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News Extra: Political unrest in Venezuela increases pressure on state oil company PDVSA

22 September 2017

The move by Venezuelan President Nicolas Maduro to bypass the country’s opposition-led Congress and appoint a new assembly to rewrite the constitution has increased instability across the country’s politics and institutions, with street protests and official repression increasingly resembling a low level civil war. One key institution that is facing a very uncertain future is the state oil company, Petroleos de Venezuela SA (PDVSA).

Used as a cash cow to provide the bulk of state revenues under Maduro and his predecessor Hugo Chavez, PDVSA is seen by the government as a vital cog in its continued survival and increased political meddling is creating increasing difficulties for the company.

According to a report by Reuters, political appointees have gained ascendancy over veteran oil executives, and employees are under mounting pressure to attend government rallies and vote for the ruling Socialists. The increasing focus on politics over performance is contributing to a rapid deterioration of the company’s operations and to a brain drain at the once world-class company.

The news agency, which interviewed two dozen current and former employees, foreign oil executives, and contractors, concluded that PDVSA was “coming apart at the seams”.

A senior management team named in January that draws heavily on political and military appointees has left PDVSA's president, the US-educated engineer Eulogio Del Pino, largely powerless, according to high-level sources in PDVSA and the government, who spoke anonymously to Reuters.

The government’s pillaging of PDVSA’s cashflow has meant there is little money for essential maintenance, which has resulted in refineries working at a fraction of capacity and safety seriously compromised at those units still in operation.

Since Chávez fired 18,000 PDVSA employees in 2003 and replaced them with party loyalists, PDVSA has suffered a series of catastrophic incidents culminating in an explosion at the Amuay refinery in 2012 which killed 48 and injured 151.

One result of this is that Venezuela, which has the world’s largest oil reserves, is likely to see production fall to a 25-year low in 2017.

The Maduro government still has support from Russia and China, which have loaned some $55 billion to the country over the last three years, according to Forbes. Bloomberg says the country’s oil giant, Rosneft, has lent PDVSA a total of $6 billion against future oil deliveries, but the parlous state of export facilities means those deliveries will likely be seriously delayed. Reuters says the waiting time to load a tanker is now 30-40 days, compared to 2-3 days a few years ago.

The Venezuelan opposition has decried what it calls the firesale of the country’s assets as collateral for these loans.  Rosneft now holds a 49.9% stake in PDVSA-owned US refiner Citgo as collateral for a loan last year of $1.5 billion, and the Russian company is said to be taking stakes in Venezuelan oilfields.
Meanwhile the US administration, which says it will take increasingly severe measures to counter the country’s slide into authoritarianism, has imposed sanctions on a wide range of senior Venezuelan officials, including some linked with the oil industry.

One of the major question marks around US sanctions is whether President Donald Trump would impose a ban on Venezuelan oil exported to the United States, its biggest market.
Administration officials have said that "all options are on the table", but some are concerned oil sanctions could worsen severe shortages of food and medicine in Venezuela and exacerbate the already widespread destitution amongst the population.

Bloomberg says about a third of all oil produced in Venezuela is processed at American refineries on the Gulf Coast and that shipments to the US were worth about $12 billion last year.

Venezuelan officials are said to be working on a Plan B to target oil exports towards other markets if the US does ban imports from the country. Nevertheless, industry observers quoted by Bloomberg said PDVSA would be forced to sell crude at deeper discounts in other parts of the world and limited export capacity could restrict any new deals with Asian countries.

Whatever the US does, there seems an increasing likelihood that PDVSA could default on its loans, making essential imports more expensive and squeezing cashflow even further.

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