Venezuela’s oil industry is falling apart – opinion

Venezuela’s oil industry is falling apart

 By Humberto Márquez –  Inter Press Service (IPS)

CARACAS, Venezuela (IPS) — Corruption in the Venezuelan state oil industry, denounced by the government itself, and with former ministers and senior managers behind bars, is the latest evidence that, in the country with the largest oil reserves on the planet, the industry on which the economy depends is falling apart.

There was a drop “in the production of crude oil, of a million barrels per day,” economist Luis Oliveros, who teaches at the Metropolitan University, told IPS. In December 2013 output stood at 2,894,000 barrels per day compared to 1,837,000 in November 2017, according to the Organisation of the Petroleum Exporting Countries (OPEC).     

By 2018 production could drop another 250,000 barrels per day at the current rate, and Venezuela, co-founder of OPEC in 1960 when it was the world’s largest crude oil exporter, is becoming an almost irrelevant player in the global market, Oliveros said.

This despite the fact that it has the largest known deposit of liquid fossil fuels, the 55,000- sq-km southeastern Orinoco oil belt, with an estimated 1.4 trillion barrels of crude, mainly extra-heavy, including proven reserves of 270 billion barrels, according to Venezuelan estimates.

Oil is virtually Venezuela’s only export product, the source of 95 percent of foreign exchange earnings, and by the middle of this decade it represented more than 20 percent of GDP. Most of the business is in the hands of the state-owned Petroleos de Venezuela (PDVSA), which has a few partnerships with transnational corporations.

President Nicolás Maduro started a purge on November 28 within PDVSA, in the midst of the hail of corruption allegations and investigations, and asked the new management, led by a general new to the industry, Manuel Quevedo, to make an effort to raise production by one million barrels per day.

The immediate target was to meet the quota assigned by OPEC for 2017-2018, of 1,970,000 barrels per day, said presidential adviser Alí Rodríguez.

“Merely to sustain the current production of 1.85 million barrels per day – let alone increase it – we need to inject between four to five billion dollars into the industry, and the evidence is that this money is not there,” said Alberto Cisneros, CEO of the oil consulting firm Global Business Consultants.

With the economy in shambles, a four-digit inflation rate, different simultaneous exchange-rate systems for a currency that depreciates daily, shortages of food, medicines and essential supplies, and a foreign debt of more than $100 billion, Venezuela does not have the resources that the industry needs, he told IPS.

Against this backdrop, the oil business “also suffers from management problems since PDVSA in 2003, after a strike against the government, dismissed 18,000 employees, half of its workforce,” former deputy energy minister Víctor Poleo (1999-2002) told IPS.

And corruption was dramatically exposed this December, when the Attorney General’s Office sent 67 PDVSA executives and managers to prison for crimes ranging from falsification of production figures to embezzlement and undermining the country’s sovereignty.

Among these were two former oil ministers of President Nicolás Maduro, in power since 2013, Eulogio del Pino and Nelson Martínez, who were also presidents of PDVSA and its US subsidiary, Citgo, which they allegedly damaged when re-negotiating debts.

Moreover, the Public Prosecutor´s Office is investigating Rafael Ramírez, a former oil minister and president of PDVSA between 2002 and 2014, and until last November Venezuelan ambassador to the United Nations, for his possible involvement in money laundering operations through the Banca Privada d’Andorra bank.

Petromonagas, a joint venture between state oil company PDVSA and Russia’s Rosneft, extracts crude oil from the Orinoco Oil Belt, in southeastern Venezuela, considered the largest oil deposit on the planet. Photo: PDVSA

According to the Spanish newspaper El País, which claims access to reports on which Andorran Judge Canòlic Mingorance is working, people close to Ramírez received at least two billion euros ($2.36 billion) in illegal commissions between 1999 and 2013.

PDVSA, a company born from the nationalisation of the industry in 1975, and which for years boasted of being one of the top five oil companies in the world, is thus languishing under a cloud of accusations of corruption, incompetence and fraudulent management.

Production “is declining due to a lack of investment and maintenance, starting with the obsolete installations of Lake Maracaibo in the northwest, which produces no more than 450,000 barrels per day,” said Cisneros. Since 1914, more than 13,000 oil wells have been drilled there, and up to the 21st century, the lake basin produced more than one million barrels a day.

The relatively new fields of the east provide the rest of the output, but the figure of 1.3 million barrels per day extracted in the Orinoco Belt, announced by del Pino in the middle of the year, has been questioned by the criminal investigation.

