Update Venezuela: Oil output continues dropping from Canada’s biggest heavy crude competitor

Watch Markham’s interview with economist Bernadette Johnson about Venezuela’s oil industry problems: click here

Does the Venezuela disaster have a bottom? Not for the country’s oil industry, according to a new report from the US Energy Information Administration (EIA), and that may create tighter supply and higher prices in American heavy crude markets just as marine shipping sulphur regulations come into effect January 1.

The EIA’s May 2019 Short-Term Energy Outlook estimates that crude oil production from Alberta’s biggest competitor in the Gulf Coast refineries averaged 830,000 b/d in April, down from 1.2 million b/d at the beginning of the year and down from 2.3 million b/d just a few years ago.

” Widespread power outages, mismanagement of the country’s oil industry, and U.S. sanctions directed at Venezuela’s energy sector and PdVSA have all contributed to the recent declines,” are to blame for Venezuela’s woes, according to the EIA.

Kevin Birn, energy economist with IHS MarkIt in Calgary, says the price differential between heavy and light crude has begun to narrow.

“The market’s already very tight and you could classify that as being short because you’re seeing it play on the price,” he said in an interview. “We’re seeing that trade out in the price difference between light and heavy crude oil. The price of waterborne crude and even Western Canadian Select relative to light crude is heightened by $2 to $3 [per barrel] and at times $4 to $5.”

The EIA expects Venezuela’s crude oil production to continue dropping in 2019 and is not expected to stablize until the end of 2020 at the earliest. In fact, declines may accelerate as sanctions-related deadlines pass.

“These deadlines include provisions that third-party entities using the U.S. financial system stop transactions with PdVSA by April 28 and that U.S. companies, including oil service companies, involved in the oil sector must cease operations in Venezuela by July 27,” says the May 20 article. “Venezuela’s chronic shortage of workers across the industry and the departure of US oilfield service companies, among other factors, will contribute to a further decrease in production.”

The power outages have very likely damaged the reservoirs and associated infrastructure in the Orinoco Oil Belt area. Like the Alberta oil sands, Venezuela produces extra-heavy crude oil that requires dilution with condensate or other light oils before the oil is sent by pipeline to domestic refineries or export terminals. Venezuela’s upgraders, complex processing units that upgrade the extra-heavy crude oil to help facilitate transport, were shut down in March during the power outages.

“If Venezuelan crude or upgraded oil cannot flow as a result of a lack of power to the pumping infrastructure, heavier molecules sink and form a tar-like layer in the pipelines that can hinder the flow from resuming even after the power outages are resolved,” said the EIA.

“I think we’ll continue to see the call for Canadian crude be really strong,” said Birn. “Arguably, the call for Canadian crude has never been greater but Canada has its own logistical (pipeline) constraints that are keeping its production potential below what it otherwise could be.”