After defaulting on debt, Venezuela’s crisis continues to unfold, threatening to worsen the state-owned oil company’s production.
PDVSA reportedly told employees that they needed to carry out an austerity campaign, looking for ways to cut costs by 50 percent. The internal memo said that savings needed to be found amid the “national economic emergency” while avoiding any hit to the company’s oil production. Profits at PDVSA fell by 90 percent in 2016 compared to the year before.
But it is hard to see how the company can prevent a deeper slide in output after slashing spending to such a degree. Bloomberg reported that PDVSA is demanding financing plans from its joint venture partners, and that any projects will be halted if they do not receive financing. The memo included a long list of other cost saving measures: credit card use for employees will be limited, employees should use video conferencing instead of traveling; company vehicle use should be curtailed; and the use of electricity, water, cell phones, internet cards, computing gear and PR will all see reductions.
Venezuela’s oil production has been sliding for years, but the descent accelerated in 2015 amid low oil prices and a deteriorating cash position for PDVSA and the government. Production dipped below 1.9 million barrels in recent weeks, the lowest level in more than three decades.
The problems will only grow worse, especially because they tend to snowball. Without cash, PDVSA will struggle to import diluent to blend with its heavy oil – the result could be steeper production losses. Again, without cash, existing facilities cannot be maintained, likely leading to an accelerating pace of decline. An array of refineries are “completely paralyzed,” the head of an oil workers union told Bloomberg. Defaults on more debt payments could spark retaliation from creditors, which could eventually put oil exports in jeopardy.
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