Will Venezuelan Oil Production Ever Collapse Like Its Economy?

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Includes: BMLA, FLN, GML, ILF, LAQ, LBJ, LDF, OIL, USO
by: Oil Unhedged

Summary

The situation continues to worsen in Venezuela as the National Assembly was suspended by the Supreme Court a few days ago.

Upcoming debt payments in April are most likely to be paid; however, the CDS market has an implied probability of non-payment in the next 12 months of 56%.

Despite all the various problems and the lack of investment in the oil sector, crude oil production in 2016 only dropped by 200kbd compared to the year before.

Recent unrest increases the risk to oil production and exports; however, Maduro retains the support of the army and still controls the oil industry.

The last attempted coup in 2002 took out nearly 2 million barrels per day from the market for 2 months. A repeat of this is very unlikely.

The political situation continues to worsen, as the Venezuelan Supreme Court suspended the opposition-controlled National Assembly. The Venezuelan opposition and many foreign media sources denounced this move as a self-coup by President Maduro. However, despite the economic crisis ongoing for years now, crude oil production has remained fairly stable. Crude oil production declined in Venezuela by 9% in 2016 and 8% in 2017 so far. These are similar decline rates to Mexico which have not had any political or economic crisis. In addition, service companies like Halliburton (NYSE:HAL) and Schlumberger (NYSE:SLB) left the country last year due to unpaid bills which should have accelerated the production decline.

(Source: IEA)

Upcoming debt payments

The upcoming debt payments have made the Venezuelan crisis even worse. The state oil company PdVSA faces a $2bn bond payment due on April 12. Thought it won't be easy for Venezuela to pay this total amount in one go, the CDS market expects Venezuela to pay this upcoming debt payment. However, over the next 12 months, the CDS market has an implied probability of 56% for non-payment. This should worry China and Russia who have lent Venezuela billions of dollars. Venezuela is very likely to sell increasing amounts of future oil production or oil assets to appease their lenders.

It was in fact, the sale of a 10% stake in a heavy oil project to Russia's Rosneft (OTCPK:RNFTF) and the National Assembly's apparent refusal that caused the latest political spat. Any future sale of oil assets to repay their lenders is very likely to increase friction between the government and the opposition.

An oil supply shock in the near future?

Despite the political, economic and the debt crisis, an oil supply shock in the near future is unlikely. This is because there is still no strong opposition to Maduro's government. In addition, Maduro retains the support of the army and still controls the oil industry. For Venezuelan production to fall off a cliff there needs to be a strike at PdVSA like in 2002. In 2002, Chavez's opponents tried to force a new election. PDVSA management tried to stop all production and managed to cut production by a huge 2 million barrels per day for a couple of months. After the strike, Chavez fired 40% of PdVSA and nationalized the company. Oil prices rallied $10 in those 2 months but prices reverted back after the strike.

The likelihood of a strike is less likely this time as PdVSA remains nationalized and the army controls the export ports. Senior members of the army remain very loyal to Maduro and the political opposition would need support from the army, especially in the low ranks.

Source: (JODI)

The current OPEC unplanned production outages remain at low levels ever since Iranian production came back to the market. The current unplanned OPEC outage level is around 500kbd lower than levels seen in 2014-15. Venezuela is the most likely candidate to increase total OPEC unplanned outage levels. However, as long as Maduro's grip on the army remains strong oil production will tick along this year with another 10% decline rate (drop of 200KBD). OPEC unplanned outages will continue to remain lower than levels seen in 2014 and 2015 which will make OPEC's job of rebalancing the oil markets even harder.

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