Venezuela, an OPEC member and holder of the world’s largest volume of oil reserves, has been hit especially hard by falling crude oil prices, according to a recent report by Douglas-Westwood (DW), citing hostile nationalization, spiraling national debt, soaring inflation and an under-developed downstream sector as factors in the country’s increasingly unattractive investment environment.
Caracas, Capital of Venezuela © Eagleflying | Dreamstime.com
Douglas Westwood called 2007 a “bumper year for the South American country’s onshore drilling market, with a total of 1,544 wells drilled,” but government seizure of foreign-owned upstream assets that same year resulted in an 80% drop in annual drilling activity by 2014. A number of companies have been hit with arbitration filings, including PDVSA, Venezuela’s national oil company, who was ordered to repay $1.6 billion to ExxonMobil, the report said.
Optimism arose in 2011 with claims the reserves of the heavy oil Orinoco Belt were double that of Saudi Arabia. However, despite various projects being brought on-stream in 2013, the Orinoco Belt production has failed to reverse the national output decline. A lack of investment in the necessary downstream infrastructure for the heavy crude has resulted in Venezuela being forced to market low-value crude oil, leading to severe financial problems for PDVSA. Therefore, DW expects onshore crude production to continue to decline at around 1% per year over 2015-2021.
Spiraling debt for both PDVSA and the government has become increasingly problematic, particularly in addressing the shortfall in Venezuelan downstream facilities. In January, Moody’s downgraded Venezuela’s to the third lowest rating, making it both extremely difficult and expensive to access international lending markets. As of March 26, 2015, total external debt in the country stands at $95.1 billion (a quarter of GDP), $38.3 billion and $36.2 billion of which is attributable to the government and PDVSA, respectively, said DW.
Falling oil prices have further compounded Venezuela’s situation; as around 95% of the country’s exports are made up by crude oil.
However, Venezuela’s offshore plays offer hope. DW expect offshore production to increase from 149 kboe/d in 2014 to 473 kboe/d in 2019. The majority of the production increase is expected to come from the Perla and Mariscal Sucre gas projects, which will contribute to a rise in offshore drilling over the next four years. Given that gas prices have not fallen by the same degree as oil prices, a quick ramp up of production could come to PDVSA’s rescue. However, DW are not expecting levels of production in coming years to be sufficient to turn around PDVSA’s or Venezuela’s fortunes in the short term, with a weathering of the storm the most optimistic scenario.