Prior to Chavez (1980-1990's), PDVSA was a organized enterprise that had benefited from working with private companies. PDVSA was considered by many to be the best run NOC in Latin America throughout the 1990's. Oil production was maintained and managed such that production was sustained despite the price of oil plummeting early in the decade.
Petrostates see business ethics as a function of the current political climate (i.e. sometimes optional) but are relatively good at safeguarding their own financial wellbeing. Venezuela is an exception to this general rule - hence this article.
Petrostates see business ethics as a function of the current political climate (i.e. sometimes optional) but are relatively good at safeguarding their own financial wellbeing. Venezuela is an exception to this general rule - hence this article.
You betcha!
Initially, I started writing this story because I didn't understand that after so many companies being financially burned by PDVSA - companies were still willing to work there. Even Schlumberger, usually an amiable industry workhorse, is having issues with being paid.
Stating the obvious: IOCs have to go where there is oil even if it means making a calculated gamble with the odds against them. During my research what stuck out wasn't PDVSA being an unusually prick-ish NOC but the story of Venezuela's government slowly poisoning it's golden goose.
Venezuela's Dutch Disease
Venezuela is a textbook case of Dutch Disease only it's current state is way worse than the Netherlands present state.
Dutch Disease is basically what happens to a country's economy when petroleum/natural resources are discovered (here is the the complete definition). The government [and depending/sometimes the populace] benefits greatly from the royalties earned and "everyone" becomes dependent on the royalty from oil/gas sales and "everyone" stops caring about investing in other industries such as mining, agriculture, manufacturing etc.
The country puts all of it's economic eggs in the petroleum basket.
This reeks havoc on interest rates, currency values and non-petroleum exports which sucks. But sh*t really hits the fan when oil prices drop and the country is effectively knocked on it's backside economically as it has no other significant economic assets to mitigate the financial hit.
That's the oil curse, it discourages interest in diversifying a countries economy. Which is why petrostates are not so often screwed despite long seasons of plentiful cash inflow.
Countries like Japan, Finland, Taiwan, Singapore and South Korea are essentially resource deficient, yet all have long histories of strong economies because (1) necessity is the mother of invention (2) economic diversity. (Though in truth it sucks to be Finland and Japan at the moment)
When Did Things go South?
The collapse of oil prices in many ways opened the door to Chavez coming to power: less petro-profits = a lot more unhappy people. Oil had propped up Venezuela's sickly/non-existent economy for many years.
Since 1998, PDVSA has officially served as Hugo Chavez's personal cashbox for a multitude of expensive social programs. PDVSA wasn't pleased about the systematic underinvestment and it's profits being milked. A PDVSA strike broke out to call early elections due to declining production and heavy handed state mismanagement in 2002. This "strike" was basically an almost successful effort of PDVSA managers and workers to completely shut off oil production for 2 months.
Following the strike, Chavez fired 19,000 PDVSA employees (~40% of the workforce). PDVSA had been expanded to include many non-petroleum units (i.e. political and social programs). Therefore the majority of personnel fired were technical staff.
For example, approximately 80% of PDVSA's R&D were pink slipped. Experienced engineers were sacked in favor of less skilled/experience engineers who, according to some reports, hadn't completed/flunked out of engineering programs. Chavez effectively expunged PDVSA of anyone critical of his policies and thereby drained Venezuela's largest reservoir of engineering and scientific expertise.
It is not my intent to paint those against Chavez as necessarily "the good guys". Likely some of the managers/executives sacked may have had their own selfish ambitions. Never the less, in view of the fact that PDVSA was efficiently run by this same staff throughout the 1990's, it is not an unwarranted assumption that Chavez got rid of the competent people.
As does the following quote:
"Engineers are always honest in matters of technology and human relationships. That's why it's a good idea to keep
engineers away from customers, romantic interests, [Hugo Chavez], and other people who can't handle the truth."
This political stunt would be somewhat valid if Venezuela's fields were Saudi Arabia's: perfect, gargantuan carbonate fields with tall oil columns waiting for vertical wells to be drilled to yield obscene flow rates sans intensive technical expertise.
Except they aren't.
The Asphaltenic Oil Curse
Venezuelan oil industry is seriously challenged by it's asphaltenic oil. Asphaltenes are not well characterized chemically: they are big molecular globs of carbon with very little hydrogen. Venezuelan oil is rich in asphaltenes which precipitate out of the oil during production, processing and pipeline transit due to P&T changes.
Asphaltenes effectively clog surface facilities, wells and pipelines making Venezuelan oil production difficult to maintain; production wells need frequent and expensive work overs, surface facilities must be carefully maintained and pipelines constantly pigged. By some estimates, Venezuela must spend $3 billion dollars each year just maintaining existing production due to Asphaltene issues.
As reservoir pressures decline over production, the rate of asphaltenes precipitation increases - which necessitates increased frequency of work overs and maintenance.
The picture below succinctly sums up the situation.
