QUANTVOX SPECIAL REPORT: A VISION ON THE FUTURE FOR VENEZUELA OIL AND GAS INDUSTRY

Transcription

1 QUANTVOX SPECIAL REPORT: A VISION ON THE FUTURE FOR VENEZUELA OIL AND GAS INDUSTRY This report provides my vision and perspective for the oil and gas industry in Venezuela and the future for the national oil company, Petróleos de Venezuela SA (PDVSA). The company is under enormous technical, financial and market challenges and operates under a problematic political environment that limits the corporation to make practical decisions to operate in a low price environment, to maintain its market share and to contribute to easing the delicate economic position of the country. A review of the strategic position of the company using a SWOT table helps in understanding the critical situation. Internal Factors External Factors Strengths Weaknesses Opportunities Threats Venezuela has enormous proven and untapped resources which include conventional and nonconventional crude and natural gas. Financial deterioration and lack of investment affected the crude oil production and reliable operations. Potential development of Natural Gas and to become a relevant international supplier. US Treasury and State Department imposing economic sanctions on Venezuela and main Government leaders. Large volume of conventional resources remain in place and the can be reactivated. Lack of a strategic business plan to drive investment decisions and solve operational problems and make feasible the development of extra heavy and bitumen in the Orinoco Oil Belt area. Availability of new efficient technology to improved recovery factor and reduce production cost. Potential international embargo over international assets and inflow-outflow shipments. Venezuela still has sufficient international assets to support financing mechanism (even though some assets have been sold in recent years). Lack of investment in the Domestic Refinery System which reduced the market share in refined products abroad and increased imports. --- Strong competition by other countries to attract investment to develop oil and gas properties in a much friendly environment for investors. Political alliance with Potential superpowers like China and Russia. Brain drain and lack of professional staff to operate efficiently and safely. --- Uncertainty over international support and bilateral foreign relationship with other countries. Source: own analysis Registered office: 68 Lombard Street, London, EC3V 9LJ. info@quantvox.com Page 1

2 Oil and Gas Production I see PDVSA struggling with many challenges ahead, unable to reassume the growth path in the medium term. With the financial position very deteriorated, PDVSA will continue reducing the investment required to maintain production levels on the prime oil fields. In the last 10 years, PDVSA put most of the effort to grow faster in non-conventional areas as the Orinoco Belt region. The declination occurring in the conventional oil fields, mainly light sweet grades, were compensated with early production from the exploration and development projects with partners on Joint Ventures. But the lack of investment and delays in expanding facilities above ground, required to move the oil drop to the processing centres and upgrades, created a cap in Orinoco Projects and partners have slowed the developing programs. At the current low price levels, with an eroded cash position and limited access to the international financial market, and with the Orinoco Belt projects reducing pace, then oil production is expected to see a massive declination toward 2018 to levels close to 1.5 mbd. Increasing the oil production back to the 3 mbd level is not a complicated issue for a country like Venezuela with the enormous resources and proven reserves. Venezuela geology has been studied for nearly 100 years and the current technologies have proven results. The current infrastructure still in place and is under utilisation, and further investment will be required to pass the threshold of 3 mbd. But PDVSA as any other National Oil Company requires the technical support and services from highly experienced international companies in drilling, engineering, completion and digitalization, among others. On the downstream segment, lack of investment and maintenance caused problems to the main refinery centres and PDVSA now is forced to import refined products to supply the domestic market and its commitments in Petrocaribe. Once the political and market conditions turn into favour, the priority will be investing in upstream to reassume production levels. I therefore see slow recovery of the national refinery segment. I see PDVSA carrying on importing more light-sweet crude oil, naphtha to use as diluents for the heavy crude projects and refined products to supply the domestic market. With the rapid declination in crude oil production, the national refinery system, already under lack of maintenance, will receive less material for processing. PDVSA export basket will become heavier as the proportion of refined products decline. This year PDVSA solved its requirements of light crude through its subsidiary Refinery CITGO Petroleum in the US and an agreement with China National Petroleum Corporation. Contrarily to the oil industry, the developing offshore natural gas resources still ongoing and it could potentially transform Venezuela into a relevant supplier of natural gas. The natural gas projects are not subject to the logistic restrictions and legacy of infrastructure and processing facilities involved in the oil supply chain. Many IOCs in the western region are in the early production stage and currently delivering the first molecule of gas to supply the domestic market. But in the eastern region, the concern is when the LNG processing plant will be ready for exporting the natural gas. This is more a matter of political will rather than a technical hurdle. The LNG projects dated from the 90s when the previous PDVSA administration promoted the Cristobal Colon LNG project, then renamed to Gran Mariscal de Ayacucho Industrial Complex but nothing has been done since then and now PDVSA partnership in upstream projects, intensively drilling and exploring for resources offshore which put a tight deadline for negotiating building the LNG trains and deep water terminal. Registered office: 68 Lombard Street, London, EC3V 9LJ. info@quantvox.com Page 2

