Caracas is preparing the return of oil contracts with private companies
that were last used in the 1990s before the Chavez era that made PDVSA the
one and only operator of oil fields. Reuters reported
this week it had seen a draft of the contract stipulating the state oil
company will give control over several fields to a set of local companies for
a period of six years. The companies will have to commit to boosting
production, funding field maintenance, and purchasing whatever equipment they
need to do all this. In exchange, PDVSA will pay them a fee for the oil they
extract.
It smacks of privatization, albeit temporary, but how successful it would
be remains an open question. Sources close to the developments told Reuters
the draft document was the foundation of a production-boost plan announced by
President Nicolas Maduro at the end of August. The plan, PDVSA’s head, Manuel
Quevedo, said later, would involve investments of US$430 million to increase
oil production by 641,000 bpd. The company picked 14 companies to take part,
but the names of only seven have been made public.
Most, Reuters reports, are oilfield service providers, which means they
don’t necessarily have oil production experience. Five of them are
Venezuelan, one is based in Panama, and one is Chinese. According to the
draft contract, in addition to the fees they receive for the oil they
produce, the companies will also be reimbursed for the investments they make
in the fields. Can the plan work?
There are a lot of “ifs” here. Anything is theoretically possible, even a
reversal of Venezuela’s sliding oil production, especially if it is urgently
necessary. This is precisely the case: with booming hyperinflation, hundreds
of millions in delayed payments to creditors by PDVSA, and, most recently, a decision by
Caracas to cut fuel subsidies, Venezuela is teetering on the brink of total
collapse. Oil is Venezuela’s biggest asset. It makes sense it would try to
use it better. The problem seems to be the choice of field operators. And the
other problem is that Caracas does not really have a choice. Related:
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Foreign companies were driven out of the country by the Chavez government.
Now, even if they would like to come back, they couldn’t because of the
severe U.S. sanctions against Caracas. Even if there were no sanctions, a
return of Big Oil to Venezuela would be questionable: the Chavez
nationalization must have left a bad taste. So, Venezuela really does not
have any other options, but to entrust its planned production boost to local
companies. And it really needs this boost.
According to OPEC’s secondary
sources, Venezuela’s oil production in July dropped to below the
1.3-million-bpd mark—at 1.278 million bpd, plunging 47,700 bpd from June.
This compares with an average of 2.154 million bpd in 2016, and an average of
1.911 million bpd in 2017. Some analysts expect production to fall to below 1
million bpd by the end of this year. The production problem, in other words,
is getting more urgent by the day.
Yet, another problem could outshine it very soon. Media covering the
proposed fuel subsidy curb recall the last time a Venezuelan government tried
to raise prices at the pump. It was in 1989 and it led to riots and an
attempted coup. Cutting fuel subsidies, in other words, is a desperate move
that might not end well for the government in Caracas, even if it manages to
boost oil production with the help of the seven private companies.
By Irina Slav for Oilprice.com
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