Cutting Bone

Schlumberger is a firm PDVSA simply cannot afford to stiff, because it can't produce oil without its help. And yet, that's exactly what PDVSA is now doing.

16

Schlumberger, the giant oil-field services company, announced yesterday it’s cutting back operations in Venezuela, after PDVSA failed once again to settle its accounts payable with the firm.

The company’s decision to pare back its operations in Venezuela is a big deal: oilfield service firms like this do much of the high tech, knowledge-intensive service work it takes to keep PDVSA running. Just about any yahoo can stick a drill bit in the ground, push a button and make it go whirrrrrr! – but the work of making sure that drill-bit is the right one for that geology, of performing the sophisticated maintenance work it requires, of knowing when it needs to be replaced, at what angle it should be put in, how hot it can get for how long, and a very long etc. – that’s all high-tech work that you need firms like Schlumberger to carry out.

In particular since PDVSA’s technical and engineering soul got ripped out following the 2002-2003 strike, the division of labour has become more stark: PDVSA puts in the brawn, the oilfield contractors put in the brains.

The news comes after the latest tiff in Schlumberger’s years’ long tug-of-war with what seems like the Client from Hell. In a brief few grafs, Reuters’s gives you a sense of what dealing with PDVSA’s been like these last few years:

“Schlumberger appreciates the efforts of its main customer in the country to find alternative payment solutions and remains fully committed to supporting the Venezuelan exploration and production industry,” the company said in a statement.

“However, Schlumberger is unable to increase its accounts receivable balances beyond their current level.”

The company said the reduction will take place through this month, allowing for a safe wind-down of operations.

Schlumberger in 2013 gave PDVSA a $1 billion credit line to allow it to continue delivering services despite the accumulating debts. It took a $49 million loss last year due to Venezuela’s currency devaluation and another $472 million in 2014 for the same reason.

PDVSA’s press office, meanwhile, awoke from its decade-long nap to deny that Schlumberger is doing what Schlumberger says it is doing.

Reuters says that, in a statement, the company

…added that “additional work required by the corporation will be distributed to other companies that provide similar services,” without elaborating.

Which, when you think about it, is totally bizarre: “They’re not cutting back on the work they do for us! Besides, we’re hiring other companies to do that work anyway!”

I have a four year old whose arguments make more sense than that.

That PDVSA doesn’t even have the money to pay guys like this – guys they pretty much need to keep the wells running, and not even just in the long term, but pretty much in the short term too – tells you all you need to know about the scale of the cashflow crunch the company’s now facing.

Schlumberger’s not exactly a new kid on the block in Venezuela. They’ve been doing business there since Pompeyo Márquez was seven years old: all the way back in 1929. That’s a long time ago. Even now, Venezuela still accounts for 10% of the firm’s worldwide business. A company like that doesn’t begin to withdraw from a market like this unless things have gotten pretty damn extreme out there.

The press statements about the partial pull-back vaguely noting PDVSA has now transferred ownership of unspecified “fixed assets” to the firm in lieu of $200 million worth of past due bills. Needless to say, nobody bothers to tell Venezuelans which specific bits of our oil industry are being privatized to cover the maula state’s uncollectable debt. But I think it’s safe to say, now: things have gotten pretty damn extreme out there.

16 COMMENTS

  1. Francisco, $200.00 worth of assets? Please elaborate. It’s either a typo or an attempt of humor that evades me…Thx, Gordon…

  2. Is there anyone who has a guess as to Venezuela’s (including PDVSA) current accounts payable balance? Would anyone else be not shocked to find out that Venezuela’s current outstanding bills (not including bonds) exceed its current reserves?

  3. “…knowledge-intensive service work it takes to keep PDVSA running. Just about any yahoo can stick a drill bit in the ground, push a button and make it go whirrrrrr!…”

    Again the complex-ridden chavistas believing they can do a job they’re not prepared for, taking ignorant shmucks over any person with a minimal expertise because they can’t stop hating meritocracy and actual preparation because deep down, they still are pinned by their superiority complex that from childhood made them think that those that studied were just fag nerds.

  4. From SLB’s annual report:

    “Schlumberger has experienced delays in payment from its national oil company customer in Venezuela.  During the fourth quarter of 2015, Schlumberger entered into an agreement with its national oil company customer in Venezuela to receive certain fixed assets in lieu of payment of approximately $200 million of accounts receivable.”

    Receivables net of doubtful accounts as of 31 December 15: USD 8.78bn

    “As of December 31, 2015, only two countries (Venezuela and Mexico) individually accounted for greater than 10% of Schlumberger’s accounts receivable balance. ”

    Lower bound for Venezuela receivables: USD 878m. Schlumberger’s net income last year was USD 2.01bn.

  5. One has to ask what is this, a desperate move to get paid, cut their losses or a power play to get more now based on the precedent with gold and the Country’s really desperate situation:

    – This news could be in fact the first salvo from SLB to force PDVSA to give up reserves in exchange to stay in country for a much more lucrative deal in the long term. The strange thing is that it was made public thus forcing the negotiation table by embarrassing the country needs to be analyzed beyond the actual context. It is quite a power play from SLB which although they do that (a lot), they are generally quite reserved about these things.

