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Drilling for Rock Bottom
The Worst Days Are Still Ahead for Venezuela’s Oil Output

When last we left it, Venezuela was reeling from the biggest monthly drop in its oil production in a decade. The country’s economy has been circling the drain for quite some time now, and stories of shortages of essential products like medicine, toilet paper, and even food have become distressingly commonplace. But it could be argued that Venezuela’s dipping crude output is its most pressing commodity problem, because exports of that hydrocarbon account for nearly all of the country’s trade revenue. Oil production dropped to 2.37 million barrels per day (bpd) last month, but analysts expect it to fall another 260,000 bpd by the end of the year because, as Bloomberg reports, the country’s state-owned oil company can no longer pay the private oil services companies it contracts with to plumb its sizable reserves:

“The situation is becoming more and more difficult for oil services in Venezuela,” Baptiste Lebacq, an analyst at Natixis SA in Paris, said by phone. As long as oil prices are at current levels, it’ll be “very difficult” for PDVSA to pay the contractors, he said. […]

Schlumberger Ltd., the world’s largest oil-services company by market value, was owed $1.2 billion by PDVSA as of March 31, according to an April 27 filing. Halliburton Co. said last month the amount it was owed rose 7.4 percent in the first quarter to $756 million. The number of rigs drilling for oil in Venezuela fell by 10 to 59 in May, the lowest level in more than a year, according to Baker Hughes Inc.

Schlumberger has reduced activity in line with the drop in payments, the company’s president, Patrick Schorn, told investors last week at the Wells Fargo West Coast Energy Conference. It still works in the country and could boost operations if “new payments models” are implemented, he said.

A year and a half ago, when crude prices were well on their way down from their June 2014 high of $115 per barrel but had not yet reached their January 2016 nadir of $27, Caracas was reported to need an oil price of somewhere in the range of $120 per barrel just to balance its budget. Staying in the black is out of the question in Venezuela these days, and instead the focus is on staving off a default of the country’s state-owned oil company; oil minister Eulogio Del Pino thinks a $50 crude price should just about be enough for that. Oil is trading a couple of dollars under that today, and with a potential American shale rebound waiting in the wings, prices aren’t likely to rise too much higher anytime soon, barring a major supply disruption.

Bargain crude is turning the screws on Venezuela at a time when it needs every drop of oil it can possibly drill, and it’s going to get a whole lot worse for Caracas before it gets better.

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