Stating the obvious: IOCs have to go where there is oil even if it means making a calculated gamble with the odds against them. During my research what stuck out wasn't PDVSA being an unusually prick-ish NOC but the story of Venezuela's government slowly poisoning it's golden goose.
Venezuela's Dutch Disease
Venezuela is a textbook case of Dutch Disease only it's current state is way worse than the Netherlands present state.
Dutch Disease is basically what happens to a country's economy when petroleum/natural resources are discovered (here is the the complete definition). The government [and depending/sometimes the populace] benefits greatly from the royalties earned and "everyone" becomes dependent on the royalty from oil/gas sales and "everyone" stops caring about investing in other industries such as mining, agriculture, manufacturing etc.
The country puts all of it's economic eggs in the petroleum basket.
This reeks havoc on interest rates, currency values and non-petroleum exports which sucks. But sh*t really hits the fan when oil prices drop and the country is effectively knocked on it's backside economically as it has no other significant economic assets to mitigate the financial hit.
That's the oil curse, it discourages interest in diversifying a countries economy. Which is why petrostates are not so often screwed despite long seasons of plentiful cash inflow.
Countries like Japan, Finland, Taiwan, Singapore and South Korea are essentially resource deficient, yet all have long histories of strong economies because (1) necessity is the mother of invention (2) economic diversity. (Though in truth it sucks to be Finland and Japan at the moment)
When Did Things go South?
The collapse of oil prices in many ways opened the door to Chavez coming to power: less petro-profits = a lot more unhappy people. Oil had propped up Venezuela's sickly/non-existent economy for many years.
Since 1998, PDVSA has officially served as Hugo Chavez's personal cashbox for a multitude of expensive social programs. PDVSA wasn't pleased about the systematic underinvestment and it's profits being milked. A PDVSA strike broke out to call early elections due to declining production and heavy handed state mismanagement in 2002. This "strike" was basically an almost successful effort of PDVSA managers and workers to completely shut off oil production for 2 months.
Following the strike, Chavez fired 19,000 PDVSA employees (~40% of the workforce). PDVSA had been expanded to include many non-petroleum units (i.e. political and social programs). Therefore the majority of personnel fired were technical staff.
For example, approximately 80% of PDVSA's R&D were pink slipped. Experienced engineers were sacked in favor of less skilled/experience engineers who, according to some reports, hadn't completed/flunked out of engineering programs. Chavez effectively expunged PDVSA of anyone critical of his policies and thereby drained Venezuela's largest reservoir of engineering and scientific expertise.
It is not my intent to paint those against Chavez as necessarily "the good guys". Likely some of the managers/executives sacked may have had their own selfish ambitions. Never the less, in view of the fact that PDVSA was efficiently run by this same staff throughout the 1990's, it is not an unwarranted assumption that Chavez got rid of the competent people.
As does the following quote:
"Engineers are always honest in matters of technology and human relationships. That's why it's a good idea to keep
engineers away from customers, romantic interests, [Hugo Chavez], and other people who can't handle the truth."
This political stunt would be somewhat valid if Venezuela's fields were Saudi Arabia's: perfect, gargantuan carbonate fields with tall oil columns waiting for vertical wells to be drilled to yield obscene flow rates sans intensive technical expertise.
Except they aren't.
The Asphaltenic Oil Curse
Venezuelan oil industry is seriously challenged by it's asphaltenic oil. Asphaltenes are not well characterized chemically: they are big molecular globs of carbon with very little hydrogen. Venezuelan oil is rich in asphaltenes which precipitate out of the oil during production, processing and pipeline transit due to P&T changes.
Asphaltenes effectively clog surface facilities, wells and pipelines making Venezuelan oil production difficult to maintain; production wells need frequent and expensive work overs, surface facilities must be carefully maintained and pipelines constantly pigged. By some estimates, Venezuela must spend $3 billion dollars each year just maintaining existing production due to Asphaltene issues.
As reservoir pressures decline over production, the rate of asphaltenes precipitation increases - which necessitates increased frequency of work overs and maintenance.
The picture below succinctly sums up the situation.
Venezuela possesses the world's largest proven oil reserves (estimated at 380 - 650 Billion Barrels recoverable or 20%+ of the global reserves). It's petroleum industry was started in the early 1900's and was nationalized in 1976 as Petroleos de Venezuela S.A. (PDVSA).
"Comrade Chavez, this is no problem!"
In addition to being heavy and asphaltenic, Venezuela's oil is also very sour. It can only be refined in refineries capable of handling heavy and sour oil which is more expensive. Venezuela refines much of it's own oil and the U.S.'s Gulf refineries refine purchased Venezuela's oil. Canada's oil sands have replaced much of this capacity and while the United States is still Venezuela's largest trade partner, the amount of oil being imported to the U.S. is slowly dropping.
Symptoms of Underinvestment/Maintenance
Years of facilities being poorly maintained and managed have begun to show. In 2012, a refinery explosion killed 42 people and is considered the worst accident in PDVSA's history and when "normalized" to the roster of refining accidents world wide, bloody awful. The shockwave from the explosion completely demolished several hundred homes and blew the windows out of an additional 1600 homes.
