On Petrobras and PDVSA: A cautionary tale

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Petrobras and PDVSA: A Cautionary Tale
Energy & Enterprise
Wednesday, 04 August 2010 13:11
by Gustavo Coronel

In its prime, Venezuela's state-owned oil company, Petroleos de Venezuela, was a corporate gem. Created in 1976, PDVSA, as it is known, rapidly became a major international oil company thanks to good management and a strictly apolitical work environment. The business model was not that of a state monopoly but a group of four fully integrated companies, each operating by its own rules under the coordination of a financial and planning holding company. In this manner the four companies competed with each other and their performance could be measured and compared.

The Brazilian state-owned oil company, Petrobras, was different.Founded in 1954, it was run as single company monopoly, under the ultra nationalist slogan of the day, "The Oil is ours!". Petrobras insisted on using only Brazilian materials and technology. Labor unions greatly influenced its operations; its executives rotated frequently while the private sector played a limited role. The result: for 20 years, from the 1970's to the 1990's, PDVSA was a great success while Petrobras remained largely stagnant. How things change. In later years, Petrobras has flourished. Partially privatized in the 1990s, the slumbering Brazilian monopoly has become lean and competitive. Professionally managed as a commercial enterprise, the company has become a vibrant world-class corporation. Today Brazilian energy self-sufficiency is within sight, while Petrobras sets the industry benchmark for offshore oil.

PDVSA, on the other hand, is nearly unrecognizable, a political instrument of Venezuela's ruling claque. Its inept and corrupt managers have gutted production, both in quality and the volume of oil. The company's international standing is now in tatters as its core business - producing and marketing oil - has been subordinated to a populist agenda such as importing and distributing food, building houses and, even, training athletes. Investment in upkeep and maintenance has dried up. As a result, the Venezuelan company has lost some 800,000 barrels per day of production capacity during the last 10 years.It's no mystery why one company has stumbled while the other has soared.
PDVSA is no longer a commercial, for-profit business but a political tool and cash cow for the government oligarchy. Its revenues garnish the ruling coffers, not the nation's. Following a major protest by the technical and managerial staff in 2002-2003 - triggered by the naming of an inept president and board of directors - Venezuelan President Hugo Chavez dismissed 20,000 employees, the cream of the staff, and replaced them with his cronies, with no concern for technical or managerial credentials. The result has been predictable.Rockefeller famously said that the two best businesses in the world were a well managed oil company and a poorly managed oil company.
What would he say about PDVSA? Chavez's handpicked management has literally destroyed the company. Payroll has swelled from 30,000 to almost 100,000 employees, refineries are running at barely 70 percent capacity, and production has collapsed. And yet Chávez is giving away oil. Only half of the Venezuela's oil is exported at market prices. The rest is being sold at a fat discount or simply donated to "friendly" regimes Cuba, Central America, the Caribbean and South America, or else swapped for weapons and agricultural goods. After years of international expansion PDVSA, rebranded as a "socialist company," is now atrophying, selling off its refineries and oil terminals abroad. Managers must undergo military training in popular militias formed by Chavez to "defend the country" against a hypothetical U.S. invasion that he has imagined to be imminent for some years now.
Petrobras, on the other hand, has become a vibrant international energy corporation. Euro Money lists it as the best managed company in Latin America. It is no longer a fully state-owned company but a publicly traded corporation engaging in exploration, production, and refining of oil and natural gas; trading and transporting fuel, petrochemicals, and derivatives; generating electricity, making biofuels, and developing other renewable energy sources. Petrobras today operates in 28 countries. The 2009-2013-business plan foresees investments in the order of $174.4 billion. The company just raised $70 billion in the largest publc share offering in financial history.PDVSA, by contrast, claims a budget of $50 billion for the same five-year period, but don't hold your breath. Lately, the company's investments have averaged some $4-5 billion per year. Petrobras's current production is around 2 million barrels per day and growing while PDVSA's is some 2,3 million barrels per day and declining. More than an oil company Petrobras has become an energy corporation, pioneering the use of clean burning ethanol in transportation and electric energy generation. And the company hasn't even begun to tap the multibillion barrel cache of pre-salt oil trapped deep below the floor of the Atlantic.
Will all this oil go to Brazil's head? As Petrobras starts production from the offshore, in the Baleia Franca field, the government is considering sweeping new legislation that would give total state control to these new oil deposits relegating private companies to the status of contractors, working for a fee. The new law has been temporarily put in the backburner as presidential elections approach. It has become a major source of debate, with critics arguing it will erode Petrobras's efficiency. The stakes couldn't be higher. Scrapping a winning formula that has taken Petrobras from sleeper to Cinderella of the energy business in favor of the old model of state command and control is a dangerous leap backwards.
Government monopoly in oil has proven a failure all over Latin America, including the old Brazil. In Venezuela, Bolivia, Ecuador and Mexico the state-controlled model has produced a steep decline in production, rising inefficiency and alarming levels of corruption. Petrobras would do well to study these unfortunate examples and keep to a model that has produced much benefit to the nation, overcoming the temptation to play politics with its vital energy industry.

Gustavo Coronel is a Venezuelan Petroleum Geologist and served on the founding Board of Directors of Petroleos de Venezuela, PDVSA. Currently he works as a consultant in the geopolitics of energy and makes his home in Virgina