Commodities

Julian Lee is an oil strategist for Bloomberg First Word. Previously he worked as a senior analyst at the Centre for Global Energy Studies.

(Updated )

Venezuelan oil minister Eulogio Del Pino has been removed from his post by President Nicolas Maduro. You might think that's scant reward for having helped his country secure the lifeline of higher oil prices needed by its battered economy -- something his predecessors, Asdrubal Chavez, a cousin of the late president Hugo Chavez, and Rafarel Ramirez, failed to do.

But look a little deeper and the move makes absolute sense for the country that's lost its position as South America's biggest oil producer to Brazil. Because Del Pino will now focus on the country's next most pressing problem -- the seemingly inexorable decline in its oil output.

Rescue Mission
OPEC's November 30 agreement to cut supply boosted oil prices by around 13 percent
Source: Bloomberg, OPEC

No OPEC country needed an increase in prices quite as much as Venezuela did. When Del Pino was appointed oil minister back in August 2015, the nation was in trouble -- 95 percent of foreign currency earnings come from crude oil exports, and the economy was teetering on the brink of collapse, with inflation running at close to 10 percent a month and foreign reserves collapsing. 

His mission was simple -- to persuade fellow OPEC members to reverse the market share strategy that had been introduced by Saudi Arabia nine months earlier. It took a while, but on Nov. 30 his hard work, along with that of his counterparts from Algeria and Qatar, was rewarded. Saudi Arabia blinked and OPEC introduced its first output cut since 2008, bringing to an end a two-year experiment with free market economics for oil.

While serving as oil minister, Del Pino also retained his other job, running state oil company Petroleos de Venezuela, which he'd been doing since 2014. This inevitably took a back seat to his ministerial obligations -- securing OPEC's output cut became almost a full-time job for much of 2016, leaving him little time to focus on the problems within PdVSA.

And the result wasn't good. Venezuela's big worry now is not that it might struggle to cut output to the level it agreed on Nov. 30, but that it might not even be able to produce as much as it is allowed.

Slippery Slope
Official figures show Venezuela's oil production in steady decline for the last two years.
Source: OPEC

Ageing fields in the west of the country are in decline, while the joint ventures with foreign companies that produce extremely viscous crude from the vast reserves of the Orinoco Belt -- the Faja -- are producing only a fraction of the amount expected. Companies have drilled wells, but are yet to sink the billions of dollars needed into building the upgraders required to convert the extra-heavy Orinoco crude into saleable product. As a result, Venezuela is importing light oil from as far away as Algeria to blend with its heavy crude.

The country's official production figures provided to OPEC -- which have long been viewed by independent analysts as wildly optimistic -- reveal an industry in decline. They show production falling from around 2.9 million barrels a day at the start of 2014 to just 2.3 million barrels in November. Independent estimates are even lower, putting output at little more than 2 million barrels a day.

After turning around Saudi oil policy, reversing Venezuela's own production decline is the new challenge for Del Pino. It seems that his success has been rewarded with the next impossible task.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Corrects Del Pino's tenure as head of PdVSA in fifth paragraph.)

To contact the author of this story:
Julian Lee in London at jlee1627@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net