Despite presiding over a period when the Venezuelan economy has been imploding – with skyrocketing inflation, rampant corruption and massive food shortages – Nicolas Maduro was re-elected as President last week. In an election branded as a ‘sham’ by many in the international community, the result does nothing to address the chronic issues that are plaguing the country. In fact, they are set to prolong even further now.
In the wake of the election, the US unveiled fresh sanctions against Venezuela. These include measures to prevent US companies from purchasing Venezuelan government debt, crippling its financial system even further. Targeted sanctions at crude oil – the country’s main source of income – have thus far not been mooted, but even the general sanctions are making it very difficult for the country to do business. In response, Venezuela is depending on the generosity of its buyers, negotiating to have shipments paid for in currencies other than the US dollar or in barter. It already has such agreements in place with Turkey, China and Russia, and last week raised the possibility of accepting payment in Indian rupees. India remains a significant importer of Venezuelan crude, but there have also been signs that it is growing impatient with the situation.
Such moves are mere band aids. PDVSA is in a lot of trouble, being debt-stricken. ConocoPhillips has already moved to seize oil products produced by PDVSA at the Isla refinery in Curacao, demanding it as payment for the nationalisation of its assets. The Isla refinery itself is the centre of another drama – with Curacao wanting to move away from PDVSA to courting a Chinese investor, though the latter has faced trouble raising cash as well. Forget about raising cash to explore new fields; PDVSA can barely even cover the costs of running its existing ones.
But the main impact of the Venezuelan implosion has been on the oil markets. Already jittery with the new sanctions on Iran, the situation in Venezuela has raised nerves even more. With the two key political sanctions in play, oil prices are now at four year highs. The IEA has already started discussions with major oil producing nations on their ability to cover the Venezuelan shortfall. Venezuela’s crude production has already fallen by some 400,000 b/d so far in 2018 and there are worries that this could dip below 1 mmb/d in the near future. This puts the OPEC supply freeze deal under pressure, with key OPEC producers worrying about the creation an unwanted spikes in crude prices that are not based on fundamentals. OPEC members and Russia are readying to fill the gap, driven by the long standing swing producer, Saudi Arabia stepping-in once again.
President Maduro claims that he will double Venezuela’s oil production by the end of the year, with the help of OPEC. That will be the latest, but certainly not the last, of his broken promises. As Venezuela's oil industry is on the verge of collapse, the world is preparing for the worst case scenario right now.
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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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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%)