Falling Oil Prices
Most recently Venezuela left OPEC's Vienna Convention extremely unhappy. To balance their budget, they will need an oil price of approximately $120/bbl, with more than a few analyst estimating an even higher price.
That is not going to happen any time soon. Venezuela does not have a significant cash cushion capable of mitigating financial pain due to oil falling, if any type of cushion at all.
PDVSA in Debt
Venezuela is deeply in debt. PDVSA debt has mounted at an almost exponentially rate to approximately $34 billion as of 2013, since 2003 a total of $43 billion. PDVSA is on it's death bed and with Chavez recently departed from his, it is hoped that Maduro will have interest in economically building the companies value rather than continuing to milk it's profits and pushing it towards the cliff of bankruptcy and collapse. So far, no real change has occurred as of this writing.
Malicious or Misguided?
The more I read about Chavez, it doesn't seem that his slow murder of PDVSA was with any malice. Somehow I really believe that Chavez genuinely implemented policies deleterious to Venezuela's future in the hope of bettering his country despite being ignorant to the technical implications.
For example, under Chavez, gasoline was ridiculously subsidized in Venezuela where citizens could purchase it for prices as low as $0.05/gal (that may be about to change). Because of this, smuggling gasoline and food (also subsidized) to neighboring Colombia is big business. In a ludicrous roundabout way, Venezuela's government subsidization does benefit it's citizens financially.
Chavez is credited by many Venezuelan's as improving the standard of living and providing the country with better education, medical services and lifting millions of Venezuelans out of poverty. Despite being unsustainable, in the past this may have been true to a certain extent.
Venezuela's Present Domestic Situation
President since 2013, Nicolás Maduro (Chavez's VP) was handpicked as a successor and so far has stuck to Chavez's playbook. Maduro doesn't have the personality cult or wild popularity Chavez enjoyed. With oil prices likely to remain low for at least 2 - 3 years, the outlook for Venezuela doesn't look good.
Venezuela could have major problems in the future. Venezuela uses its oil money to import the bulk of its food from neighboring Brazil that is sold at greatly subsidized prices within the country. Other critical commodities such as medicine, equipment and chemicals are imported by the government and the few remaining companies in Venezuela. Should oil prices remain low, the already indebted government will fall short on it's ability to provide basic goods and services to citizens. Should that come to pass, it will only be a matter of time until civil order breaks down.
Years of facilities being poorly maintained and managed have begun to show. In 2012, a refinery explosion killed 42 people and is considered the worst accident in PDVSA's history and when "normalized" to the roster of refining accidents world wide, bloody awful. The shockwave from the explosion completely demolished several hundred homes and blew the windows out of an additional 1600 homes.
Falling Oil Prices
Most recently Venezuela left OPEC's Vienna Convention extremely unhappy. To balance their budget, they will need an oil price of approximately $120/bbl, with more than a few analyst estimating an even higher price.
That is not going to happen any time soon. Venezuela does not have a significant cash cushion capable of mitigating financial pain due to oil falling, if any type of cushion at all.
PDVSA in Debt
Venezuela is deeply in debt. PDVSA debt has mounted at an almost exponentially rate to approximately $34 billion as of 2013, since 2003 a total of $43 billion. PDVSA is on it's death bed and with Chavez recently departed from his, it is hoped that Maduro will have interest in economically building the companies value rather than continuing to milk it's profits and pushing it towards the cliff of bankruptcy and collapse. So far, no real change has occurred as of this writing.
Malicious or Misguided?
The more I read about Chavez, it doesn't seem that his slow murder of PDVSA was with any malice. Somehow I really believe that Chavez genuinely implemented policies deleterious to Venezuela's future in the hope of bettering his country despite being ignorant to the technical implications.
For example, under Chavez, gasoline was ridiculously subsidized in Venezuela where citizens could purchase it for prices as low as $0.05/gal (that may be about to change). Because of this, smuggling gasoline and food (also subsidized) to neighboring Colombia is big business. In a ludicrous roundabout way, Venezuela's government subsidization does benefit it's citizens financially.
Chavez is credited by many Venezuelan's as improving the standard of living and providing the country with better education, medical services and lifting millions of Venezuelans out of poverty. Despite being unsustainable, in the past this may have been true to a certain extent.
Venezuela's Present Domestic Situation
President since 2013, Nicolás Maduro (Chavez's VP) was handpicked as a successor and so far has stuck to Chavez's playbook. Maduro doesn't have the personality cult or wild popularity Chavez enjoyed. With oil prices likely to remain low for at least 2 - 3 years, the outlook for Venezuela doesn't look good.
Venezuela could have major problems in the future. Venezuela uses its oil money to import the bulk of its food from neighboring Brazil that is sold at greatly subsidized prices within the country. Other critical commodities such as medicine, equipment and chemicals are imported by the government and the few remaining companies in Venezuela. Should oil prices remain low, the already indebted government will fall short on it's ability to provide basic goods and services to citizens. Should that come to pass, it will only be a matter of time until civil order breaks down.
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