3 Perhaps, the real challenges will be the negotiation of convenience and favourable terms and conditions for IOC to return to Venezuela and investors to be confident on the rules. But the political paralysis limits and confrontation between President and the Parliament limits the possibilities to agree on the new terms for Joint Ventures. As an example, Venezuelan Government now used the Supreme Court of Justice (SCJ) to dictating guidelines and approvals any economic and financial decision regarding the natural resources and PDVSA. In addition, there is a strong competition between oil and gas rich countries calling for foreign investors and participation of oil and gas companies with a large track record of successful upstream projects. Countries such as Mexico, Brazil, Oman, Egypt, Australia, new areas in East Coast of Canada and the UK are pending to awards areas. Other countries like Greenland, Mozambique, Gabon, Cameroon, and Argentina already closed the round licensing bid process early this year. In addition, Shale and Tight Oil continue attracting investors and major players. Traditionally, PDVSA books the premium onshore oil fields and offers less profitable oil fields such as marginal fields and non-conventional heavy and bitumen reserves in partnership with IOC, but nowadays IOC are prioritising the projects, looking to increase their reserve book value and seeking valuable reserves, but Venezuela is not on the target yet. As a result, traditional major partners are not willing to take more risk in Venezuela and the recent deals and partnerships have been done with companies with a questionable reputation. PDVSA and Venezuela Government require a pragmatic approach and different paradigm to find favourable agreements to recover the oil and gas industry. But so far I see a Government and top managers trapped on ideological and political declarations of nationalisation and sovereignty against IOC that extracting most of the value from Venezuela. The problem with the top decisions is that the members of the board of directors are not experienced oil and gas professional but active members of the political bureau and military forces, all involved in serious acts of corruption and a long list of uncompleted projects with different institutions. On top of this mismanagement problem, PDVSA is suffering a brain drain and losing skill and talented professional required to accomplish the growth plans. The exodus of experienced and skilled workers at any level will make complicate to complete the investment plants on time, another reason why partners are procrastinating investment in Venezuela. Financial Cash Flow and Debt Levels The PDVSA business plan is very ambitious and will require around USD 247 billion of capital investment for the next 4 years, mainly to the Orinoco Belt projects. I think this investment plan is not achievable and PDVAS will continue exploring alternative business models for the upstream projects changing the investment proposition and foreign exchange regime on the Joint Ventures and the commercial agreements and contracts in order to facilitate preserving cash flow. In early 2016, PDVSA changes the Joint Venture investment plan into an SPV with the isolation of the cash flow from the sponsor partner, PDVSA, with the inclusion of operational partners and investors partners. In the commercial side, PDVSA will continue providing deferred payment terms to the Petrocaribe participants. But at the same will continue pursuing payment in advance from important clients to get fresh cash inflow although it carries implications on the value of the transaction. Another complication for PDVSA business is the quality of the crude oil produced. Venezuelan is famous for its heavy and sour crude oil grades which are priced at a discount to the Light-Sweet benchmarks, WTI, Brent and Dubai, depending on the market destination. But under a low-price environment, the PDVSA see a further dramatic shrink in revenues and weakening cash flow Registered office: 68 Lombard Street, London, EC3V 9LJ. info@quantvox.com Page 3

