Venezuela brushing aside oil price signals for now

Venezuela's crude production partially recovered to around 700,000 b/d at the end of March, but state-owned PdV and its foreign partners cannot afford to dismiss weaker price signals for much longer, according to industry officials inside and outside Venezuela.

Output had slid to about 500,000 b/d in mid-March because of chronic storage constraints caused mainly by US sanctions. The bottlenecks are now aggravated by the bottoming out of market demand wrought by coronavirus restrictions blanketing much of the globe.

Flagship crude Merey, a 16°API blend of heavy and light grades, can still eke out a profit, but all other production no longer makes economic sense, the officials say.

Venezuela's production costs are around $15-$20/bl, compared with the average price for Venezuela's crude basket of just $13.76/bl on 30 March, down from $15.93/bl in the week ending on 27 March, according to oil ministry data.

Some Venezuelan cargoes may have effectively drifted into negative price territory already. The official basket prices exclude steep discounts that PdV is offering to its remaining clients still willing to endure formidable risks, including the US sanctions that drove Rosneft to distance itself from Venezuela this week. At the same time, Venezuelan crude loadings are often part of barter or debt arrangements whose opaque valuations reflect political rather than commercial imperatives.

Under particular scrutiny are cargoes channeled into Asian destinations via Mexico-based brokers Libre a Bordo and Schlager that report sending food back to Venezuela in exchange for Merey, a favorite of China's independent refiners that have roared back on line in recent weeks.

Topping the list of Venezuela's costliest grades to produce is 10.5°API Boscan, which comes from PdV's PetroBoscan joint venture with Chevron in western Venezuela. In late March, the venture was still producing in the range of 80,000 b/d. PdV's other joint venture with Chevron, the PetroPiar heavy crude project, produces higher value 26°API Hamaca synthetic crude, but the upgrading process alone adds $4-$5/bl to production costs.

PdV's PetroMonagas joint venture and others that derive their main feedstock from the Orinoco heavy oil belt have given up on upgrading and produce Merey through less complex blending with lighter grades. PdV's PetroSinovensa with China's state-owned CNPC is among the most resilient projects, thanks to lower costs and some independent power supply.

Overall Orinoco production was running around 300,000 b/d at the end of March, topped off by mature eastern and western division output.

Notwithstanding some curtailments blamed on replete storage, PdV is forging on with production in spite of the unfavorable economics that its foreign partners - including Russia's outgoing Rosneft, Chevron, Spain's Repsol and CNPC - are less inclined to ignore. Some are pressing PdV for managed shut-ins as the spreading coronavirus further complicates operating conditions and puts staff at risk.

Staying the course

There is no sign that PdV is veering from its strategy of keeping the taps open for as long as possible in the hope of a price rebound. "PdV is not closing Boscan, much less the Orinoco," one industry executive mused. Renewed Chinese demand and a new Saudi initiative to assemble producers for a market discussion will only encourage PdV to stay the course.

PdV now has almost 40mn bl of oil in land-based and floating storage. PdV-owned tankers loaded with crude are waiting in Venezuelan waters for opportunities to make STS transfers to potential buyers, according to a PdV official. If no buyers are found, the oil could be shipped to Venezuela's ally Cuba, where PdV sent crude, fuel oil, vacuum gasoil and diesel last weekend in an effort to clear out an export backlog and meet its longstanding commitment to supply Havana.