The rapid decline of PDVSA

Friday, January 28, 2011
The Rapid Decline of PDVSA

Production is too low and too little of it is commercially driven, resulting in a need for more cash.

BY GUSTAVO CORONEL

What is the production of Petroleos de Venezuela (PDVSA), the state-owned oil company of Venezuela? The company claims a production of 3.2 million barrels per day, although OPEC and the International Energy Agency place it at 2.3 million barrels per day, almost one million barrels per day less.
This is a huge discrepancy that has already persisted for a long time. The level of commercial oil exports is also in doubt since Venezuela is consuming over 600,000 barrels per day internally and is sending highly subsidized oil to Cuba, Nicaragua, Bolivia, Ecuador, Argentina, Central America and the Caribbean countries. It also has to send oil to China to pay for a jumbo loan of $20 billion received last year. The amount of oil being exported in commercial terms is relatively low, possibly of the order of 1.3 million barrels per day. Exports to the U.S. are now below the level of 900,000 barrels of oil per day. In documents originating in Wikileaks some directors of the company admitted to fraud in Venezuelan export figures since some of the oil going to nearby oil terminals such as Bonaire and Curacao travels back to Venezuela and is counted twice as exports, while some oil acquired from third parties to comply with clients, including Citgo’s refineries in the United States, is counted as produced and exported by Venezuela.
There seems to be no doubt that production is lower than the government claims. Mr. Rafael Ramirez, the Minister of Energy and also president of the Venezuelan state-owned oil company, just announced possible sanctions against Venezuela’s partners in joint ventures where the Venezuelan company has 60 percent of the shares. He threatened these companies, including Repsol and Chevron, with taking away their licenses if they did not increase production at once. If Venezuela were producing the volumes it claims, there would be no need to increase production. In fact, an increase in production would lead to a violation of the OPEC’s production quota. The threat by Mr. Ramirez is hard to understand since, after all, the Venezuelan government is the majority partner in the threatened companies.
The conclusion has to be that the country urgently needs to increase production. Why? Because the government needs more money. Again why? Because much of the oil produced is not being sold in commercial terms but under politically driven agreements with Latin American and Caribbean countries and the Venezuelan government is spending immense amounts of money in food imports and in a campaign for the presidential re-election of Hugo Chavez in 2012 essentially based on handouts.
In parallel with this strategy the Hugo Chavez government has invited a Babel Tower – like collection of state oil companies, mostly from ideologically friendly countries, to develop portions of the Orinoco heavy oil region, where billions of barrels await to be produced and upgraded. Most of the companies invited and already present in the area, from Cuba, Angola, Vietnam, Iran, China, Russia, Turkey, Uruguay and Belarus lack the proper technology and the management and financial capability to do the job. In fact they complicate matters for the few that can do the job, such as Repsol, Chevron and other “real” oil companies, by competing with them for the limited work force, services and materials available in the country.
Not surprisingly Petroleos de Venezuela has had to resort to increased borrowing in order to be able to keep going. Its existing and potential financial obligations due to pending arbitrations and lawsuits are already close to $70 billion, and more borrowing is planned for this year. Since the government finds it increasingly difficult to obtain loans in the open financial markets it is using the company as a vehicle to obtain fresh money, the same suicidal financial strategy that sank the Mexican state-owned oil company, Pemex, years ago. As the company is being forced to deviate from its core business in order to go into food imports and distribution, house building and, even, the training of athletes, its capacity to operate efficiently has been deeply eroded, perhaps irreversibly.

Gustavo Coronel, a 28-year oil industry veteran, was a member of the first board of directors of Petroleos de Venezuela (PDVSA) and is the author of several books.