PDVSA Braces for Oil Production Drop as Default Looms Large

  • Venezuela output is expected to drop by 200,000 barrels a day
  • Fitch Ratings reiterates PDVSA debt default is “probable”

The recent bump in oil prices isn’t enough to help Petroleos de Venezuela SA as it faces its fourth consecutive year of declining production.

The company’s crude output is expected to fall this year as it failed to raise cash for investments and after Venezuela agreed to cut 95,000 barrels a day for six months as part of a deal struck by the Organization of Petroleum Exporting Countries and other non-members to lift oil prices, analysts say. Even the recent increase in oil prices, following the cuts, aren’t enough to ease the company’s financial burden, Lucas Aristizabal, a senior director at Fitch Ratings, said.

“Giving the tight liquidity, prices need to be significantly higher to revive output,” Aristizabal said in a phone interview from New York. “At least more than $100 to start with,” he said. Fitch reiterates that a default of PDVSA’s debt is "probable" amid lower production associated with a moderate oil price increase and weak liquidity.

Front-month Brent prices closed at $56.80 a barrel on the London-based ICE Futures Europe exchange. The last time Brent traded above the $100 a barrel mark was in August 2014. Prices have since declined on higher production from U.S. shale oil plays and with the recovery of oilfields in Libya.

At a time that oil prices aren’t high enough to generate adequate cash for PDVSA to pay off debts or invest in new rigs, the company also faces $10 billion in interest payments and principal maturities coming up this year with an estimated $2 billion, at most, in cash holdings to service the amount, Aristizabal said.

Venezuelan oil output is expected to fall by 200,000 barrels a day this year as PDVSA won’t be able to realize projects announced last year, Luisa Palacios, a senior managing director at the Medley Global Advisors LLC, said in a phone interview from New York.

“It’s the result of a total collapse of the Venezuelan economy,” Palacios, who is also a fellow at the Center on Global Energy Policy at Columbia University, said. “Production has been declining and I don’t see that trend changing direction any time soon.”

Venezuela crude output has fallen 16 percent since 2013, to 2.33 million barrels a day in September, the latest data made available by the energy ministry. Falling output should translate into reduced exports, notably to Caribbean countries that are part of the Petrocaribe program, where PDVSA sells oil under low-cost financing, Palacios said.

She estimates Venezuelan exports of crude and fuel oil fell 10 percent last year, while shipments to China rose 11 percent. Exports to Petrocaribe countries declined 25 percent compared with a year earlier. Lower shipments to countries like the Dominican Republic have forced them to look elsewhere for supplies. Dominican Republic’s Refineria Dominicana de Petroleo, known as Refidomsa, recently bought two cargoes of West Texas Intermediate from the U.S. and Jamaica’s Petrojam Ltd. confirmed buying Mexican Maya and Isthmus oil for its refinery.

PDVSA didn’t immediately respond to a phone call or e-mail request for comment.

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