JVs take brunt of new OPEC cuts

Thursday, January 8, 2009

JVs between Venezuela's state oil company PDVSA and international partners must cut output by 189,000b/d in line with new OPEC output cuts, the oil and energy ministry (Menpet) said in a statement.

Specifically, Petromonagas, a JV between PDVSA and British oil major BP (NYSE: BP), must cut production by 90,000b/d. Petrolera Sinovensa, held with China's CNPC, will reduce production by 18,000b/d, and Petrocedeño, a JV with France's Total (NYSE: TOT) and Norway's Statoil (NYSE: STA), will cut output by 13,000b/d.

The Petroboscán JV owned by PDVSA and Chevron (NYSE: CVX) must reduce production by 30,000b/d, and the Petroregional del Lago JV with Shell (NYSE: RDS-B) will cut output by 10,000b/d.

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The Petroritupano JV with Brazil's Petrobras (NYSE: PBR) will cut production by 6,000b/d, and Petrolera Indo Venezolana, a JV between PDVSA and India's ONGC, will reduce output by 8,000b/d.

Finally, the Petroperijá JV with BP will cut output by 5,000b/d, and the Petroquiriquire JV with Spanish oil major Repsol YPF (NYSE: REP) will cut output by 9,000b/d.

PDVSA maintains at least a 60% stake in each of the JVs.

Venezuela announced previous output cuts of 46,000b/d and 129,000b/d after OPEC meetings in September and December, bringing the country's total share of the OPEC cuts to 364,000b/d.

The government already told JVs with Shell and Harvest Natural Resources (NYSE: HRN) to reduce production in line with the previous cuts.

Venezuela is producing 3Mb/d, according to Menpet, although Venezuela's OPEC target was 2.47Mb/d before the cuts began in September, according to the Paris-based International Energy Agency (IEA). The country has a sustainable production capacity of 2.6Mb/d, according to the agency.

OPEC's total daily output target currently stands at 24.8Mb/d, down 4.2Mb/d from the 29.05Mb/d ceiling in December.


A total of 166,000b/d of the newest output cuts was being shipped to the US. China will see Venezuelan exports drop by 18,000b/d and the final 5,000b/d of production cuts had been directed to Europe, according to the statement.

PDVSA already has informed refining partners about the cuts. The Chalmette and Sweeney refineries in the US will be the hardest hit by the reduction.

The refineries are each JVs between PDVSA and oil majors ExxonMobil (NYSE: XOM) and ConocoPhillips (NYSE: COP) respectively. Both companies are in arbitration with Venezuela after pulling out of the country in 2007 in the wake of nationalizations on the Orinoco heavy crude belt.

Venezuela previously said it would reduce shipments to Chalmette after ExxonMobil won court orders to freeze US$12bn of assets held by PDVSA. The court orders were later overturned.

"As a matter of practice, Chalmette Refining does not discuss its day-to-day operations or supply arrangements," an ExxonMobil spokesperson told BNamericas. "It expects to be able to meet its contractual commitments."

The newest cuts represent around 15% of Venezuela's current oil sales to the US. Venezuela exported 1.16Mb/d of oil to the US in October, according to the most recent statistics available from the US Energy Information Agency. Venezuelan exports to the US peaked in July at 1.34Mb/d.


Analysts and industry sources contacted by BNamericas largely were divided on whether Venezuela's new production numbers could be trusted. By directing cuts to JVs held with international oil companies, however, PDVSA will be able to minimize the financial impact by forcing foreign firms to absorb around 40% of the revenue losses.

The cuts also focus mostly on heavy crude, which will allow PDVSA to further minimize revenue losses by prioritizing light crude production.

"The reasons to target American refineries may be related to a communication strategy for the OPEC cuts more than anything else," one industry analyst said. "I think you should believe the numbers, though, at least the ones involving private companies."

"They are applying cuts where they know it will be most public in order to keep up the appearance of compliance and try to spur an oil market rally," another industry source said. "But PDVSA already is producing far less than it claims, so talking about production cuts or limits is a little absurd."

OPEC's attempts to boost the falling price of oil with drastic output cuts, meanwhile, has yet to yield substantially higher prices.

Venezuela's oil export basket price, for instance, has fallen to around US$30/b after hitting highs around US$125/b in July.

"Venezuela is complying with its share of what is the largest OPEC cut in recent memory and OPEC unity will be a key to compliance with production cuts," said Gianna Bern, an energy analyst and president of Chicago-based Brookshire Advisory and Research.

"However, OPEC production cutbacks may be eclipsed by the collapse in global crude oil demand and crude supplies that are rising at a faster-than-expected pace. Most of the geo-political risk premium that was in crude prices was erased by yesterday's crude inventory numbers," she said.

The drastic drop in oil prices is quickly changing the economic and political status quo in Venezuela and the growing tensions in the country made the Eurasia Group's top 10 global political risks for 2009, the political consultancy said in a research report.

"Chávez is going to be progressively stripped of cash over the coming two years and he needs to secure the steadiest stream of revenues that he can over the short term," Eurasia Group Venezuela analyst Patrick Esteruelas said in an interview.

"That means he'll have to keep the screws very tight over the entire industry including PDVSA and the international companies that will be under extreme pressure despite calls to loosen policies in a lower price environment," he continued.

With annual inflation hitting 35%, Chávez is unlikely to be able to maintain spending increases to keep real income balanced.

"As oil prices decline, Chávez's ability to sustain a high pace of spending, maintain wages levels, carry on providing handouts and stop people feeling the pinch of inflation is increasingly being undermined. His support will likely fall and his position will be compromised," Esteruelas said.

Fitch announced last month it had downgraded Venezuela's long-term foreign and local currency IDR rating from BB- to B+ as the country's dependence on oil revenues, high inflation and an overvalued currency increase the challenges for authorities to adjust to a low oil price environment.