4 position. Maximisation of the crude oil revenue involves the increase of the refined products exports but priority will be given to upstream production. The problem of the investment plan is the non-core activities PDVSA assumed as part of the paradigm of economic model used by the former President Chavez and continue today. Between 1998 and 2004, PDVSA generated I average more than 1.2 more per one million of Capex invested. In the last 6 years, the ratio fell to somewhere around 150 kboe per one million of Capex. I expect PDVSA forced to sell more of its international assets as an emergency measure to get free cash, especially non-upstream assets. PDVSA, as any others national oil company, has experience in operating at low oil prices. Actually, it is not the first time, PDVSA faces low oil prices. In 1998 oil price collapsed to levels unprecedented but had a minimal negative impact on the financial position during the following years. The current situation of PDVSA is the enormous debt service to pay back in this and the following year. Economic collapse with a Legal and Constitutional Battle The populist economic model is proven to be unsustainable not because of the low oil price but because of the huge increase in the public sector and the inefficiency of the state-own companies, the currency control system and the centralised imports of products. The populist and state-centric government model deepens the dependency to a single commodity export, crude oil, while the nationalisations and takeovers on land and factories generated a massive declination in productivity and increased dependency on imports of any kind. On top of this mismanagement of the economy, the government increased substantially the debt levels for PDVSA and nation creating the undesirable combination of high debt and low growth and at the moment there is limit access to financial markets. Under the previous National Assembly, dominated by the Government Political Party; President Chavez was given absolute powers in terms of economics and finance. Nowadays, the Revolution is running out of steam with complex structural problems, lack of foreign currencies and a National Assembly unwilling to continue on the same economic spiral and stop providing support to the Government decisions. This situation forced the Government, the previous National Assembly, to appoint new heads at the Supreme Court of Justice (SCJ), and used them as the counter power to the National Assembly. Now the legal game gets stuck since the General Attorney, Mrs Luisa Ortega Diaz, a previously supporter of Mr Chavez, declared that the TSJ breached the Constitution and Government coup to unlawfully seize the power of the National Assembly. This raised concerns for international companies operating in Venezuela and investors with stakes in several natural resource projects. I do not see the political conflict to ease in the short term because the radicalization of the Government methods to control the level of protest is causing more radical response on the civilians and this battle could destroy everything around them. The government initiative to activate a Constituency Assembly without an open process of consultation to population came as an ultimate strategy to get rid of the institutional setup that limits the government free range to manoeuvre. The coalition of opposition leaders moved forward to organised a plebiscite this July 16 th without the coordination of the Government. The expectation is a massive participation in the polling process and more participation than the Government process to vote for the representatives to the Constituency Assembly. Registered office: 68 Lombard Street, London, EC3V 9LJ. info@quantvox.com Page 4

5 US Sanctions: Washington has been cautiously investigating the cases of drugs trafficking, corruption, links with terrorist groups and cases of human right violations. The list names the head of the Venezuelan Government and political bureau. But the Venezuelan oppositions are extremely cautious in pursuing concrete actions against the Venezuela Government and the national oil company because the risk of escalating the internal conflict and end in a more complicated economic condition. On top of this, there is a strong economic interest from other superpower countries such as Russian and China with a stake in many projects which would stop any intervention in Venezuela crisis. Conclusion I do believes PDVSA will continue under difficult circunstances till end The main reason of my lack of confidence in PDVSA is the actual bord of directors who have not expecience and are not capable make ultimate decisions to restore the previous oil production levels. The company has many wearkness points, challenges are many, yjere are few opportunities and not uniques factors yo PDVSA, but treats can possible become a fact. Political environment is decisive to move forward in finding solutions to the low cash flow position. The chances to see a political change will take us to Mid 2018, and in the mean time investment will continue shrinking and production to decline. Jhoan Cordoba, Economist Managing Director Quantvox Ltd Disclaimer: With respect to the information available from this material, neither QuantVox Ltd nor any of its employees, contractors or agents makes any warranty either express or implied, including the warranty for fitness for a particular purpose, nor assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of information, product or process disclosed, nor represents that its use would not infringe privately owned rights. Nothing in this presentation shall constitute an offer or solicitation of any kind and its content shall be regarded as academic research. Past results are not indicative of future returns and should not be relied upon for making any financial or investment decisions. Any person with access to the information herein is encouraged to obtain appropriate professional advice before making any investment or financial decision. Our Company accepts no liability for the content of this document, or for the consequences of any actions taken on the basis of the information provided. Copying, distributing or taking any action in reliance on the contents of this information is strictly prohibited. Registered office: 68 Lombard Street, London, EC3V 9LJ. info@quantvox.com Page 5