Venezuela Forced To Shut Down Oil Production As Operations Fall Apart

The crisis in Venezuela takes a turn for the worse.There are now signs that its oil industry is entering a dangerous new phase. Here’s the details…

by Nick Cunningham of Oil Price

Every week the crisis in Venezuela takes a turn for the worse.

There are now signs that its oil industry is entering a dangerous new phase. Argus Media reports that Venezuela has begun to “proactively shut in oil production to cope with nearly replete terminal storage, further accelerating an output decline and bringing the OPEC country closer to the psychological barrier of 1mn b/d.”

Venezuela’s oil production fell to an average of 1.392 million barrels per day in May, down another 42,000 bpd from a month earlier, according to OPEC’s secondary sources. However, with the crisis in Venezuela spiraling out of control at a horrific pace, the numbers from May might as well be a year ago.

The May numbers don’t reflect the full ramifications of having to deal with inadequate port capacity, after PDVSA diverted operations to Venezuela from its Caribbean island refineries and storage facilities following the attempt by ConocoPhillips to take control of them.

The problem of export capacity has become so acute that PDVSA is demanding customers send ships that can handle ship-to-ship loadings, since there is a backlog of ships trying to load up at the country’s decrepit ports. PDVSA is even considering declaring force majeure on contracts that it will be unable to fulfill. The upshot is that PDVSA might have only 694,000 bpd available for export in June, which is less than half of the 1.495 mb/d that it is contractually obligated to deliver this month.

Related: Venezuela Won’t Have Enough Oil To Export By 2019

As such, the 1.392 mb/d figure for May, bad as it is, is woefully out of date. Sources told Argus Media that production plunged to just 1.1-1.2 mb/d in early June, heading down towards 1 mb/d.

To be sure, upstream operations are in crisis mode. But the bottlenecks at storage facilities and the ports have opened up a whole new crisis.

“Eastern division land-based storage of 11mn bl is at full capacity, and western division storage capacity of almost 48mn bl will be filled to its operational capacity in a question of days,” the western division executive told Argus. PDVSA’s terminals and facilities, equipped to handle 61 million barrels are “filled nearly to capacity,” an oil ministry official said.

The storage and exporting problem is having a ripple effect upstream. PDVSA and its partners have halted operations at two upgraders that process heavy oil, and two more facilities could be shutdown, according to Reuters, moves intended to ease the pressure on the storage facilities. But if upgraders are shut down, PDVSA won’t be able to process heavy oil, which means it will have to curtail or shut down operations at its oil fields.

Analysts have predicted that Venezuela’s oil situation would deteriorate over the course of 2018, but the descent is happening much faster than most people predicted. If OPEC said Venezuela produced 1.392 mb/d in May, and sources from within the Venezuelan oil ministry are now saying the country is producing between 1.1 and 1.2 mb/d, that could potentially mean output falls by a few hundred thousand barrels per day in June compared to a month earlier. Venezuela had been losing roughly 50,000 bpd each month this year, so the unraveling underway right now is a sign that production losses are spiraling out of control.

In another sign of trouble, PDVSA announced that it will suspend oil shipments to about half of the Caribbean nations in the Petrocaribe program, according to the Antigua Observer. The program, inaugurated under the late Hugo Chavez, offered Caribbean nations oil and refined products on favorable terms, often including extended payback periods at extremely low interest rates.

PDVSA said it would cut shipments of refined products by about 38,000 bpd to eight of the 17 countries in the program. Amazingly, PDVSA has vowed to keep up some 45,000 bpd of shipments to the other nations. Meanwhile, PDVSA apparently does not have enough of the type of oil that it typically sends to Cuba, so, despite being essentially broke, it is reportedly trying to purchase light crude from third parties to send to Cuba in order not to disrupt shipments to its ally.

It is hard to see things turning around anytime soon. “For Venezuela, we assume no respite in the production collapse that has taken 1 mb/d off the market in the past two years,” the IEA said on Wednesday.