Caracas Chronicles

It’s hard to persuade someone who doesn’t have enough to eat that anything else is a big problem. When you can’t buy food, or medicine to treat a serious illness, all other difficulties pale in comparison. Which is why it’s easy to overlook things that, while maybe not as crucial to life and health, are still deeply woven into everyday life.

Like, say, cooking fuel. Or, what amounts to the same thing for most Venezuelans, la bombona.

This is a problem that flies under the radar, but, you, try going for a week without being able to cook food. Yet that’s not an uncommon situation Venezuelans find themselves in these days: delays to refill gas cylinders can range anywhere from a week to months. Reuters reports people are now turning to cooking with wood for lack of options. The problem is so bad that it has set off its own protests in the capital and elsewhere.

But why is it so bad? We know the whole gas sector is subsidized, and the reality is that we don’t know how exactly that subsidy works.

We don’t have a detailed understanding of how much of the benefit of the subsidy is captured by final consumers, how much by bachaqueros, and how much by the consejos comunales increasingly in charge of distribution.

If you have gas directo – if you live in one of the one-out-of-every-seven households that get gas piped to your kitchen – this is a non-issue. But everyone else must go through hell and high water just to cook. It’s already a war zone, without having to picture the effects an official price increase would have.

It’s ironic because, of course, Venezuela has enormous gas reserves – the stuff should be cheap, and plentiful. It’s anything but that.

Try going for a week without being able to cook food. Yet that’s not an uncommon situation Venezuelans find themselves in these days.

If you ask an official about this, they’ll blame the protests, how they prevent trucks from reaching the distribution centers. The fact is that these problems have been ongoing for years. What follows is our best approximation of why this is happening, given the lack of public information on gas scarcity and its supply chain’s operational status. Get ready for the big box of crazy that bombonas is.

What’s up with the supply?

Most Venezuelan homes (82% according to the 2011 Census) use Liquefied Petroleum Gas (LPG) – basically propane – stored in cylinders known as bombonas. Around 14% use methane sent through pipes (the so-called “gas directo”), while the rest have electric stoves or burn wood. When you hear about distribution problems with gas, they’re essentially talking about bombonas and the trouble people face refilling them.

Currently, the main source of gas is the oil extraction operation located in the eastern part of the country. This hydrocarbon mix generates Natural Gas Liquids (NGL), and some of the NGL is later transformed into propane (and from there, put into bombonas).

The vast bulk of gas released from oil extraction is used by the oil industry itself or sent to boost other industries or power plants. The NGL that gets processed and, in part, goes into bombonas is only 2% of the gas PDVSA produces. The NGL goes from the extraction plants into  fractionation plants, where different components are obtained, including propane. The Jose Cryogenic Complex in Anzoátegui handles almost all natural gas from the east and processes it for different uses. From here, propane is shipped to other regions or loaded onto trucks and sent to distribution plants. Finally, the gas is transported to your home by a PDVSA subsidiary called PDVSA Gas Comunal.

You start to see the problem. Since 2006 the supply of natural gas has been declining, which can be attributed to declining oil production. Let’s also keep in mind that, as the northern Monagas fields are depleted, the share of the extracted gas that could be used for NGL purposes is lower (the gas becomes “less rich”), so this poses an additional problem. Between 2006 and 2014, the cumulative decline in NGL supply has been 35.3%. The country stopped exporting propane in 2012, and, in recent years, LPG imports have been increasing to 24% of domestic use.

Consider the multiple uses for NGL and their components. Propane could be used by the petrochemical industry to obtain polypropylene, which is used to make, for instance, plastic bags or pipes. The rivalry between final uses has important economic implications: the natural gas in a bombona could be worth 30 times more than what you pay for it in a bombona if it was used by the petrochemical industry instead.

Thirty times!

LPG is also a subproduct of the refining sector. And as activity in refineries declines, less and less LPG is available. With PDVSA’s financial distress, it’s harder to compensate domestic gas supply with imports.

In boroughs like Catia, prices in the Bs.5,000-6,000 range are common for a bombona that might last 10 days.

Gas production is not the only problem. There aren’t enough actual bombonas available for everyone. Most cylinders are 10kg, and, if you assume that each family uses one unit while it has another on stand-by, then some 14.2 million cylinders are required. There’s no public information about the number of bombonas currently in circulation, but if we consider that in 2008 it was estimated that there were 7.5 million, it’d mean that you should have produced over 750,000 bombonas each year between 2008 and 2017 to meet the shortfall. Current estimates by local analysts point to a deficit of 2 million cylinders.

The latest info provided by the Ministry of Petroleum and Mining says that in 2015 PDVSA manufactured 98,302 bombonas, and lately there have been announcements of the creation of mixed enterprises to increase production to a million per year.

Then we have PDVSA Gas Comunal. This PDVSA subsidiary was created in 2007 from the expropriation of Tropigas and Vengas, which together accounted for about 60% of domestic gas distribution. (Private companies had been in charge of this final distribution stage since 1938.) The idea was to transfer the distribution of gas to Empresas de Propiedad Social Directa Comunal (EPSDC). PDV Comunal is also in charge of constructing LPG storage plants, among other things. There’s no public information on the status of any of these projects.

