Commodities

Venezuela’s Oil Heads East


Last year, Petróleos de Venezuela sent more oil to Asia than North America

Photograph by Dhiraj Singh/Bloomberg

Last year, Petróleos de Venezuela sent more oil to Asia than North America

The late Venezuelan President Hugo Chávez used to berate the old management of state oil company Petróleos de Venezuela (PDVSA) for sending oil to Europe. Chávez, who died in March 2013, said PDVSA’s sales to Germany, the U.K., and Sweden made no commercial sense because of the distance involved and the proximity of Middle East suppliers to European customers.

Fast-forward 15 years, and PDVSA is firmly in the hands of the late president’s adherents. Last year, PDVSA sent more oil to Asia than to North America, the first time in the company’s history, even though it takes a month for Venezuelan crude to reach China and India.

Sales to Asia rose 11 percent to about 1.03 million barrels a day, while sales to North America, chiefly the U.S., fell 12 percent to 879,000 bbl. per day. Today, Chávez’s old criticisms about the wisdom of having far-flung markets are forgotten, as his successors applaud Venezuela’s expanding toehold in Asia.

Growing sales to China are mostly in response to cash-strapped Venezuela’s soaring debt with Beijing. In the last few years, Venezuela has borrowed more than $40 billion from China to cover its budget deficits, and those loans are repayable in oil. “Sales to China may be increasing,” says Fernando Sanchez, vice president of the Society of Venezuelan Petroleum Engineers. “But the company doesn’t earn money from them. The U.S. is where they sell oil for money.”

PDVSA’s situation would be manageable if the country were expanding oil production. It isn’t. That means any increase in shipments to China is coming through the reduction of sales to the U.S. market, which once took as many as 1.5 million bbl. per day.

Venezuela sits atop the world’s largest oil reserves at 297 billion barrels. Yet according to the country’s Oil Ministry, crude production has fallen for two consecutive years. Output dropped to 2.89 million bbl. a day last year, down from 2.91 million in 2012, and 2.99 million in 2011. Many analysts believe the actual production figures are lower.

The decline is coinciding with PDVSA’s current six-year investment plan to expand output to 5.8 million bbl. per day through capital expenditures of $257 billion.

As production falls, domestic consumption is growing thanks to heavily subsidized prices, including gasoline at pennies per gallon, leaving the country less oil to export and further reducing PDVSA’s ability to fund investments.

“PDVSA just doesn’t have the money to grow production,” says Sanchez. “And international oil companies aren’t investing.”

He estimates that foreign oil companies invested about $1 billion last year in their Venezuelan operations, down from a peak of $10 billion during the period when the country was courting private investment.

Chávez nationalized the operations of all private oil companies last decade, decreeing that PDVSA had to have operational control—and a 60 percent stake—in any subsequent joint venture. Chávez also rewrote existing contracts, raising taxes and royalties. He decreed that any business disputes be heard in Venezuela’s courts rather than before international panels.

Many oil companies, including ExxonMobil (XOM), ConocoPhillips (COP), and BP (BP) left the country.

For those that remained, operating under the new guidelines has been difficult. “Companies face many challenges,” says Igor Hernandez, an oil professor at the Caracas-based IESA business institute. “Companies want more operational freedom, less PDVSA control. There are shortages of pipes, valves, and other materials thanks to Venezuela’s foreign exchange controls.”

Venezuela also hasn’t had much success in attracting investment for its upgraders, specialized refiners that are needed to process its extra-heavy crude, which has the viscosity of tar, before traditional refining takes place.

Each upgrader carries a price tag of about $5 billion. Given that the vast majority of the country’s reserves are in extra-heavy crude, production can’t accelerate until the upgraders are built, Hernandez says.

Some companies—most notably Russia’s Lukoil (LKOH:RM) and Malaysia’s Petronas—have grown weary of waiting for PDVSA to improve the investment climate. Both companies withdrew from planned extra-heavy oil ventures with PDSVA.

Lukoil executive Andrei Kuzayayev said last year that Venezuela could increase output but only if the government provided more security to private investors. Kuzayayev said companies needed a “tranquil situation, contract stability, and a good situation” for investment.

Months later the Russian company closed its office and left. PDVSA President Rafael Ramirez, who is also the country’s oil minister and vice president for economic affairs, assured oil companies in February that the government could roll back some of Chávez’s policies to make their investments more attractive. Those changes have yet to occur.

Diversification to Asia may eventually make sense, especially if Venezuela can expand production and reduce loan repayments made in crude, analysts say.

“Today’s PDVSA is doing exactly what the old PDVSA was doing,” says IESA’s Hernandez. “They are seeking to sell oil in growing markets, and as the U.S. increases its oil output and reduces imports, that’s probably a good idea. But Venezuela needs to increase output to be successful.”

Wilson is a special correspondent based in Caracas.

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Companies Mentioned

  • XOM
    (Exxon Mobil Corp)
    • $94.06 USD
    • -0.37
    • -0.39%
  • COP
    (ConocoPhillips)
    • $77.27 USD
    • -0.57
    • -0.74%
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