- Senior energy expert Igor Hernandez responds to Anadolu Agency questions on Venezuela's oil market options

Anadolu Agency interviewed Igor Hernandez, a professor of the International Center for Energy and Environment at Instituto de Estudios Superiores de Administracion, a school of management in Venezuela on the country's energy sector and economy.

Hernandez is currently an adjunct professor of the Center of Energy and Environment at the Instituto de Estudios Superiores de Administracion (IESA) in Caracas, Venezuela.

Between 2013 and 2016, he worked as adjunct director of the Center of Energy and Environment at IESA, coordinating academic programs targeted at oil and gas professionals, conducting the research agenda for the center and developing strategies to promote research activities within IESA as well with other institutions in the energy sector.

Previously, he worked as a financial adviser and strategic planning analyst for Mercantil Servicios Financieros, the largest financial group in Venezuela.

Hernandez is still a graduate fellow at Rice University's Baker Institute.

-How can Venezuela manage its oil trade with the U.S. sanctions in place?

Venezuela already has placed tenders that require payment upfront in cash, or proposed schemes by which they swap crude for gasoline and other derivatives. Both options imply a steep decline in revenues given that they have to offer large discounts on prices in order to sell the crude, or they will get products for domestic consumption, so they don’t get cash from sales.

Another option is to deviate shipments to other facilities capable of processing heavy crude, such as those in India or possibly China. The problem is that given the debt obligations that Venezuela has with China and with Rosneft [Russia's oil giant that partially owns a refinery in India capable of processing Venezuelan crude], those shipments will not compensate for the loss in cash from selling to the U.S. This means that even if there are other consumers for the Venezuelan crude, the financial consequences will be severe for PDVSA [state-owned oil and gas company], given the reduction in their cash flow.

-What are your predictions and expectations for Venezuela and the global market after the April 28 deadline when U.S. sanctions will take effect on crude oil trade?

Sanctions are already in place, which means that CITGO [a subsidiary of Venezuelan state oil company PDVSA] is allowed to purchase Venezuelan crude until April 28 but PDVSA is not allowed to engage in transactions with third parties since the official sanctions announcement. This means that other refiners in the Gulf Coast cannot buy more Venezuelan crude. As the problems in investment and production aggravate in Venezuela, there will probably be a shortage of heavy grades, which is already reducing the spread between heavy and light grades. This will accelerate the collapse in the country given the decline in revenues. The U.S. provided close to 80 percent of the cash exports from the country, so having to go to the open market or looking for other refining options will imply higher discounts on the price of oil.

-Given that offshore companies currently buying PDVSA oil will have to decrease purchases by April 28, what effects will this have on the market?

It has already happened that several traders have refused to buy more Venezuelan crude lest they jeopardize their business relationship with the U.S. and other countries that have recognized Guaido [opposition leader to President Nicolas Maduro] as the president. Even if PDVSA manages to find another destination for their crude, it will be with lower margins and, therefore, lower revenues.

This immediately tells us that cash flow constraints will be even more severe now, and will affect overall investment and production capacity. Moreover, sanctions also affect the availability to procure naphtha and diluents that are required for mixing with the heavy crude produced in Venezuela, which means that the industry will face further operational obstacles and probably higher costs if they manage to find other suppliers.

The sanctions also affect imports from the U.S. of other commodities such as propane, which is highly in demand now for its domestic use for cooking. In


addition, the operation for some of the joint ventures in Venezuela will be affected given that partners such as Chevron will have to reduce their operations, including maintenance of upgraders in the Orinoco Oil Belt [Venezuela's extensive oil-producing area] for instance. Activities of large oilfield service companies will be affected, and there is past evidence of steep declines in production in the short run whenever these service companies stop operating. Market reports already point to a decline of 300,000 barrels per day in production within the next month, so that the collapse in production will continue with devastating consequences for the country if the political situation does not have a quick and stable solution.

By Murat Temizer

Anadolu Agency

11.02.2019 · VENEZUELA