You hear it everywhere: PDVSA’s production will fall in 2017 but oil prices will rise so Venezuela’s exports vis-a-vis 2016 will increase, but only slightly. Coupled with a cut to imports from last year’s record lows, that means the country’s hard currency financing needs will be a few billion dollars lower this year. The verdict?

“Venezuela can probably muddle through and pay its bills in 2017.”

These quick-and-dirty assessments of Venezuela’s external accounts are great if you’re a bondholder looking to get paid.

These quick-and-dirty assessments of Venezuela’s external accounts are great if you’re a bondholder looking to get paid. But they’re useless if you’re an ordinary Venezuelan trying to get a sense of the long-term damage wrought on PDVSA and Venezuela’s public finances by incompetence and neglect. They ignore that PDVSA, the golden goose that rakes in 95% of Venezuela’s exports and feeds the county, is falling apart.

The truth is, PDVSA has been slammed with bad news recently; news that’s bad enough to impact the firm’s value and viability, even in the long-term.  

PDVSA, the golden goose that rakes in 95% of Venezuela’s exports and essentially feeds the county, is falling apart.

First there was a dangerous round of crony musical chairs in January. Maduro “created a new post of executive vice president” in PDVSA and named “vice presidents in areas including finance and exploration.” Even with PDVSA’s back against the wall, he put PDVSA’s management in the hands of political appointees with zero industry experience, whose role is to act as placeholders for some political cacique.

Take Ismael Serrano, a “Venezuelan navy rear-admiral, Hugo Chavez’s former Twitter manager and a leader of the late leftist president’s failed 1992 coup.” Serrano got the job because he’s a Tareck El Aissami man. Hell, even Delcy Rodríguez is now a PDVSA executive.

Then there was the news about delayed cargoes. Everybody knows that after years of underinvestment, PDVSA’s production has been falling. But the issue isn’t just that production is falling, it’s that no minimally competent person is managing the decline.

At the end of January, PDVSA was late on nearly 10 million barrels of refined products that the company owes the firms.

Au contraire: from October to January, “PDVSA canceled or delayed delivery of almost 7 million barrels of crude” to regular clients, such as U.S. Phillips 66 and Thai TIPCO Asphalt. Seven million barrels sell for some 300 million dollars and are almost three and a half full days of all of PDVSA’s production. Not exactly change. Reportedly, PDVSA is also late in its loan-for-oil deals with Russia and China, even after China effectively gave a grace period to Venezuela last year:

“The total worth of the late cargoes to state-run Chinese and Russian firms is about $750 million, according to a Reuters analysis of the PDVSA documents. At the end of January, PDVSA was late on nearly 10 million barrels of refined products that the company owes the firms.”

What happens if PDVSA’s delays or fails to deliver shipments too often? Its clients get sick of it, don’t renew contracts, don’t roll over loans, and eventually replace PDVSA with new suppliers or demand a price discount for continued business. Not good.

PDVSA is producing less oil, lower quality oil, and a growing share of its exports aren’t generating cash.

Then there was the news of PDVSA’s non-cash sales. Marianna Párraga and Brian Ellsworth from Reuters report that “PDVSA aims to boost crude deliveries to China by 55 percent in 2017.” This is serious, considering that deliveries to China are largely repayments and don’t generate fresh cash. You know which sales do generate cash? Sales to the U.S. But, as reported by Marianna Párraga, those are at a 25-year low.

The story here is not just that PDVSA’s production has been falling and that non-cash exports to repay Chinese and Russian debts have risen. The story is also that the quality of Venezuelan crudes has fallen and that Joint Venture (Empresas Mixtas) partners are taking a growing share of export revenues.

According to a recent paper by Igor Hernández and Francisco Monaldi, even though PDVSA’s production fell 8% between 2010 and 2015, production in traditional east and west regions (light, medium crudes) dropped disproportionately by 24% and 16%, with production in la faja (heavy gunk) growing by 12% to compensate. In the same period, production in fields operated solely by PDVSA fell 28% from 2.1 mbpd to 1.5 mbpd while production in fields operated by JVs rose 42% from 0.8 mbpd to 1.2 mbpd. Overall production fell by another 10% in 2016.

On balance, PDVSA is producing less oil, lower quality oil, a growing share of its exports aren’t generating cash, and a growing share of production is happening with JVs, which keep a cut of export revenues.

Production in fields operated solely by PDVSA fell 28%  while production in fields operated by JVs rose 42%.

Coupled with low oil prices, these developments have crippled PDVSA’s cash-flow which in turn has exacerbated production problems. It’s a vicious cycle, a negative feedback loop. The cash crunch at PDVSA has forced it to cut its investment and operations budgets from already record lows, again. PDVSA is now at the point where it’s not just scrimping on maintenance and equipment —which it shouldn’t shortchange, but can— and is now cutting the purchase of genuinely vital inputs and services.

As this Reuters story by Alexandra Ulmer and Brian Ellsworth points out, PDVSA faces “a sizable deficit of light crude and naphtha [in 2017.]” Without these lighter crudes to mix with the heavy gunk pumped out of la Faja (about 45% of overall production), the gunk will sell for much less than it could.

It’s depressing.

Diluent should be a sure bet for PDVSA and any financier looking to bankroll a sound business venture. For every barrel of diluent you buy and mix with gunk from la faja, you get a new mixture that’s worth more than the two things sold separately. You add value just by stirring the damn things. That PDVSA can’t even secure financing for diluent is the best example of the meteor that hit its operations and credibility.

This is the kind of problem native to chavismo mágico that no MBA prepares you for. Sort of like this other story by Marianna Párraga, which explains how tankers full of oil are stuck at sea because PDVSA doesn’t have enough cash to pay to clean their hulls. Pathetic.

