The Great Venezuelan Oil Bust

Via the Globe and Mail, an interesting look at Venezuela’s petroleum industry:

When Venezuelan oil minister Rafael Ramirez recently announced an ambitious new target of six million barrels per day by 2019, the state-run press heralded the imminent expansion of an industry vital to the country’s health.

But people here heard the news and rolled their eyes. After all, the last five-year plan had a goal of 5.8 million barrels a day by 2012, only to finish last year at just 2.9 million. That’s down from 3.2 million back in 2005.

In fact, the last time Venezuela’s oil industry productivity per employee was this low was 1940.

There is open speculation about how long Petroleos de Venezuela SA (PDVSA) can carry on, even at its current depressed level. There is little faith in the official data put out by the firm – whose senior managers are now mostly political appointees. And rumours are circulating about accidents, breakdowns and critical shortages of even the most basic supplies needed to run the business.

Cash flow from PDVSA is all that is keeping the lights on here. Far from becoming less dependent on oil, as has been a government mantra for years, Venezuela is now almost exclusively reliant on it, as other industries are shuttered in the country’s slow-motion economic implosion.

“The goose that lays the golden egg is in the stew pot,” said Igor Hernandez, an industry analyst in the capital. “And she’s a very skinny goose, at this point.”

Venezuela is among the world’s top five producers, and OPEC has said it has the largest proven oil and gas reserves. But to call PDVSA beleaguered is an understatement.

The company is the chief piece of collateral damage in Venezuela’s political drama. Its revenues were directed by the late President Hugo Chavez to fund a series of social “missions,” populist health and education programs that saw the oil company take on production of everything from subsidized chicken meat to elementary schools.

At the same time, PDVSA sends oil to Cuba and has a preferential payment agreement with 16 other countries in the region under agreements made by Mr. Chavez, which accounts for a total of 500,000 of each day’s production. Another 200,000 are used to pay down the firm’s $80 billion in debt (including hefty loans from China).

Yet another critical chunk of production is siphoned off to feed high domestic consumption. Petroleum products are heavily subsidized. A typical driver spends more to fill up once in Canada than Venezuelans do in a year. The subsidy costs an estimated $16-billion (U.S.) per year. And some 100,000 barrels a day are smuggled to Colombia. That means that only a bit more than half of PDVSA’s production is generating cash flow, Mr. Hernandez pointed out.

That leaves PDVSA little to spend on boosting production, said Richard Obuchi, a professor at the Instituto de Estudios Superiores en Administración in Caracas. At the same time, inflation is running at more than 50 per cent, and the bolivar’s value has collapsed on the black market. PDVSA must pay for imports at the black market rate, but sell its precious dollars to the central bank at the posted one. The company is reported to be months in arrears on paying for everything from chemicals for refining to food for the workers’ canteen.

PDVSA has been trying to push its foreign partners into paying for the construction of pipelines, storage capacity and other components in its new fields, even though these are ostensibly joint ventures, by withholding dividends and other payments. In its most recent annual report, the company said it needed $257-billion in new investment between last year and 2019.

Senior managers in the company have been replaced by cronies of the regime, while engineers and other skilled workers have fled en masse, many to Calgary.

Meanwhile, those foreign partners are proving increasingly unwilling to operate in this climate. They cannot get access to dollars for imports, and they operate under a constant threat of another wave of nationalization and new tax demands. Malaysia’s state-owned Petronas, for example, pulled out of the Orinoco field last September. And even producers from governments aligned with Venezuela’s socialist party are trying to get out of Orinoco. Russia’s Lukoil, said it wants to sell its stake, and Surgutneftegaz got out last year.

Yet any effort to meet the expanded production targets laid out by Mr. Ramirez hinges on a string of ambitious projects in the Orinoco, a rare largely-untapped major crude reserve.

Not everyone will leave. For all its troubles, Venezuela’s production costs are still lower than many of its competitors, such as Brazil’s pre-salt fields or Alberta’s oil sands. “Companies are staying because they know PDVSA will have to make changes eventually – they are staying to have an entry point for when the change comes,” said Luis Vincent Leon, who heads the market analysis firm Datanalisis. “They can’t afford the cost of not being here.”

This entry was posted on Monday, February 10th, 2014 at 4:27 am and is filed under Petróleos de Venezuela, Venezuela.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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