For example: one of PDVSA Gas Comunal’s projects was the creation of Estanterías Comunales – community facilities where people could fill their bombonas at a “fair price”, once signed up on a list kept by the local consejo comunal.

Thing is, the gas never made it to the Estanterías because the cylinders just got stolen: either final users kept them, or they fell foul of shady deals between the distribution plant and bachaqueros.

So forget about the “fair price”. The bottom line is that people have to wake up pretty early to be in line, risking street crime, and wait up to 8 hours to see if they can fill their bombona at a price-controlled rate.

It’s like the old infierno venezolano joke: if you have a bombona, there’s no gas. If the truck comes with gas, there are no bombonas. If you find the bombonas and the gas, the bachaquero doesn’t show up.

The natural gas in a bombona could be worth 30 times more than what you pay for it in a bombona if it was used by the petrochemical industry instead.

The end result is that the country with the world’s 8th largest reserves of conventional natural gas, and the largest natural gas reserves in Latin America, is full of people who can’t get enough gas to cook.

The good news is that PDVSA has several infrastructure projects to help everyone get more bang for their buck… theoretically. In practice, the large investments, operational efficiency and massive human capital requirements are a challenge, not necessarily on the scale of say, developing the Orinoco Oil Belt or recovering production in Lake Maracaibo, but nevertheless with the same results as pretty much any other energy issue mentioned in the Plan de la Patria.

One of the projects now underway is the creation of an additional extraction unit in the San Joaquin extraction plant, to increase gas processing capacity and a 98% C3+ (used to obtain propane) recovery factor.

That was supposed to have been completed by 2015.

In 2011, it was 36.8% finished. By 2015, that was 40%, the investment required was US$ 1,385 MM and the project is now supposed to be completed by 2018. Similar mysteries shroud projects to increase the daily barrel capacity for the Jose Complex and the substitution of domestic propane for methane.

While there are also fractionation plants (that could be used to increase available propane) in western areas of the country, these are small compared to Jose, but more importantly, the decline in oil production in Lake Maracaibo constrains the amount of gas used for these purposes.

It could all be solved with private sector investment, right? Well, the legal framework allows for a higher participation by private companies in comparison to that in oil sector exploration and production activities, but it all comes down to when the issue messing everything-up-for-everyone rears its ugly face: the price of gas and its subsidies.

Subsidies, again

Gasoline is not the only fuel in Venezuela whose price is fixed. Domestic gas prices – nominal prices – haven’t budged since 2004. By now, the price Venezuelans pay is a laughably tiny fraction of international prices. Even representatives of PDVSA Gas Comunal have acknowledged that the price of a bombona in Colombia is about 1,300 times higher than in Venezuela.

Let that number sink in.

It has also been estimated that, as of last year, the cost to PDVSA of producing LPG could be eight to 14 times the price it can charge customers. If you’re a private company, there doesn’t seem to be that much of a financial incentive to get involved in such a business.

The country with the world’s 8th largest reserves of conventional natural gas… is full of people who can’t get enough gas to cook.

Fine and dandy, but local prices are in bolivars and international prices in US$. Which rate should PDVSA use to convert the income from gas exports? Lately, a conservative VEF 60/US$ is being used (the rate used by PDVSA in its 2015 Financial Statements) and that’s how the Center for Energy and Environment at IESA estimates an LPG subsidy of some $600 MM in 2015.

Now, if you’re a guy in Táchira selling your cylinder in Colombia, the rate will be much higher, and we’re not even talking about bachaqueros and their candid role. In the end, nobody knows how much this subsidy really helps consumers (to the extent they get access to a subsidized bombona at all.)

Another issue is that the problems are highly localized. In some areas, access to subsidized gas continues to more or less work. In the Petare 2016 IESA study, among D and E income level homes, less than 1% of the households reported gas shortages.  54% reported getting gas directly -the rest waited in line for less than an hour.

The estimated average consumption of LPG was 21.42 Kg/month, with fees paid at between Bs.10.47/Kg and Bs.24.02/Kg.

Based on these numbers, Petare residents spend less than 1% of their estimated monthly income on cooking gas. Notice that the study was performed about a year ago, so there might be reason to believe that some of these results have changed.

Even representatives of PDVSA Gas Comunal have acknowledged that the price of a bombona in Colombia is about 1,300 times higher than in Venezuela.

The situation is radically different in other areas. In boroughs like Catia, prices in the Bs.5,000-6,000 range are common for a bombona that might last 10 days. In Guayana bachaqueros charge up to Bs.8,000 for a 10 kg bombona.

How much the subsidy helps depends on how easy it is for you to actually get a cut-rate bombona in the first place.

How much Venezuelans benefit from the scheme is a nebulous zone with no government info and the currency distortion game singing the tune we all know and hate. What do we know? Many questions arise involving the supply chain and the operation and economics of the oil & gas industry in this country. Reforming this mess will be excruciating in a nation with subsidies for gasoline, diesel and electricity. Gas issues affect people’s lives in an immediate, palpable way…

And will continue to do so for as long as there are arepas to be baked or fried.