Venezuela’s Oil Production Is Collapsing

Sharp drop in output increases the odds of a debt default, worsens economic crisis

By Anatoly Kurmanaev and Kejal Vyas

Updated Jan. 18, 2018 9:58 a.m. ET

CARACAS, Venezuela—Venezuela’s oil output is collapsing at an accelerating pace, deepening an economic and humanitarian crisis and increasing the chances the country will default on its debts.

Crude production fell 11% in December from the month before, according to government figures released Thursday. Over all of 2017, output was down 29%, among the steepest national declines in recent history, driven by mismanagement and under investment at the state oil company, say industry observers and oilmen.

The drop is deeper than that experienced by Iraq after the 2003 war there—when the amount of crude pumped fell 23%—or by Russia during the collapse of the Soviet Union, according to data from the Organization of the Petroleum Exporting Countries.

“In Venezuela, there is no war, nor strike,” said Evanán Romero, a former director of government-run Petróleos de Venezuela SA. “What’s left of the oil industry is crumbling on its own.”

 Oil is critical to Venezuela’s state-led economy. Petroleum sales bring in 95% of the country’s foreign-currency earnings, so declining output will make it harder for the government to import everything from machinery to food and medicine.

Over the past four years, the country’s economy has shrunk by about 40% and inflation has surged—topping 2,600% last year, according to the National Assembly. Nearly one in four factories didn’t reopen after Christmas, according to a local industry association.
Malnutrition is spreading among the young and elderly, while health officials report a resurgence of illnesses ranging from malaria to diphtheria. Meanwhile social stability is fraying. At least four people have died during outbreaks of looting in recent weeks.
The government is already resorting to barter—seeking to trade diamonds and other valuables—in an effort to bring in sorely needed supplies as President Nicolás Maduro prepares for elections this year.
This week, the state oil company’s new chief, National Guard Gen. Manuel Quevedo, blamed the production downturn on sabotage and terrorist attacks by the opposition. He didn’t offer any evidence. He said output has stabilized and will grow to 2.5 million barrels a day this year.
Most analysts, however, expect Venezuela’s production to continue falling. By this year’s end, output could fall to 1.3 million barrels a day, according to Francisco Monaldi, a Venezuelan energy expert at Rice University.
“The only discussion right now is how much is it going to decline by. There is no talk of a turnaround,” said Luisa Palacios, analyst at consultancy Medley Global Advisors in New York.
In December, daily production fell by 216,000 barrels to 1.6 million—the 15th consecutive monthly decline. In the last 12 months, Venezuelan output fell by 649,000 barrels a day.
The decline has been exacerbated by a management purge at state-run PdVSA by Mr. Maduro that has paralyzed the oil giant. Seventy senior managers have been jailed on graft allegations in the past three months. Generals with no industry experience have been named to run the firm.
U.S. sanctions have also hurt, scaring off some of the last remaining investors.

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