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As Venezuela’s oil industry crumbled over the past decade, there was one sector that remained standing: the country’s joint ventures with foreign companies, particularly the ones extracting heavy oil from the reserves of the Orinoco Belt.
Those deposits of sludgy extra-heavy oil give Venezuela the world’s largest proved reserves, and foreign companies including Chevron, Total, Eni and Statoil have decided it is worth continuing to work there in spite of the country’s mounting problems.
As Venezuela’s financial crisis deepens, however, and with a new set of US sanctions adding to the pressure, even the foreign joint ventures are feeling the strain. As conditions deteriorate, European and US companies will face tough questions about the future of their operations.
Foreign oil companies’ continued presence in Venezuela is already the result of their willingness to compromise.
The sector’s “crown jewels” were four projects in the Orinoco Belt for extracting extra-heavy oil, which has the consistency of peanut butter, and upgrading it into a lighter form of crude that can be more easily processed by refineries.
Mr Chávez issued a decree to give PDVSA, the national oil company, a 60 per cent stake in those projects, and then sent troops to enforce the order at the point of a gun if necessary.
Two US companies, Exxon and Conoco, chose to walk away, subsequently suing to recover the value of the assets they had lost. The others mostly remained, deciding that retaining minority stakes was a better bet than a long and uncertain legal battle.
For years, that seemed like the wiser decision. Extra heavy oil in Venezuela has been a long-running success story: production rose from 200,000 barrels a day in 2000 to 900,000 b/d in 2016, according to the International Energy Agency, and that success continued even after PDVSA was put in charge.
Chevron, for example, was able to hold its production in Venezuela steady over 2010-16, at about 56,000 b/d of oil.
BP, which also accepted Mr Chavez’s terms, was able to sell its minority stakes in its Venezuelan joint ventures, along with some assets in Vietnam, to its Russian affiliate TNK-BP for an attractive-looking price of $1.8bn in 2010.
When the oil price slumped in 2014, however, PDVSA was plunged into crisis. Desperate for cash to service its debt burden, it has been starving its operations of funds.
“It has become very difficult to invest in the facilities or even to maintain them properly,” said an industry executive familiar with Venezuela. “Which is why production keeps declining.”
Estimates of Venezuela’s production vary, but the figures the government provides to Opec show a decline from an average of 2.65m b/d in 2015 to 1.96m b/d in October. Francisco Monaldi, a Venezuelan energy economist at Rice University in Houston, argues that PDVSA faces a “death spiral” of falling output and deeper financial crisis.
The effect of the cash drain is compounded by mismanagement at PDVSA, foreign executives and analysts say. The state-owned company had already had an exodus of talent under Mr Chávez — there are skilled Venezuelan oil engineers scattered around the world — and a squeeze on spending and political infighting have degraded its capabilities still further.
“PDVSA has no control or management,” Mr Monaldi said. “It’s not a company, it’s a set of fiefdoms.”
Dozens of PDVSA executives have been detained on charges of sabotage and corruption, paralysing decision-making. Last week, President Nicolás Maduro, elected after Mr Chávez died of cancer in 2013, appointed Major General Manuel Quevedo, a career soldier with no apparent oil industry experience, as the new chairman of PDVSA and petroleum minister. Risa Grais-Targow, a Venezuela analyst at Eurasia Group, wrote that his lack of experience would “cloud an already bleak outlook for PDVSA”.
Another problem is that the deepening recession is making it harder to import essential supplies, including fuel and light oil to dilute Venezuela’s own heavy crude. The country’s imports dropped from $37bn in 2015 to $18bn last year, according to the government and central bank, and have fallen again this year.
This already difficult situation has been exacerbated by the latest round of US sanctions imposed by the Trump administration this year.
The sanctions were not aimed at the oil industry — thousands of Americans are employed in refineries and other facilities that process and distribute Venezuela’s crude — but they have had the effect of making it harder for any international company to operate there. “Financial institutions have become very cautious about any transactions with PDVSA,” the oil industry executive said.
The sanctions also seem to restrict one tactic that has been used by oilfield services companies, including Schlumberger and Halliburton, to keep working in Venezuela: taking interest-bearing promissory notes as a substitute for hundreds of millions of dollars of unpaid bills. Sanctions imposed in August barred US citizens from buying new PDVSA bonds with a maturity of more than 90 days.
Raul Gallegos of consultancy Control Risks, author of a book on Venezuela called Crude Nation, said foreign companies would nonetheless be prepared to “sit tight” through the turbulence, to retain access to the country’s vast reserves.
“This is a business where you look 20 or 30 years down the line, not at what’s going to happen in the next year or two,” he said “They are trying to maintain relations with the government while hoping that better times might come; not this year or next, maybe, but in the medium term.”
The foreign companies have issues that they are not prepared to give ground on, however, including the safety of their staff and their legal status. If those seem threatened, they will have to reassess whether trying to stick it out is worthwhile.
China has played an increasingly important role in Venezuela, but last year the Chinese embassy in Caracas warned of growing insecurity, advised local workers not to travel by themselves, buy guard dogs for their homes and install GPS systems in cars to make kidnap victims easier to find. Over 30,000 Chinese workers have left Venezuela since 2014.
One great advantage of Venezuela’s joint ventures for foreign companies has been that, rather than allowing PDVSA to sell the oil and then waiting to be paid their part, they have taken a share of production and been able to sell it themselves. There are now signs that those arrangements are being tested.
Reuters reported recently that PDVSA had asked its Petropiar joint venture with Chevron to hand over up to 45 per cent of the oil it planned to export last month. Chevron declined to comment on the report, saying only that it “continues operating normally in Venezuela”.
If that kind of appropriation, apparently intended to meet domestic fuel demand, becomes common, it could be the final straw, Mr Monaldi says.
“If they are not able to get the oil, it would put tremendous pressure on the idea that they should stay there.”