposition.
There is no way out of the downward economic spiral for Venezuela in the short run without significantly higher oil prices. Argus Media reports that Venezuelan officials fear that state-owned oil company PDVSA might default “within five months if oil prices remain stuck below $50/bl in second half 2017.”
The Venezuelan government and PDVSA both have a large pile of debt maturing later this year, with $4.9 billion in payments due between August and December, although two-thirds of that belong to the oil company. The key deadlines to watch are October and November – the sovereign and PDVSA have to pay bondholders a combined $3.63 billion in those two months.
The problem is that cash on hand has been in freefall for the last few years, with total holdings somewhere around $10 billion.
At the same time, Venezuela’s oil sector is in a state of crisis. Production has been falling for years, although the declines really started to accelerate since the market downturn that began in 2014. Production stood at 1.938 mb/d in June, down 221,000 bpd from the end of last year. The declines will continue because the state has no money left to invest in maintenance at existing fields, let alone invest in new projects.
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Worse, few companies are interested in investing in such an unstable environment, leaving little hope that the private sector can turn things around.
There was even talk recently about the prospect of the state nationalizing some privately-owned assets, a move that would surely scare away the remaining companies doing business in Venezuela. A prominent ally of President Nicolas Maduro said that the upcoming rewrite of the constitution could include state ownership of the oil industry, comments interpreted as a threat at full-scale nationalization
PDVSA was forced to issue a statement earlier this month guaranteeing the “legal security” of foreign companies operating in the country in an effort to tamp down fear that the company’s international partners would see their assets taken by the state. Indeed the company is seeking more cooperation from the private sector, not less. Without any cash to invest or maintain production, PDVSA has reportedly offered stakes in projects to companies such as Russia’s Rosneft in exchange for investment.
“Imagine justifying to your board of directors that you put more money into Venezuela when there was an announcement from the president’s top adviser that he was going to nationalize companies,” Francisco Monaldi, fellow in Latin American energy policy at the Baker Institute at Rice University in Houston, told Reuters in an interview.
Monaldi made similar comments in a separate interview with Bloomberg in early July: “It would be suicide,” Monaldi said, referring to nationalization. “It would have an enormous cost given that production has fallen so much and that about half of the country’s current output comes from these joint ventures with foreign companies.”
What happens next is unclear. The government and the opposition are heading for a major clash over the July 30 vote to revise the constitution. The opposition fears a dictatorship-in-the-making. But either way the country’s economy is standing at the abyss.
To complicate matters further, the U.S. government warned about “swift economic actions” if Maduro’s government moves forward with the July 30 vote. “The United States will not stand by as Venezuela crumbles,” President Trump said in a statement. The White House could target PDVSA in an effort to cut into Venezuela’s oil revenues, a move that could very well destabilize the country further.
Venezuela’s roughly 2 mb/d of oil production hangs in the balance, which, if lost in some sort of sudden calamity, would certainly send oil prices sharply up.
By Nick Cunningham, Oilprice.com