The reasons for the rapid decline are threefold:
- lack of investment and maintenance on mature, legacy conventional light oil projects in the Maturin and Maracaibo Basins;
- operational difficulties at heavy oil upgraders that deal with 0.5 million b/d of production;
- and limited access to the diluent needed to facilitate transportation.
Traders are not prepared to risk bringing these lighter liquids into Venezuela for fear of not getting paid.
What are the ramifications of Venezuela’s oil crisis? First, the country’s own parlous economic position.
Dollar revenue garnered from crude exports has dwindled from the IMF’s estimate of US$32 billion in 2017. Substantial volumes of crude sales are dedicated to loan repayments to China and Russia or ‘soft’ oil for food/medicine deals. There’s insufficient hard currency to pay for imports of the nation’s basic needs, and as a result, the country is leaking people to its neighbours.
The election on May 20th is a critical moment. A priority for the new government has to be to revitalise the golden goose and rebuild the nation's income from oil and gas. External capital will be needed and the bargaining chips are the giant remaining reserves. But the pool of potential investors is tiny and has a strong negotiating position.
Second, US refining.
The US Gulf Coast is a core market for Venezuelan heavy crude, and it’s been toughest going for the high-conversion refineries configured to process Venezuelan grades. But the overall, impact has been less than expected. There’s plenty of oil around right now, and refiners have sourced alternative heavy crude from Mexico, where domestic demand has faltered, Canada, Colombia, and Iraq.