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Venezuela oil's collapse is a harsh blow

Bloomberg

Government revenue likely to plummet by nearly half this year

By Fabiola Zerpa and Peter Millard/Bloomberg

CARACAS/RIO
Petroleumworld 03 16 2020

As nations across the globe struggle with the one-two punch of the viral pandemic and cratering oil prices, one is suffering far more than others -- Venezuela.

The regime of President Nicolas Maduro, which had begun to make its way around punishing U.S. sanctions and historic mismanagement by allowing dollars to circulate and markets to flourish, will see its government revenue, completely dependent on oil, nearly halve this year.

Maduro announced a suspension of flights from Europe and Colombia to Venezuela and a shipment from Cuba of 10,000 Interferon treatments. He said some 30 people had so far been tested and all proved negative.

Maduro, who rarely acknowledges bad news, also spoke of the “brutal blow” caused by plummeting oil prices. Venezuelan oil has fallen from $48 to $24.25 a barrel, a victim of Russia's battle with Saudi Arabia for oil dominance despite Moscow's alliance with Caracas.

Shipments to Asia

The Kremlin's efforts to prop up a partner in the U.S.'s backyard now conflict with a bigger priority -- defending its share of a shrinking oil market from Saudi Arabia's aggressive price cuts and production increases. Even worse for Caracas, Saudi Arabia is boosting shipments to Asia where Venezuela sends about 90% of its remaining exports.

Russia, Venezuela and Saudi Arabia all produce similar grades of heavy crude and compete to supply refineries geared to process it.

The price war will cut Venezuela's oil revenue to an estimated $13.9 billion this year, according to consulting firm Ecoanalitica , compared with $23.1 billion in 2019. It's unclear how much the additional economic pain will undermine Maduro, whose approval rating was already at 13.5% in February. The plunge in oil prices will likely push the country to rely more on illicit sources of funding.

“As oil revenues fall for Maduro, government officials will be pressed to look further into other illegal sources of cash,” said Diego Moya-Ocampos, a political-risk consultant at IHS Markit in London. “Venezuela's income will be slashed in half and will push Maduro to rely even more on gold mining and narcotrafficking.”

Rosneft

It's hard to overstate Maduro's reliance on Russia in the past year. Foreign Minister Sergei Lavrov, during a trip to Caracas in February, reiterated Moscow's willingness to confront U.S. threats to Venezuela while Russian advisers worked on a plan to restore the ailing oil industry. State-controlled producer Rosneft PJSC has transported enough oil to withstand U.S. sanctions and prevent a complete collapse of its industry.

Rosneft has also been negotiating access to oil and gas fields across Venezuela for future development, an initiative likely to founder with oil priced so low.

“You have to wonder if the Russians will help Venezuela,” said Francisco Monaldi, a lecturer in energy economics at Rice University's Baker Institute for Public Policy, and an expert on Venezuela's oil industry. “They are flooding the market in a price war with Saudi. It's not the best time for Venezuela to get Russian support.”

The price collapse is hammering Maduro just as he managed to ease the worst social and economic crisis in Venezuela's modern history. Oil production had stabilized and was even ticking up at the start of the year, an informal dollarization of the economy relieved widespread shortages, and remittances from millions of Venezuelans abroad were breathing some life into the crisis-torn economy. The U.S. responded by tightening oil sanctions in February to include Rosneft's trading unit.

PDVSA Shakeup

The crisis is also hitting state-owned Petroleos de Venezuela as it goes through yet another management shakeup. Maduro imprisoned more than 30 trading and maritime officials last month, including two top managers, whom he accused of collaborating with the U.S., and announced a commission to rescue the company from an energy emergency. Vice President Tareck El Aissami, who has been sanctioned by the U.S. Treasury for alleged drug trafficking, will lead the commission in a move that weakens PDVSA President Manuel Quevedo.

The transition has been anything but smooth. El Aissami's committee has been working under wraps, and new appointees have moved into their roles without any formal swearing in. An internal audit that includes the trading division has created administrative bottlenecks and led to tension among employees, according to people familiar with PDVSA's operations, who asked not to be named to avoid retribution.

An estimated 95% of Venezuela's legal revenue comes from oil exports. Only 22% of its production is profitable with oil prices below $35 a barrel, according to energy consultancy Wood Mackenzie. Escalating U.S. sanctions make this revenue hit even worse. Traders buy Venezuelan crude at a discount of about $20 to international benchmarks due to the complications of buying sanctioned oil, according to Monaldi. This means the country would sell oil at near cost and may need to rely on Cuba as an outlet for its oil production to avert field shutdowns.

“They are faced with awful choices, selling oil basically for free or shipping to Cuba,” Monaldi said.

— With assistance by Lucia Kassai


Story by Fabiola Zerpa and Peter Millard from Bloomberg

bloomberg.com
03 13 2020

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