A casual observer of the OPEC production cuts who has even basic knowledge of the current Geo-political situation might have cause for confusion. Why is Venezuela, a country rocked by some of the worst economic turmoil in the world not exempted from the OPEC production cuts? After all, while Libya, Nigeria and Iran are all experiencing some degree of economic turmoil, the situation is not as bad as in Venezuela which has chronic food shortages.
The answer is the decline of Venezuelan oil production is not a matter of choice but a result of the chaos which has engulfed the country. The only thing keeping Venezuela from becoming a failed state are the oil revenues brought in by state owned energy company PDVSA. However, the government is in such desperate straits that these revenues are being used almost entirely to fund the government. PDVSA, the proverbial golden goose, is starving due to a lack of funds available to maintain its infrastructure.
This situation has led to declining oil production in Venezuela for a decade and the situation is getting worse. Last month oil production stood at 1.956 million bpd down 10% from last year and approaching 20% from two years ago. This is a trend which is expected to continue at a steeper rate throughout the year with some estimates predicting the country’s production will be down another 200,000-300,000 bpd by 2018.
The problems don’t end with the production side of the industry. The turmoil that is wracking the country has hit Venezuela’s refineries which are operating well below capacity due to a lack of spare parts. The country’s two largest refineries, the Cardon and Amuay, which are part of the Paraguana Refining center are producing 409,000 bpd, 43% of the center’s supposed capacity. The country’s third largest refinery Puerto la Cruz is functioning at minimal levels due to problems with two of its three distillation units.
This widespread neglect and erosion of the production capacity of one of OPECs members is unlikely to end in the near future and could indeed grow significantly worse as the countries security situation deteriorates further.
