“In 2006, Rafael Ramírez, the energy minister, gave PDVSA workers a choice: Support President Hugo Chávez, or lose their jobs. The minister also said: "PDVSA is red [the color identified with Chávez's political party], red from top to bottom". Chávez defended Ramírez, saying that public workers should back the "revolution". He added that "PDVSA's workers are with this revolution, and those who aren't should go somewhere else. Go to Miami".
On paper, Venezuela has the largest proven oil reserves in the world, dwarfing even Saudi Arabia. That, however, hasn’t proven to be any blessing given the way that the country has been imploding since the death of Hugo Chavez. Facing financial meltdown and a plunging currency, the government of Nicolas Maduro is desperately holding on to power. State oil firm PDVSA (Petróleos de Venezuela, S.A. or Petroleum of Venezuela) used to be the country’s cash cow; now it is the main player in the ongoing Venezuelan drama.
That corruption is endemic to PDVSA is unsurprising, but the company was also once one of the better-run national oil companies, ranking alongside Petronas, Saudi Aramco and China’s CNPC in a 2007 Financial Times article titled ‘The New Seven Sisters’. This was largely because the company was allowed to operate independently, with the government content with a state-patronage arrangement. PDVSA flourished; establishing an American downstream arm Citgo, creating a Caribbean refining industry in Aruba and Curacao and shipping much of the heavy, sour crudes the US Gulf refining industry was based around.
Last week, Nicolas Maduro had the former heads of the oil ministry and PDVSA arrested on charges on corruption, installing Major General Manuel Quevedo – an energy neophyte – at the top of PDVSA. He then had Congress rubber stamp authority for him to review all oil contracts, service agreements and executive positions at PDVSA. Scores of PDVSA executives have been arrested – some on legitimate charges – and now Maduro wants to replace the plunging bolivar and circumvent US sanctions with a cryptocurrency called ‘petro’, backed by its vast oil reserves. Signs that the government is backed into a corner.
For the last year, PDVSA has been approaching international friends to seek lifelines from mounting debts. From Russia’s Rosneft, it gained some US$6 billion in cash for shares in Citgo and crude volumes, which allowed PDVSA to narrowly avoid default. From India to China, PDVSA is offering up its only asset – crude oil – in a desperate attempt to seek oil-for-cash loans. But there are more dangerous signs. Output is down to a 28-year low. Key indicators – active rigs, exports, crude quality – are declining at an ‘alarming rate’. Venezuela’s crude imports – light crude used to dilute its heavy domestic crude like that in the Orinoco Belt – have plunged from a usual average of 100 kb/d to 40 kb/d in 1H17 to almost zero in November. Forget about selling oil, PDVSA can’t even produce oil at the moment. And it is fast running out of friends. Sinopec is suing over unpaid debts. Curacao is cutting PDVSA off from access to its refinery, turning to the Chinese. Even Russia is losing patience. The implosion of Venezuela and PDVSA would be a major shock to the market, and sadly, one that is looking more and more certain by the day.
Infographic: Venezuela’s oil industry at a glance
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Headline crude prices for the week beginning 11 February 2019 – Brent: US$61/b; WTI: US$52/b
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Global liquid fuels
Electricity, coal, renewables, and emissions
2018 was a year that started with crude prices at US$62/b and ended at US$46/b. In between those two points, prices had gently risen up to peak of US$80/b as the oil world worried about the impact of new American sanctions on Iran in September before crashing down in the last two months on a rising tide of American production. What did that mean for the financial health of the industry over the last quarter and last year?
Nothing negative, it appears. With the last of the financial results from supermajors released, the world’s largest oil firms reported strong profits for Q418 and blockbuster profits for the full year 2018. Despite the blip in prices, the efforts of the supermajors – along with the rest of the industry – to keep costs in check after being burnt by the 2015 crash has paid off.
ExxonMobil, for example, may have missed analyst expectations for 4Q18 revenue at US$71.9 billion, but reported a better-than-expected net profit of US$6 billion. The latter was down 28% y-o-y, but the Q417 figure included a one-off benefit related to then-implemented US tax reform. Full year net profit was even better – up 5.7% to US$20.8 billion as upstream production rose to 4.01 mmboe/d – allowing ExxonMobil to come close to reclaiming its title of the world’s most profitable oil company.
But for now, that title is still held by Shell, which managed to eclipse ExxonMobil with full year net profits of US$21.4 billion. That’s the best annual results for the Anglo-Dutch firm since 2014; product of the deep and painful cost-cutting measures implemented after. Shell’s gamble in purchasing the BG Group for US$53 billion – which sparked a spat of asset sales to pare down debt – has paid off, with contributions from LNG trading named as a strong contributor to financial performance. Shell’s upstream output for 2018 came in at 3.78 mmb/d and the company is also looking to follow in the footsteps of ExxonMobil, Chevron and BP in the Permian, where it admits its footprint is currently ‘a bit small’.
Shell’s fellow British firm BP also reported its highest profits since 2014, doubling its net profits for the full year 2018 on a 65% jump in 4Q18 profits. It completes a long recovery for the firm, which has struggled since the Deepwater Horizon disaster in 2010, allowing it to focus on the future – specifically US shale through the recent US$10.5 billion purchase of BHP’s Permian assets. Chevron, too, is focusing on onshore shale, as surging Permian output drove full year net profit up by 60.8% and 4Q18 net profit up by 19.9%. Chevron is also increasingly focusing on vertical integration again – to capture the full value of surging Texas crude by expanding its refining facilities in Texas, just as ExxonMobil is doing in Beaumont. French major Total’s figures may have been less impressive in percentage terms – but that it is coming from a higher 2017 base, when it outperformed its bigger supermajor cousins.
So, despite the year ending with crude prices in the doldrums, 2018 seems to be proof of Big Oil’s ability to better weather price downturns after years of discipline. Some of the control is loosening – major upstream investments have either been sanctioned or planned since 2018 – but there is still enough restraint left over to keep the oil industry in the black when trends turn sour.
Supermajor Net Profits for 4Q18 and 2018
- 4Q18 – Net profit US$6 billion (-28%);
- 2018 – Net profit US$20.8 (+5.7%)
- 4Q18 – Net profit US$5.69 billion (+32.3%);
- 2018 – Net profit US$21.4 billion (+36%)
- 4Q18 – Net profit US$3.73 billion (+19.9%);
- 2018 – Net profit US$14.8 billion (+60.8%)
- 4Q18 – Net profit US$3.48 billion (+65%);
- 2018 - Net profit US$12.7 billion (+105%)
- 4Q18 – Net profit US$3.88 billion (+16%);
- 2018 - Net profit US$13.6 billion (+28%)