The Venezuelan oil industry analyzed at the Atlantic Council

THE EVENT ON VENEZUELA AT THE ATLANTIC COUNCIL, WASHINGTON DC . Watch it complete at: 

https://www.youtube.com/watch?time_continue=4716&v=YoytyOwfIHY

Last Tuesday the 13^th an event on the Venezuelan oil industry took place at the headquarters of the Atlantic Council, in Washington DC.  The panel consisted of Francisco Monaldi, author of the central document that served as the basis for the discussion, David Goldwyn, from the Atlantic Council, Rebecca Bill Chavez, former U.S. under-secretary of Defense; Kerry Contini, from Baker-MacKenzie and David Smolansky, former Mayor of El Hatillo, a suburb of Caracas, Venezuela. I could not attend this event, as I had wished, but watched it later in the link above. The discussion was ably facilitated by Jason Marczak, a Director of the Atlantic Council

The discussion allowed each panelist to comment on questions posed by Marczak. I summarize below the discussion, as I heard it, with some comments of my own. I apologize for any misunderstanding I might have had in listening, since I already have hearing problems.

1.    Why did the Venezuelan oil industry collapse?

Monaldi: The debacle has been long in the making. Firing by Chavez of 22,ooo PDVSA employees in 2002-2003 had much to do with it. The company was politicized. Today the company is subsidized by the Venezuelan Central Bank. 50% of its production comes from the activity of the foreign partners, not generated by PDVSA. Not one single important project has been done by PDVSA during the last 20 years. The former president of PDVSA, Rafael Ramirez, claims the debacle started after he left in 2014 but this not true. In particular, the collapse of the light oil production is immense. A background slide indicated the possible reasons of the debacle, including: Chavez, corruption, collapse of activities, mismanagement, Ramirez, del Pino.

Goldwyn: PDVSA is not paying their contractors. The workers are being mistreated.

My comments: The PDVSA debacle is the result of all the factors mentioned above. One strong reason, not mentioned by the panelists, is the conversion of the company from a commercial enterprise to a “social” company, engaged in numerous activities not related to its core business. That diverted much of the money that should have been used to maintain the company in good form to social activities including subsidies, housing, food distribution, agricultural projects, etc.

2.   Misuse of money generated by PDVSA

Smolansky: Today PDVSA is producing only some 1.7 million barrels per day. The political regime is divided, with Ramirez and Maduro blaming each other for the oil industry debacle. Much of the problem has to do with the diversion of oil income to a Fund called FONDEN, that had no transparency and was controlled politically by Chavez and Ramirez. Today the oil company is run by the military, specifically by a man who was responsible for the repression and many deaths of protesters in 2014.

3.   Social situation

Rebecca Bill Chavez: The homicide rate in Caracas is the highest in the region, at 140 per 100,000 inhabitants (?). Mass emigration into Colombia and Brazil is affecting these countries. Poverty is very high.

4.   Sanctions against Venezuela

Kerry Contini: U.S. sanctions are decided at the level of the State Department [and Treasury Department?]. There are two types: individual and financial sanctions. The objective of the sanctions, according to the U.S. government, is not regime change but, in practice, the Maduro regime has been hard hit.

Monaldi: Individual sanctions include former PDVSA presidents Ramirez and del Pino, while economic sanctions are limiting Venezuelan ability to export oil to the U.S.  due to the limitations imposed on finance matters and for payment by U.S. companies. The partners of PDVSA are also affected, since they can be perceived as subsidizing  the Venezuelan government.

Smolansky: Sanctions against the Venezuelan regime should be expanded. The Lima Group should play a more aggressive role in this respect.

Goldwyin: The partners of PDVSA are afraid of an oil embargo. They already have big problems with PDVSA. The Venezuelan regime is now relying on China and Russia/ The U.S. should not act unilaterally in Venezuela but try to enlist multilateral support for any sanctions.

Rebecca Bill Chavez: Multilateral actions and sanctions are very important.