    – PDVSA may trade some (or lots) of fields to SLB under production sharing agreements. By the 2001 Gas and Hydrocarbon Law signed by el finado, PDVSA has to retain largest share hence the same share for investment and production costs. If keeping up with the law mandated royalties (20-30%) plus local taxation, and without hard cold money, PDVSA may just give up a lot more producing fields just to pay the SLB tab.

    – The Venezuelan government just gave a lot in thecase of gold by expanding the deal with Canada Gold Reserve at the expense of “ecosocialismo” (HA-HA-HA).. why not doing the same with the “black gold”. (Everyone makes timber of a fallen tree)

    – The void could be filled with small mom & pop services companies that includes (of course) some international and own Venezuelan firms a lot more willing to get into shadowy deals with PDVSA. I doubt SLB wants that.

    – Small companies may step in at the cost of increasing corruption, reduce efficiency and ultimately end up costing more money to the country. For a production log (registry) a normal price would $10,000; they will charge $60,000 and get the $10,000 as down payment leaving $50,000 in debt.

    – Chinese services companies may try to get more market share. However, it may end up without payment a la SLB and credit just dried up…

    – PDVSA may pass the tab of critical services to the remaining existing operators particularly the traditional/western ones. So, the Shells and Chevrons will pay for the services to avoid getting any negative actions from the government and stay producing in the country. More or less in the same fashion a rancher at the border pay for the “vaccine” to the guerrilla. (PDVSA is already doing just that!!!). The issue there is Venezuela’s lower oil quality and current market pricing, there may not be a lot of leverage to force international operators to this scheme anymore.

  6. Although Schlumberger is the leading company in this matter I’m almost certain that PDVSA will find an alternative, albeit a temporary one, probably a Chinese consultant paid by the Chinese government at least for some time.

    The day China turns its back on Venezuela that’s the day our oil industry will really collapse, but indeed Schlumberger leaving such a big customer behind is a reflection of the status of things.

  7. Venezuela is simply “”BuBuBuBuBuBu…Bad To The Bone” (Schwarzenegger, dixit). They, like Cuba historically, under Chavismo with oil not going up, simply do/will not pay their commercial bills, and their international debt bills either for much longer. Oil at $40, where shale oil starts to be profitable, at least on bare current costs, with Iran ramping up, barring future sanctions, with a global warming future catastrophe growing consensus, and with production cost of at least $20/bbl, with $33/bbl ($7 less than WTI at $40), means that at maybe 1mm/da. sold for real money X $13 profit/bbl=$13 mill./da. X 30 das.=$400 mill./mo. X 12 mos. = approx. $5 bill./yr., vs. at least $30 bill./yr. needed just to bare-bones feed/industrially supply the Country, which supposedly/doubtfully has $13 bill intl. reserves. But, hey, not to worry, Venezuela Potencia has 15 Motores that are going to produce it out of its Hell, coupled with the new “Corporacion Tiuna” military corp., whose charter allows it to produce/import/export just about anything, and which will supposedly tie in enough Venezuelan military, as a similar Cuban construct did for the Cuban military, to allow the completion of the Cubanization of Venezuela….

  8. Pdvsa just doesnt have the money to keep going , its very clearly in desperate financial straits , they try to go from magic trick to magic trick to buy a bit of extra time but at some point the bag is emptied ……this decision from such essential service contractor is clear evidence that Pdvsa is very near the death throes of its financial viability !!

    The notion that one can buy services by exchanging them for a share in the exploitation of an oil field forgets that all oil from such fields by law must be sold to Pdvsa and that Pdvsa is long in arrears in paying the companies they partner with their share of that production income ……..!!

  9. I wonder, when a company cuts its business with the regime like this, is it essentially writing off its accounts receivable? In other words, do companies tolerate this kind of indebtedness – and allow it to grow, to a point-because they know the regime will not pay any outstanding accounts if they walk away? And does this sort of default scare away anyone else who might want to pick up the work?

  10. Unfortunately, it’s not just the large multinationals that aren’t getting paid. A friend of the family has a couple of contracts with PDVSA to provide various services. These contracts are her life-blood and she has not been paid for many months. Many of her direct and extended family relatives are employed by her, so much of the family’s income depend on payments from these contracts as well – and everyone is starting to hurt and are getting very, very nervous about what the future may bring.

  11. Based on my experience, the lack of payments have been happening for quite some time (we are talking about years). I think Slumberger has turned the blind eye for way too long betting on a long term relationship which at some point of the future will turn profitable again. However, low oil prices makes more difficult for them to keep betting on future. So, they decided to finally show them they can’t keep playing PDVSA’s game anymore. I don’t think this will have a remarkable impact unless other contractors start doing the same thing.

Leave a Reply