International oil companies give up Venezuela

Despite huge oil reserves waiting to be tapped, the ongoing sanctions against Venezuelan oil and the current state of politics and the economy are driving international oil companies away from the Venezuelan energy market.

International companies are beginning to give up Venezuela, which has the world’s largest proven oil reserves of 304 billion barrels, as US sanctions and the country’s political situation pose too many risks to ongoing investments.

This summer, both TotalEnergies and Equinor divested their stakes in Venezuelan state-owned company Petrocedeno, leaving PDVSA with all its shares, in a move that suggests they are giving up their stake in the Latin American oil giant after decades of investment.

Petrocedeno operates in Venezuela’s Orinoco belt, producing extra heavy crude, which it transports to be upgraded and blended to become a lighter crude suitable for export.

TotalEnergies blamed the inability for operations in the Orinoco Belt to meet the company’s new environmental criteria for the withdrawal, as Total commitments to invest only in low-carbon oil projects moving forward.

Equinor also avoided blaming US sanctions or the state of Venezuelan politics for the withdrawal, instead citing his focus on international core areas and prioritized geographic areas where Equinor can leverage its competitive advantages.

But if oil majors cut their investments, Venezuela’s current state of the national economy will no longer be able to sustain its oil and gas industry as billions of barrels of oil remain in the ground. A slump in the country’s oil production, which fell from about 2.03 million barrels per day of oil in 2017 to just 480,000 barrels per day in 2020, left Venezuela with fuel shortages and a damaged economy.

Svetlana Doh, an upstream oil and gas analyst at GlobalData, explains the fuel shortage situation and response: “The Petrocedeno upgrader is planned to be redesigned to produce naphtha as a feedstock for refineries. Essentially, this means that refineries in the country are in such dire need of renovation or even simple maintenance that upgraders now have to perform a refining step for them.

In addition, “Converting the upgraders could be quite challenging as it would require new equipment while the poor PDVSA can barely find the resources to perform basic maintenance of its refineries. The continued decline in Venezuela’s crude oil production, a major pillar of the country’s economy, coupled with sanctions imposed by the US government, the Covid-19 pandemic, government corruption and lack of investment have led to that the country was collapsing,” said Doh.

Even before the change in Venezuela’s oil industry landscape this summer, production figures plummeted due to a shortage of diluents needed to blend the extra-heavy crude, making it suitable for export. In August, production in Orinoco fell by a quarter to under 300,000 bpd. The shortage arose because of the decision to use medium and light crudes to manage the scarcity of motor fuels in the country rather than prioritizing the dilution of the heavier crudes. If the country has to continue this strategy to stay afloat, it could have a dramatic impact on production and export figures for the rest of 2021.

State-owned Petroleos de Venezuela (PDVSA) changed tactics last month when it imported 620,000 barrels of the diluent condensate to support its oil refining industry. PDVSA is also considering using synthetic crude oil to sustain production as Venezuela’s import options are limited due to US sanctions against the country’s oil and gas industry.

One of Venezuela’s few hopes is the emerging oil power China. China is expected to keep international demand for oil high over the next decade as European and US counterparts move from fossil fuels to alternative forms of energy.

As the Venezuelan oil industry faces its greatest challenges yet, with US sanctions curtailing the country’s energy exports and imports and international oil majors withdrawing, China has seen its opportunity to increase its presence in Latin America and to fill the void left by the United States.

As China looks set to overtake the US to become the world’s largest refiner and importer of crude oil this year, the country seems willing to lift US sanctions against both Venezuela and Iran to feed its oil demand. And in April and May of this year, China Concord Petroleum Co (CCPC) mapped out ships to transport more than a fifth of Venezuelan oil exports clearly disregard sanctions.

However, the energy relationship between Venezuela and China was not easy, with new taxes imposed by China on heavy sour crude oil earlier this year posed a threat to Venezuela’s export ties with the country. The new taxes were expected to make profit margins on Venezuelan crude oil too low to justify investment. But with the recent change in the country’s oil industry, it looks like China isn’t giving up completely just yet.

As international oil companies pull out of Venezuela and leave the national oil industry underfunded, at a time when it is already struggling with major fuel and diluent shortages, will China step in to save the day and expand its nascent oil market into Latin America? -America?

By Felicity Bradstock for Oilprice.com

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