Monaldi: The Venezuelan government is having a difficult time importing crude oil and products for PDVSA. In case of an embargo Venezuela could sell the volumes going to the U.S, some 400,000 barrels per day, to Asia but it would be more costly to do so. A total embargo imposed by the U.S. could probably be counter-productive. The embargo would also create new problems for the partners. There are less dramatic alternatives, less costly politically.

Smolansky: There other options that can be exercised before going into a total embargo, such as limiting the U.S. exports of gasoline and diesel to PDVSA.

Goldwyn: an embargo would affect gasoline prices in the U.S. and employment in the Gulf Coast refining sector. There should be other, better options. Losing Venezuelan heavy oil would eventually require costly reconfigurations of the Gulf Coast refineries

Monaldi: Venezuelan heavy crudes could be replaced by Canadian heavy crudes but the problem would be the transport.

My comment: I agree that a total oil embargo should be the action of last resort but it should be viewed as a shock treatment and not as a chronic measure. It should force the government out in a matter of three to six months.

5.   Situation in the Caribbean/Petro Caribe

Rebecca Bill Chavez: The Caribbean countries could be supplied by Mexico, now that Venezuela can no longer do so. However, Mexican production is also decreasing and the coming presidential elections could introduce a political factor in this alternative.

Goldwyn: IMF could also help the Caribbean countries in financing alternative sources of energy. The U.S, Caribbean Initiative can also help.

Monaldi: Venezuelan deliveries to the Caribbean are now much less than before. Countries like Cuba, Haiti are particularly affected.

6.   Foreign Investment in the Venezuelan oil industry.

Monaldi: Investment is less than before and comes principally from Chevron and Russia. China is now less willing to invest more money into Venezuela. Russia is the most aggressive investor at this moment.

Smolansky: Russia is the most active due to geopolitical considerations.

Kerry Contini: U.S. investments in Venezuela at this point in time are being discouraged by the sanctions.

7.   The Future of the Oil Industry

Goldwyn: Russia has helped to extend the life of the Venezuelan regime. The substantial level of oil reserves in Venezuela indicates that the country will still be an important player in the future.

My comment: The problem is the time frame. There is a pronounced trend to replace oil for other sources of energy. Will the oil reserves of Venezuela enjoy the time required to be developed and marketed before oil ceases to be the main source of energy?

MONALDI’S ESCENARIO FOR THE FUTURE

In closing the event Monaldi described some possible future developments for the Venezuelan oil industry. He said:

·       Oil production will keep declining

·       Heavy oil is mostly what is left

·       However, the potential is there, due to its huge reserves

·       There is no geological risk in Venezuela,  the oil is there

·       The country would need foreign investment and the best foreign companies to come to the country, in order to develop the oil industry

At the end, Smolansky spoke about Venezuela having the largest oil reserves in the world and on the need to recover PDVSA.

My comment: Monaldi’s outlook is essentially correct within a severe time limitation, say the next 40 years. This limitation will particularly apply to the heavy, contaminant types existing in the Orinoco area. The logistics of extraction and upgrading this Orinoco oil make it costly to develop and its reserves are grossly overstated, although I agree that there is a lot of oil there. However, the reservoirs are far from continuous and productivity per well is not that great. Water cuts come in rather early.

As time ran out nothing could be said about the model of management the future oil industry should have. I do not believe, as Smolansky said, that PDVSA can be recovered. Another management model will be required.

Valuable contributions on what this model could be have already been made by Diego Gonzalez, Leopoldo Lopez and Gustavo Baquero, Nelson Hernandez, COENER, the Think Tank and Francisco Monaldi in different articles. I have also made some suggestions in this regard, see:  http://lasarmasdecoronel.blogspot.com/2012/08/articulo-sobre-petroleo-en-el-journal.html

It was a good event.

In watching I came away with the conclusion that nothing can be done about the Venezuelan oil industry, or what is left of it, until this regime exits power. The first action in favor of the Venezuelan oil industry should be to force the current regime out of power. Until this takes place the oil industry, like all other aspects of Venezuelan life will continue on the death spiral mentioned by Monaldi.