Venezuelan expert Francisco Monaldi, at Rice University in Texas, pointed out that exports are already below 1.4 million barrels per day (they stood at over 2.5 million at the beginning of the century), and less than 500,000 barrels per day were exported to the United States in November

For a century, the United States was the biggest importer of Venezuelan oil, purchasing 1.5 million barrels per day. And it is still the main source of revenue, as exports to China, which exceed 600,000 barrels per day, are used to pay off debts.

In oil refining, “it is perhaps even worse” according to Cisneros, since the Venezuelan refineries, installed to process 1.3 million barrels per day, “worked a few years ago at 90 or 95 percent of their capacity and now are only working at a third, 30 or 35 percent. We do not even supply our fuel needs,” which in part have to be imported, he pointed out.

To the decrease in the production of gasoline, lubricants and other derivatives are added distribution problems in the 1,650 service stations in this country of almost one million square kilometers, 31 million people and four million vehicles.

One of the problems is the absurdly low price of fuel in the country, the cheapest in the world. One litre costs just one bolívar, which at the official exchange rate is equivalent to about 10 cents, but at the black market rate is equivalent to one-thousandth of a cent: with one dollar you could buy 100,000 litres.

The cost of selling half a million barrels of fuel each day at this low price is a loss of between 12 and 15 billion dollars a year for PDVSA.

In addition, there is a problem of smuggling to Colombia, Brazil and the Caribbean, which Venezuela partially curbs with controls and rationing that cause shortages and huge queues of vehicles at gas stations along the border.

PDVSA has paid back interest in arrears this year for its debt bonds, while a US subsidiary of Chinese company Sinopec – a partner that has contributed more than $50 billion in loans to Caracas – sued the Venezuelan state-owned company before a US court, for $21.5 million over unpaid bills.

The United States imposed sanctions on Venezuela that make it difficult to renegotiate the country’s and PDVSA’s debts.

“Sanctions and default make it more difficult for partners to invest in joint ventures. The Venezuelan oil industry seems to have entered a spiral of death,” said Monaldi.

Cisneros believes that a recovery of the industry “is possible with a different organisational scheme, such as Argentina’s, which has a ‘front company’, Enarsa, and an operator, YPF (51 percent state-owned, 49 percent listed on the stock market).”

To achieve that “there are two possibilities; one is that the current regime reacts with respect to the economy and oil, and another is that there is a political change and the country starts to take advantage of its human, economic and oil resources,” he argued.

Source: Inter Press Service (IPS)

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Comments

  • Clyde Duncan  On 12/25/2017 at 8:06 am

    Dear Caracas Chronicles Readers,

    Blessing or curse we Venezuelans have always had the ability to unshackle the bad vibes from a terrible situation and get on with the day’s festivities. Especially during Christmas Season.

    Well, this year there just might be no Parranda super power left to spin these sad holidays into something better.

    This tweet by Eugenio Martínez pretty much sums it up:

    “December 19th. 7:20 pm and Caracas looks… it’s hard to describe. Sad, dull, bleak, abandoned, are just a few of the epithets I can think of. And I’m probably falling short”

    But the heart wrenching stuff came in the replies. Dive in if you have the stomach to.

    2017 has been too much of so many things we never thought would come:

    Separation, abandonment, loss, disappointment… exhaustion. It sucked. So good riddance to bad rubbish.

    The Weekly Arepa will be back in January, y viene con todo. Because 2018 won’t be easy. Next week we’ll be publishing some end-of-the-year posts, and some surprise goodies, including the world-renowned Tropical Mierda Awards. Barring some crazy Delcy Eloina announcement on the 26th of December, we hope to all relax a bit until this year is finally over.

    Also, we’re finally on Instagram! Follow us and stay tuned. We’ll be posting the best illustrations published on Caracas Chronicles throughout the year.

    Stay safe, try to make the best of the holidays, and remember:

    Sometimes you can’t see the light at the end of the tunnel because you’re looking back.

    Raúl Stolk
    Caracas Chronicles

  • Clyde Duncan  On 12/25/2017 at 8:43 am

    Punch Drunk on Oil: A Visionary Call to Fix Our Relationship with the Black Stuff

    Francisco Toro | Caracas Chronicles

    In his book, Blood Oil: Tyrants, Violence, and the Rules that Run the World, Leif Wenar has a great riff on the parallels between oil and booze.

    On average, Wenar explains, people who drink moderately have better health outcomes than people who drink either a lot or not at all.

    On average, moderate drinkers are usually happier, more satisfied with life and have lower mortality rates overall, though they do suffer increased risk of some illnesses.

    But there’s a trick there, and it’s hidden in the two most harmless sounding words in that paragraph: ON AVERAGE.

    Because when you start looking at individual cases, well, you find all kinds of strangeness. Some people drink titanic amounts and manage to keep it together nonetheless. Hell, some people seem to thrive because they’re always drunk.

