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Chávez victory could further compromise Venezuelan oil and gas sector

Author : Alan Franck

01 November 2012

Hugo Chávez won a third term as President of Venezuela on October 7, sealing his oil-rich country's economic destiny at least until 2019.

Hugo Chávez won a third term as President of Venezuela in October 2012
Hugo Chávez won a third term as President of Venezuela in October 2012

To his supporters, the populist president has helped the poor by distributing the country's vast resource wealth through a wide number of social programmes, closing the gap between rich and poor and making Venezuela the fairest country in terms of income distribution in the whole of Latin America.

But his detractors say his ‘Bolivarian revolution’ has seen an explosion of bureaucracy, cronyism and corruption, and has made Caracas one of the murder capitals of the planet.

The main source of Chávez’ aid and patronage to the poor has been Petroleos de Venezuela (PdVSA), the state-owned oil company. A decade’s worth of social revolution culminated in the overhaul of its employee structure to include more Chávez loyalists (or ‘Chavistas’) following a walk-out by nearly half of the company’s workforce. Oil production has dropped some 17% or 600,000 bpd since he came to power.

Reuters Breakingviews columnist Raul Gallegos says PdVSA’s operations have been a lesson in oil wealth mismanagement.

“Last year the company posted $125 billion in sales. More than 40% of that fed Chavez’s spending machine. Roughly $24 billion fattened state coffers in the form of royalties, taxes and dividends. And $30 billion lined Chavez’s discretionary spending funds. After covering production and financing costs, PdVSA had to borrow $9.5 billion and tap its $6 billion cash holdings to help fund investments. Despite generally rising crude prices, PdVSA has seen negative free cash flow for the last five years.”

Gallegos says the troubled state oil group may now pay its suppliers with IOUs instead of cash. 

“The company invested $17.5 billion last year, scarcely more than half what went to Chavez’s social projects. But PdVSA’s own plan requires it to invest nearly twice that much on average over the next six years to reach its goal of producing 4.2 million barrels a day by 2018. Venezuela is currently pumping 2.9 million barrels a day, according to the Organization of the Petroleum Exporting Countries, and it probably won’t reach its goal of 3.5 million by year-end.

“PDVSA’s cash squeeze hurts the rest of the energy industry, too. Debts to suppliers stood at $12.4 billion in 2011, up 80% in two years. The fact that PdVSA may now pay part of what it owes contractors using bonds, even at a time when oil prices are high. PdVSA’s joint-venture partners also face delays in their share of the oil pumped. And Chevron recently lent PdVSA $2 billion to cover investments.”

Observers say this investment starvation is the main reason for the string of health and safety related incidents under the Chávez administration, culminating in the August 25 explosion at Amuay, the country’s largest refinery, where 42 people were killed and hundreds made homeless. The President declared three days of nationwide mourning and promised a full investigation into the incident, but previous fatal incidents have seen little subsequent follow-up. Ivan Freites, a union leader at Amuay, accused PdVSA's management of playing down the scale of the disaster. His union has been calling on the company for years to improve safety standards across its installations.

Earlier this year, an engineering firm's inspection of the giant Paraguana refinery complex in Falcon state, which includes the Amuay plant, found problems in major and routine maintenance, according to a March 2012 report prepared by RJG.

Major maintenance (turnarounds) has been seen to be suffering from delays, typically of one or two years,“ the report said. ”Routine maintenance suffered a significant 'low' in 2009, the effects of which are still being felt, evidenced by a marked increase in the ratio of corrective to preventive maintenance.”

On top of its plant maintenance problems, PDVSA’s ability to sustain current production from the ageing fields of Lake Maracaibo and make new E&P investments in the Orinoco Belt, are being hampered by its cashflow problems.

Although difficult to extract and currently producing around 1.1 million bpd, Orinoco’s heavy oil could earn Venezuela $34 trillion at current market prices. The government said that its partnership with the likes of China’s CNPC and Russia’s Gazprom on six new projects in Orinoco would boost production to 2 billion bpd by 2020.  

But the 2006 nationalisation of oil and gas E&P activity in Venezuela saw many international oil companies leave the country, including ExxonMobil, BP and Brazil’s Petrobras, all technology leaders who would have been in a position to help PdVSA maintain extraction levels.

And within PDVSA, there has been a flight of top management talent to neighbouring countries after they fell out with the Chávez administration. 

Many Chávez government critics recognise and applaud the large reduction in poverty and unemployment in Venezuela, the increase in the population’s access to health and education, and the many other social benefits achieved by the President with oil-derived funding. But they are surely right to raise their voices against what opposition politician Ricardo Villasmil, in a recent piece on PvDSA in the Financial Times, called “killing the goose that lays the golden eggs”.

Few industry observers think the country’s oil and gas sector will benefit from his re-election, and there are many who expect the wholesale looting of PdVSA to get worse as Chávez makes good his pre-election spending promises. This could have potentially difficult, and perhaps even catastrophic, consequences.

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