Venezuelan oil output plummets amid Chevron 'treason' scandal

08 May 2018 4 min. read

As the situation in Venezuela deteriorates by the day, the country’s oil production continues to plummet. However, Venezuelan authorities, instead of attempting to reconcile with the main industry which is keeping the country’s economy turning, have arrested two Chevron staff over a contract dispute.

The decision has caused international outrage with consulting firm Medley Global Advisors among others, hitting out at the Venezuelan Government. The allegations that the staff are facing include treason against the Venezuelan state.

Chevron’s workers refused to sign a contract for the supply of furnace parts because they did not believe that the move would be in their best interests economically. Immediately after the incident, Chevron evacuated a number of executives following the arrests.

A spokesman for Chevron said in relation to the arrests: "Chevron Global Technology Services Company is aware that two of its Venezuelan-based employees have been arrested by local authorities.”

The Venezuelan national intelligence have accused the detainees of refusing to sign the agreement because they are acting in line with the United States to topple the Venezuelan economy. 

However the Chevron employees were faced with a contract which demanded parts at double their market price - a common way to extract bribes from foreign companies - in the environment of an emergency decree: no bidding case and no competition.

Chevron is currently producing about 50,000 barrels per day (bpd) in Venezuela in a joint venture with the Venezuelan state-owned oil and gas company PDVSA. Last year Chevron earnings were down 18% on 2016 with a total revenue $329 million in the country.

"We have contacted the local authorities to understand the basis of the detention and to ensure the safety and wellbeing of these employees. Our legal team is evaluating the situation and working towards the timely release of these employees.” The two employees could face up to 30 years imprisonment if found guilty of the charges.

Venezuelan oil output plummets as Chevron “treason” scandal

Venezuelan crisis in action

Luisa Palacios from the consulting firm Medley Global Advisors commented on the situation, referring to the declining bpd rate: “Some of that production could now be at risk. To hit out at Chevron and bite the hand that feeds seems to go in the opposite direction of oil production stabilization.”

Venezuela’s ability to produce oil continues to fall with expectations that the country’s output will drop significantly by the end of 2018. Medley Global Advisors predicts that the current output of 1.5 million bpd will reduce to roughly 1.2 million bpd and JPMorgan fear that that that number could drop to lower than 1 million.

In the years since Maduro took over from Hugo Cháves as the leader of the United Socialist Party, the country has become more divided over the governments social agenda. Accused of economic mismanagement and a turn towards dictatorship, Maduro has led the country with the worlds largest proven oil reserves to economic free-fall.

Maduro has accused the United States of imposing economic sanctions and has emerged as an unchallenged political presence, in the belief that the opposition are colluding with foreign entities. Oil accounts for 95% of the country’s export revenue and the rapidly falling export rate has seen a lack of basic necessities on supermarket shelves.

Whilst the country suffers from surging prices and an inflation rate of above 6,000%, Venezuela’s oil production equipment is deteriorating rapidly. One of the bosses of the PDVSA warned that the crisis has caused a “a lack of tools, there is a lack of everything”.

Medley Global Advisors

Medley Global Advisors is a consulting and research firm who service a diverse client base including some of the world's top hedge funds, institutional investors and asset managers. The firm advises it’s clients with reports and studies on the effect that political and policy events have on the global market.

The firm has been advising its clients in the oil and gas industry on the Venezuelan crisis since the country began descending into chaos. The election of Nicolas Maduro and a shift towards a social economic agenda saw Venezuela drawn into a series of recessions and hyperinflation of the Venezuelan Bolívar.