    Sir Winston Churchill is the paradigmatic example here: the guy worked through a famously prodigious amount of booze on his way to defeating Hitler, winning a Nobel Prize for literature and becoming Britain’s most celebrated leader in centuries.

    And plenty of people who drink no more than two glasses of wine, two or three times a week live miserably, accomplish nothing and die young.

    So yeah, hard drinking is definitely bad for you on average. But we don’t live on average, we live one by one.

    For Wenar, these lessons transfer beautifully when you look at nations’ relationships with mineral wealth.

    On average a little is better than none at all or than too much.

    On average, countries that have too much oil wealth are basket-cases:

    Autocratic, violent, misruled, corruption prone and indecent.

    But “on average” only gets you so far.

    “On average” doesn’t rule out the freaks and outliers. Not at all.

    López and Baquero understand that the mechanism through which oil rents mess up the politics of a petrostate is by inverting the arrow of dependence in the relationship between the state and the people.

    In this view, Norway is the Winston Churchill of Petrostates. It takes on oil wealth with the same kind of frenzied abandon with which Churchill guzzled champagne.

    By all rights, it should be a basket case…but it isn’t. It thrives. And it doesn’t thrive despite oil, it thrives because of it.

    But you don’t need to go all Scandinavian to find a country that bucked the trend.

    Some countries make the most out of big oil revenues even when they start out poor and autocratic, even when they seem to have none of the prerequisites for “drinking responsibly.”

    For the whole long half century between 1925 and 1975, for instance, the best-performing economy in the planet lived almost entirely off of oil — transforming itself from a dictatorial, malaria-ridden backwater with hardly any of the trappings of modernity into a flourishing democracy with a fast-growing middle class, universal free education all through university level, fast social mobility and contested elections amid political stability.

    It seems unimaginable now, but forty years ago before the Norwegians discovered oil in the North Sea, we, Venezuelans, were the Winston Churchills in this story.

    The question is, can we get it back?

    In their visionary new book, Venezuela Energética, Leopoldo López and Gustavo Baquero answer that with an emphatic YES. Mirroring Wenar, they concur that when we say a nation is addicted to oil what we really mean is that it’s addicted to oil rents:

    To the huge amounts of free money that come out of the ground in an oil economy. Like Wenar, they understand that the mechanism through which oil rents mess up the politics of a petrostate is by inverting the arrow of dependence in the relationship between the state and the people.

    In a normal country, the state depends on the people. People produce wealth, through work, and the state captures part of the value they create by taxing them.

    If the people do badly, the state does badly. Whether he’s a democrat or a dictator, the ruler of such a country can’t afford to not care about the people. He has to care, because he has to tax them.

    But in a petrostate gone wrong, that relationship is reversed: it’s the state that produces the wealth (by mining it) and the people seek to capture part of the value by cozying up to the rulers. Look around for the nearest line to get a carnet de la Patria if you need a graphic representation of how this works.

    The Fondo Patrimonial de los Venezolanos they propose amounts to a distributed set of individual savings accounts made out to each Venezuelan over the age of 18 that they can tap to invest in human capital.

    What López and Baquero propose to do about it is as radical as it is simple. They want to reverse the direction of dependence, by shifting ownership over the bulk of the oil resource stream (royalties, some taxes and PDVSA dividends) directly to each adult citizen.

    The Fondo Patrimonial de los Venezolanos they propose amounts to a distributed set of individual savings accounts made out to each Venezuelan over the age of 18 that they can tap to invest in human capital — that is, to pay for health insurance, education, a home or to fund a pension.

    If the state wants in on that action, it can tax the income from that fund — but then, it has to do it the normal way, by putting its hands in people’s pockets in a way they will see, and they’ll get to vote on.

    López and Baquero deserve plaudits for getting at the heart of the matter, and for putting a genuinely visionary proposal to address it front and center.

    It is entirely clear, of course, that nothing like the Fondo Patrimonial de los Venezolanos stands the least chance of being implemented so long as the current lot stays in power.

    And the current lot’s relationship to oil wealth is as destructive as the most hopeless gutter drunk’s relationship to booze is.

    But it doesn’t have to be like that, and it doesn’t have to last forever. And when it’s over, Venezuela will be in dire need for the kind of clear-eyed, far-seeing proposal López and Baquero have put forward.

    For the next few days, we’ll be publishing pieces related to oil policy and details on the book which we hope can jump-start a much-needed conversation.

    Caracas Chronicles

    • Ali  On 12/25/2017 at 5:58 pm

      Everyone here puts in their two cents worth but feel compelled to copy and paste what others have to say. Why?
      You don’t trust the stuff upstairs and afraid to mess up the bed. That is weird old fella.

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