Caracas Chronicles

Two decades after Hugo Chávez’s first electoral victory, Petróleos de Venezuela Sociedad Anónima (PDVSA) produces 60% less oil and 80% below forecasts for 2018.

For Andrés Rojas, a journalist specialized in economy and energy, at least eight factors have a definitive impact on the drop in PDVSA production:

1. Legality: the Hydrocarbons Law limits foreign partners by establishing PDVSA as the main shareholder;
2. Foreign Exchange: the lag in DICOM’s exchange rate amidst a hyperinflationary context and a broad gap regarding the black market rate;
3. Management: the decisions for purchasing assets and services are centralized in PDVSA, and very little is delegated to partners;
4. Labor: employee resignations due to poor salaries when compared with wages in Colombia, which are at least five times higher;
5. Security: constant mugging on oil facilities;
6. Taxes: the tax load established by Venezuela at 33% of royalties, 50% of Income Tax and taxes on extraordinary and exorbitant profits;
7. International pressure: the sanctions imposed by the U.S. on any medium and long-term financing by any company registered in that country to PDVSA;
8. Finance: delays in payments for PDVSA contractors and the State-run company’s financial debt, along with the policy of subsidies in fuel sold in the national market; investments dwindled after the drop in oil prices since 2014.

Economist Luis Oliveros points out that, in 1974, “Venezuela produced 3,040,000 bpd, a level it wouldn’t reach again until 22 years later (…) Between 1974 and 1990, Venezuelan oil production dropped by 27% and this is why in Carlos Andrés Pérez’s second term, and later in Rafael Caldera’s, increasing oil production becomes a priority.”

In the years prior to the presidential election of 1998, Chávez turned his criticism of PDVSA into one of his main campaign banners, focusing his speeches in what he called “a State within the State.” For him, it was inconceivable that Venezuela was bound to the oil company, and it was mandatory that the company served the coming government.

The more political power Chávez gained, and the more institutions and State powers fell under his control, the less operational and financial autonomy PDVSA had, until it finally became the main financier of his economic and social policies: that was the beginning of the “petrodiplomacy” era.

After the oil strike of 2002, Chávez accelerated his strategy of control, speeding up the operational decline. The strike helped him achieve his main desire as a candidate: eliminating the company’s autonomy, subordinating it to his government.

The Petro-State

The oil boom that Chávez, and partly Nicolás Maduro, enjoyed between 1999 and 2016, has been estimated at $900,000 million. In fact, between 2006 and 2012, the Bolivarian Revolution managed the same oil revenues handled by the governments of Rómulo Betancourt, Raúl Leoni, Rafael Caldera (in his first government) and Carlos Andrés Pérez (in his first government) put together.

A collection of mistakes

Nowadays, a series of accumulated mistakes has destroyed production in scarcely five years, slashing it at least by half (varies according to the source) from 2.82 million bpd in October 2013,  to anywhere between 1.1 and 1.4 million bpd in October 2018.

For Ernesto Tovar, a journalist specialized in covering energy topics, “The problems have been accumulating since the reversal of the Apertura Petrolera, in 2005 by order of Chávez to Rafael Ramírez, then chairman of PDVSA, when the arrogance of the chavista leadership thought that the barrel at exorbitant prices would be enough to pay for the president’s many excesses and whims regarding the management of public finances.”

In this sense, he points out that the battlefronts keep increasing: “Financial and political sanctions imposed by the United States on the main hierarchs of the Venezuelan government, which include PDVSA’s capacity to do business; the company’s commercial and financial debt with the Republic and his foreign partners and providers, without liquidity or capacity of indebtedness to invest in maintenance of its expanding oil and gas production. There’s also an alarming loss of human capital and know-how, due to internal political persecution and mass resignations.”

PDVSA, not just oil

Chávez’s absolute control over PDVSA led the company to diversify its non-priority activities. Specialists identify another cause for the collapse here. Activities not related to oil turned the industry into a “gargantuan, inefficient structure with numberless tasks,” ranging from the development of huge social plans, to paving roads.

Petrocaribe to control the OAS

Secondary sources hold that, between 2006 and 2016, Venezuela sent 92,000 bpd to Petrocaribe member countries. Even Rafael Ramírez, former chairman of PDVSA, once claimed that the supply to Petrocaribe covered 42% of the energy needs of the 18 States in the agreement.

Supporting the Cuban Revolution

On October 30, 2000, Venezuela and Cuba signed the Integral Cooperation Agreement (CIC for its initials in Spanish) for an original period of five years. Chávez’s government promised to finance the sale of crude to the island, including a daily supply of 53,000 barrels in exchange for goods and services (specifically, medical assistance).

This agreement was modified in 2006, increasing the shipments to Cuba to 90,000 bpd. The agreement was then expanded and extended to 2020. According to Oliveros, “This agreement is frequently criticized for its lack of transparency; so far there are no official figures regarding how Cuba pays, how the Cuban personnel in Venezuela is paid and how many of them are in the country. Unofficial figures indicate that, by 2015, Cuba’s debt with Venezuela surpassed $13 billion.”

Less efficiency every day

Ernesto Tovar says that, in 2006, when crude production was 2.82 million bpd and the workforce stood at 53,000 employees, PDVSA had a productivity of 53 barrels per worker. In 2016, when the company produced 2.37 million bpd (a million more than today) that relation scarcely reached 16 barrels per worker.

By 2018, when workforce estimates are unknown, if the payroll size is the same as in 2016, we would be talking of scarcely 9.5 bpd per worker.

Plummeting production

Tovar also points out that, in 2005, a plan called “Siembra Petrolera” was presented to the country and the global oil market, promising to increase production to six million bpd by 2019.

The reality is quite far from that goal, which sounds like a dream for today’s PDVSA. Production has plummeted since late 2017. Refining operations scarcely process some 300,000 bpd, ravaged by failures in their various process units, shutdowns, lack of materials and parts, and even workforce decline.

Complex future

Specialists on the energy topic agree that decision-making in the Venezuelan oil industry during the past two decades has been focused on exercising as much control as possible on revenues and, although this isn’t the only cause of the collapse, the institutional decay was key.

For Tovar, “That mixture of arrogance and mismanagement was the same that forced service providers such as Schlumberger or Halliburton to abandon their operations, in a context of political and financial crisis, without a glimpse of corrections on the part of Maduro’s government, which so far has insisted on keeping a military officer in charge of PDVSA, surrounded by figures from the president’s inner circle.”