Venezuela has doubled its oil production in recent months thanks to Iran and other players that are helping it evade U.S. sanctions, but the country’s industry is now running near the top of its capacity and it is unlikely it could go much higher than current output levels, according to industry analysts.
By Miami Herald – Antonio María Delgado
Jan 20, 2022
Oil industry sources confirmed to the Miami Herald that Venezuelan oil production reached an estimated average of 900,000 barrels per day, or bpd, in December and could reach 850,000 bpd in January, thanks mainly to regular shipments of thinners from Iran that have allowed the country to make up for the decline in domestic production.
Those thinners, usually the petroleum derivative known as naphtha, are essential to reducing the viscosity of the super-heavy Venezuelan crude oil.
The new production figures, which contrast with the 450,000 bpd that were being produced at the beginning of last year, dispel lingering doubts surrounding the announcement made by President Nicolás Maduro weeks ago that Venezuela’s production was already at one million barrels per day.
Although that level still constitutes a slight exaggeration over the real numbers, the fact is the Caracas regime is currently enjoying a significant improvement in oil revenues, experts said.
“Indeed, they have increased production and there are several elements that indicate this,” said Juan Fernández, former Executive Director of Planning for the state-owned Petróleos de Venezuela, PDVSA. “A lot of it is because they have been receiving the Iranian thinner and that goes directly to production in the Orinoco heavy-oil belt.”
This increase, together with the sharp rise in oil prices, is providing significant additional income to the Maduro regime and it is helping fuel forecasts that Venezuela will notch in 2022 its first GDP in six years, Fernández added.
Crude production had been gradually declining over the years from the 3.2 million barrels per day that Venezuela was generating when the late President Hugo Chavez came to power in 1999. By the time Maduro took office in 2013, production stood at 2.5 million bpd, and lack of investment in the industry had reduced the level to an average of 1.34 million bpd by 2018. Production fell below one million bpd after the United States sanctioned PDVSA in January 2019.
The Iranian naphtha, which is shipped through obscure routes to avoid the consequences of evading U.S. sanctions, is essential to be able to sell crude from the Orinoco Oil Belt, which needs to be diluted to be sold on world markets.
The U.S. government began to level sanctions during the Donald Trump administration to penalize the Maduro regime and high-ranking officials involved in corruption, drug trafficking and the dismantling of the democratic system.
The hardest blow came in 2019, when the U.S. Treasury Department banned business with PDVSA, in essence prohibiting the purchase of Venezuelan crude in the United States and threatening to punish any U.S. or foreign company dealing with or even discussing business with state-owned companies.
Companies from third countries run a great risk when dealing with Venezuela because they could also be sanctioned for doing so, which can end their access to the international financial system, which mostly operates in U.S. dollars. Fearing this, Russian oil company Rosneft divested its Venezuelan interests in March 2020.
Irán, which has already been sanctioned, apparently does not share Rosneft’s fears and has continued to provide the needed thinners. Fernández said the Venezuelan industry estimates that each barrel of thinner allows Venezuela to produce three of Orinoco Belt oil. “Oil production estimates for the belt currently add up to 450,000 to 500,000 barrels a day and that is due mainly to Iran’s help,” he said.
Experts said that of the nearly 900,000 bpd currently being produced, some 600,000 could be destined for export despite the U.S. ban, which has already led to the application of sanctions to companies from other countries that have helped Venezuela export crude.
Most oil sales are currently being shipped to Malaysian and Singaporean buyers via tankers that turn off their satellite tracking devices to avoid detection. From there the oil is sold to China, which remains the largest customer of Venezuelan crude.
Due to the risk of buying from the Caracas regime, Venezuelan crude is normally sold with for $25 less per barrel than the benchmark Brent crude, said an industry source who spoke on condition of anonymity.
But given that the Brent crude is now at around $90 a barrel, the sale of 600,000 bpd could be generating a monthly revenue of about $1.1 billion a month, experts said. And the flow of oil income could go even further in the near future, given that analysts believe that the price of the Brent crude could exceed $100 a barrel in coming weeks.
Yet, there is doubt that Venezuela could increase its revenue by boosting production from its current levels barring a decision from Washington to end the sanctions.
The industry source that spoke on condition of anonymity said PDVSA still faces a number of problems that makes it difficult even to maintain the current output levels.
“They are still facing equipment and facility maintenance problems; they still have personnel problems, given that many professionals have left, and they still suffer from shortages even though they now have a little more money to purchase some of the supplies that they lacked,” the source said.
Among the largest obstacles to increasing production is the lack of oil drills in the country, which are essential to tap new wells to replace those that stop producing due to natural decline. Experts said that in order to produce more than a million barrels per day, Venezuela must first make large investments to acquire new drills and other key equipment.
Despite the rebound in production, internal fuel shortages continue to be a problem in Venezuela, particularly in the country’s interior, where millions of drivers are often forced to spend hours waiting in line outside gas stations hoping to reach the pump before the fuel runs out.
Despite the internal shortages, the regular supply of fuel to Cuba has not been interrupted. Venezuela sent at least three shipments of gasoline to Cuba this month with about 170,000 barrels of gasoline and other refined products, according to Venezuelan press reports.
Venezuela, which maintains an agreement to exchange oil for medical services with Cuba, does not receive cash payments for these shipments.
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