Death spiral is an overused term, but it is justified when describing Venezuela’s oil industry right now. Energy consumers and investors should pay attention.
Though production at national oil company Petróleos de Venezuela SA has been falling fast, investors have assumed the company could keep global markets supplied and keep hard currency flowing to the country. Those assumptions are starting to unravel.
ConocoPhillips COP, +0.56% has moved to take control of PdVSA facilities in the Caribbean after winning a $2 billion legal judgment tied to Venezuela’s seizure of its assets in 2007. That move alone hurts Venezuela because that storage and refining infrastructure is needed to blend the country’s heavy crude with lighter varieties and make it suitable for sale abroad. Energy economist Philip Verleger estimates the issue could cut off exports of as much as 500,000 barrels a day out of the 1.4 million Venezuela produces. Coupled with renewed sanctions on Iran, the cutback could push oil prices CLM8, -1.19% LCON8, -0.37% above the current multiyear highs.
Now Conoco’s gambit has set off a rush by others to seize the assets that PdVSA holds outside of Venezuela, including tankers and oil cargoes. Canadian gold miner Rusoro, for example, is going after Citgo Holding, the Venezuelan-owned U.S. refiner. Citgo is a vital link to the U.S. market for Venezuela and one of its only assets not shielded by being physically within its borders.
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