Hardline ascent dims outlook for PdV oil flows

OREANDA-NEWS. August 04, 2016. Political hardliners are gaining the upper hand in Venezuela's government, quashing a modest proposal to reform the oil services sector and signaling further declines in state-owned PdV's oil production.

President Nicolas Maduro late yesterday sacked moderate economy and industry minister Miguel Perez Abad, replacing him with Communist Party veteran Carlos Farias.

Perez, a former businessman, had proposed economic reforms that included relaxing price controls, returning all "non-essential" nationalized companies to their former owners, and raising hard currency flows to private-sector companies in desperate need of dollars to pay for imports. The appointment is a "clear indication that more economic controls are coming soon," business chamber Fedecamaras told Argus today.

In another cabinet shift, National Guard general Nestor Reverol took over the powerful interior and justice ministry. The provocative appointment came only days after the US government unsealed a drug-trafficking indictment against Reverol.

Reverol replaced another general who now takes over intelligence service Sebin. Around a third of Maduro?s cabinet is now active military.

The cabinet shakeup comes on the heels of energy minister and PdV chief executive Eulogio Del Pino's 30 July announcement in traditional oil city Maracaibo that PdV wants to return dozens of oil services companies nationalized in 2009 to their original owners. He called the seizures a mistake, questioning longstanding official dogma that inspired a wave of nationalizations over the past decade.

The backlash was swift. Former National Assembly president Diosdado Cabello and former agriculture minister Elias Jaua, two ruling party hierarchs, publicly rebuked Del Pino?s assertions without directly naming him.

The harsh reaction was echoed by the radical wing of the ruling PSUV party, including oil unions affiliated with the FUTPV national oil workers federation. The energy ministry and PdV headquarters in Caracas have declined to comment.

The rejection of the proposal deals a blow to PdV?s efforts to recuperate oil production. An executive with PdV's western division told Argus today that PdV is "incapable of increasing upstream crude and gas production by itself. It's impossible. We can't do it."

Argus estimates that PdV is currently producing around 2.1mn b/d, some 300,000 b/d less than its official number for June.

Maduro gave no indication that Del Pino would be removed. But the oil engineer is "thinking about resigning" after Cabello and Jaua "publicly de-authorized and humiliated him," a senior energy ministry official said. Del Pino was appointed PdV chief executive in September 2014 and took the dual role of energy minister around a year later.

PdV is at odds to check natural upstream decline, particularly in its legacy eastern and western divisions where it produces light and medium quality grades such as 32°API Mesa. These grades are critical for blending with extra-heavy crude from the Orinoco oil belt, a vast deposit that requires steady drilling of low-productivity wells to sustain output.

Del Pino?s proposal to revive the local oil services industry through joint ventures with PdV controlled by the companies? former owners followed the recent withdrawal of big foreign oil services companies including Schlumberger on lack of payment.

Beyond the upstream implications, the government?s hardline tilt could hurt PdV's attempt to persuade foreign bondholders to voluntarily swap up to \\$8.5bn in debt due for payment in 2016-17 for new bonds that would reach maturity starting in 2024, reviving a threat of default.