Submitted by Herman Wang of Platts

Staggering debt, crumbling equipment and infrastructure, and mass worker resignations, have set back Venezuela's oil industry decades, with experts saying they see scant prospects of any turnaround. Venezuelan crude output plummeted in December to 1.70 million b/d, according to the latest S&P Global Platts OPEC survey released Monday.

The output level represented a decline of 100,000 b/d from November and a low not seen for more than 15 years, when a major strike from December 2002 to February 2003 hobbled production. Not counting strike-affected months, Venezuela's production was last this low in August 1989, more than 28 years ago.

Sources in the country say new PDVSA President Manuel Quevedo, a brigadier general in the National Guard who was also named the country's oil minister in November, sacked several high-level company officials in a so-called corruption purge at the end of the year and these people have yet to be replaced.

PDVSA is also facing internal protests and widespread resignations of refinery personnel who fear a serious accident, since security protocols are not being followed, added the sources, who spoke on condition of anonymity. Several market watchers have put Venezuela top of their geopolitical risk lists, with the economic crisis and PDVSA woes seen likely to continue, if not accelerate, amid threats of further US sanctions.

"The Venezuelan economy could collapse at any moment," said Torbjorn Kjus, oil market analyst with Norway's DNB Bank. "We could envisage scenarios spanning from outright civil war to a state coup, to a general strike or even just one more year of strangulating slow death for the economy. Neither of these outcomes bodes well for Venezuelan oil production."

Service company Baker Hughes, which tracks rig counts internationally, reported this week that Venezuela had 50 rigs drilling in December, up from 39 in October, which had been the fewest since 2003 during the worker strike.

Einstein Millan, an independent Venezuela-based analyst who formerly worked for PDVSA, estimated that the company would need 100 to 110 active rigs to reverse its production decline, let alone achieve a presidential directive of increasing oil output by 1 million b/d. The rig pullback and accelerating field decline rates will cause Venezuelan oil production to fall by another 300,000 to 400,000 b/d in 2018, analysts with Washington-based Rapidan Energy forecast.

The scarcity of rigs is only part of Venezuela's problem. There is evidence of advanced stages of corrosion and deterioration in much of the country's operational infrastructure, including pipelines, gas compression plants, crude upgraders, storage facilities and refineries.

Analysts with Washington-based ClearView Energy Partners noted Monday in a report that PDVSA's capital expenditure dropped from $25 billion in 2014 to $11 billion in 2016, according to its financial statements.

"Given the country's cash shortage, we would not be surprised to see PDVSA capital expenditures fall further when the company reports 2017 data," the analysts wrote.

Venezuela's troubles have already opened the door for other oil producers, such as Iraq, Mexico and Canada, to take its market share.

TRADING SIGNALS OF WOE

For months already, Venezuela's refineries have been short of crude to run anywhere near full capacity, with S&P Global Platts Analytics estimating that December throughput was about 400,000 b/d "after multiple outages and lack of feedstocks."

The 955,000 b/d Paraguana Refining Center in northwest Venezuela was operating at 336,000 b/d, or 35.2% of capacity, last week, according to a technical report seen by S&P Global Platts. Several units have been offline due to damage that PDVSA has been unable to repair. A fire also hit a distillation unit on December 29.

The 140,000 b/d El Palito refinery remains shut for lack of crude to process, according to an operator, who spoke on condition of anonymity, and the 187,000 b/d Puerto La Cruz refinery is operating at low levels, also due to lack of crude, according to union officials, though no figures were available.

US naphtha sources have said that Venezuelan interest in purchasing reformer-grade naphtha - largely used to produce high-octane gasoline components - from Gulf Coast sources has waned in recent weeks, a sign of refinery troubles.

Millan said the refineries have seen several worker protests in the last few months, with more employees likely to quit in the weeks ahead. "The level of internal tension is such that the risk of accidents due to inappropriate management of systems, equipment and installed infrastructure has escalated to really critical levels, which could lead to catastrophic scenarios," he wrote in a recent report.

The shortage of crude to process has forced PDVSA to increase its purchases of refined products in the international market to supply domestic consumption. At the end of 2017, the company began negotiating directly with traders to exchange gasoline, diesel, naphtha, butane and other products for crude deliveries in January, according to a source from PDVSA's Trade and Supply Department, speaking on condition of anonymity.

PDVSA has also been selling natural gasoline ("C5") on the US East Coast, with Vitol taking 165,000 barrels aboard the Norient Solar at New York December 27 and PetroChina taking 164,000 barrels aboard the Elka Eleftheria two days later at Newark, New Jersey, market sources said.

C5 is often used to dilute heavy crude, and the sales suggest PDVSA lacks crude to dilute for its refineries.

"They need dollars for sure," a US refined products source said last week of the C5 deals.

PDVSA DIVESTMENTS ON TAP?

Venezuela's problems have been compounded by US sanctions, including restrictions on trading new debt and equity, which hamstring PDVSA's efforts to restructure its crushing debt load. PDVSA is close to $90 billion in debt and has come close to defaulting on several recent payments.

The US administration of President Donald Trump imposed the sanctions after Venezuelan President Nicolas Maduro convened a controversial Constitutional Assembly last summer amid a deadly crackdown on opposition protesters.

Trump officials have said the administration reserves the right to issue further penalties, including potential bans on sales of US oil products to Venezuela or restrictions on Venezuelan crude exports, if it sees continued political repression and corruption.

Maduro last week announced that Venezuela would in the coming days issue 100 million "petros," a bitcoin-like cryptocurrency backed by the country's oil resources, to help bypass the sanctions restrictions on its debt.

Each petro is to be worth the value of one barrel of oil, though experts have doubted that investors will be eager to adopt it. Leading Venezuela through its oil crisis is Quevedo, 50, who despite having no apparent experience in the industry, has been directed to restructure PDVSA and increase Venezuela's oil production by 1 million b/d. Details of this plan are scant.

Sources have told S&P Global Platts that one model being studied involves PDVSA giving up partial interests in a refinery or projects involving extra heavy crude or national gas in exchange for financing or loans that would be repaid with crude or refined products.

But except for a few Russian and Chinese companies, the preferred partners and allies of the Venezuelan government, it is difficult to identify companies disposed to invest without guarantees that their assets and profits will not be confiscated when and if crude prices rebound and the government suddenly decides it does not need to share the wealth.

Quevedo, whose Twitter account largely retweets nationalistic fervor from Maduro and other government officials and offices, had little to say to journalists at the last OPEC meeting November 30 in Vienna. He is scheduled to attend a January 21 meeting in Oman of the OPEC/non-OPEC monitoring committee, of which Venezuela is a member.

Venezuela's declining production has made it the most compliant -- if unwillingly so -- member of the 24-country OPEC/non-OPEC coalition that has implemented output cuts to help prop up prices.

Venezuelan crude shipments to the US, its largest export destination, fell 1.7 million barrels from November to December, according to US Census data. Its average production of 1.897 million b/d for 2017 was below its quota under the deal of 1.972 million b/d, making it 179% compliant, according to S&P Global Platts OPEC survey data.