That PDVSA can’t even secure financing for diluent is the best example of the meteor that hit its operations and credibility.

As if that wasn’t enough, we recently learned of PDVSA’s latest stealth attempt to privatize oil fields. According to Alexandra Ulmer and (you guessed it!) Marianna Párraga, PDVSA recently offered a 10% stake in the Petropiar venture to Russia’s Rosneft. Nobody knows at what valuation PDVSA will sell equity in that project for, but my guess given that the sale is transparently illegal without congressional approval, low oil prices, and PDVSA’s desperation for cashis much, much less than it’d be worth in normal circumstances. (And that’s assuming Chevron waives its right of first refusal, which they may not!)

In exchange, PDVSA will forego the revenues of 10% of that project in perpetuity. Bread today, hunger tomorrow. It’s an outrage.

In sum: Pana, se le estan cayendo los cauchos al carro. Your excel model might tell you that 2017 looks a lot like 2016 for PDVSA and Venezuela. But there’s no model that captures chavismo mágico’s wanton destruction, no accounting shorthand for the putrefaction of a whole management culture from within. Our golden goose is beginning to look like the rest of the country: like it’s in collapse.

20 COMMENTS

  1. Excellent report on the technicalities, but I don’t see the key word even once in the entire article: CORRUPTION. Galactic, astronomical embezzlement.

    That’s the main reason, by far, behind PDVSA’s demise.

    “..long-term damage wrought on PDVSA and Venezuela’s public finances by incompetence and neglect. ”

    It’s not incompetence, or ineptitude. There a plenty of savvy engineers, Venezuelans and foreign experts. People with extensive experience, like Gustavo Coronel, who often posts here. But these valuable professionals were mostly kicked out by Chavismo, because they were HONEST. And were replaced by corrupt mercenaries, complicit with the filthy regime. So the real cause of the so-called “ineptitude” or “incompetence” is massive corruption, that’s all.

    Additionally, if there is no maintenance, abysmal finance management, obscure, twisted deals with China and Russia.. why?? You guessed it: $$$$. Corruption. Theft. PDVSA is nothing but a den of mega-thieves, from top to bottom.

    Maintenance does not generate $$$ under the table for the crooks, you see? Cleaning an oil tanker at sea is too much work, expensive, so they figure: “cuanto hay pa’ eso?” Nada? “Como quedo yo ahi?” Deja esa vaina asi pana, que se jodan esos barcos, si no hay contratico, no se mantienen.” Same happens with Corpoelec, no maintenance, lights out, because “el mantenimiento no da, pana, pura perdida.”

    Chavismo named Elogio del Pino as President because he’s a corrupt puppet of the regime, a crook, a thief, complicit with the dictatorship. Down from del Pino, all the employees are in the Guisos, Tigres, Segundas, favorcitos.. heck, PDVSA is everywhere cocinando, even in the Food Industry now.. Why? You guessed it again.$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$.

    And Maduro’s new “Vice Presidents” to “defeat corruption”? What a cruel joke. You can bet they just want a piece of the pie, crooks, all of them, you can bet the house on that.

    http://www.reuters.com/article/us-venezuela-pdvsa-idUSKBN15D12D

    • Epa! Thanks for the comment! I definitely agree that corruption is a massive problem in PDVSA. But my take is that more it’s a consequence of other, more fundamental institutional issues (like mismanagement, poorly designed incentive structures, lack of transparency, nepotism, etc), rather than the cause. A symptom more than the underlying disease. I think the way to “fight corruption” is by getting the other things I put in parentheses right.

      • Both corruption and mismanagement are correct answers- both of which are consequences of Chavista control of PDVSA. Consider corruption. Chávez took control of PDVSA in order to get control of Venezuela’s cash cow. While his explicit reason for doing so was to channel more of PDVSA’s money to funding of social programs, corruption was an inevitable byproduct, Although Chávez talked a good game in his 1998 campaign about reducing or eliminating corruption, his toleration for corruption among his cronies was made evident early into his administration. Why would Chávez-controlled PDVSA be any different?

        Channeling PDVSA funds to social programs meant that PDVSA had less money available for maintenance and investment: incompetence. In 2007, a petroleum consultant informed me that in his inspection tours of Venezuela, the deterioration in maintenance of equipment was quite evident. That was 10 years ago. That neglect has now been going on for nearly 15 years. The vast increase in PDVSA personnel after Chávez took over also reduces the funds available for maintenance and investment.

        Summation: due to corruption, funds transferred to social programs either inside or outside PDVSA, and padding the payroll with incompetents, PDVSA has steadily been deprived of funds needed to operate its business. Not having the funds to clean tankers is a rather damning example.

        A consequence of the strike was that PDVSA lost a substantial proportion of its professional staff, which in nearly all cases were not replaced with professionals of equal competence.

        Your posting has done an excellent job of fleshing out the current consequences of Chavista control of PDVSA.

  2. I see it the other way around:

    The fundamental problem, ‘the root of all evil’ is corruption. The consequences are ‘mismanagement, poorly designed incentive structures, lack of transparency, nepotism’, ineptitude, incompetence, lack of maintenance, financial collapse, etc.. PDVSA’s personnel stinks, because they are all corrupt. Thus inept, non-transparent, nepotist, etc.

    For decades, Venezuela proved they can dig large quantities of oil, provide expert technicians, nationals or from the USA, plan, maintain, and run PDVSA financially, making large profits. But that’s before Chavismo, when there was some corruption, but not nearly as much. They know exactly how to do things, what should be done, pero.. “cuanto hay pa’ eso?”

  3. Corruption is made rampant were the method for hiring and appointing people (and firing them) from Pdvsa jobs is based not on the professionally monitored assessment of their performance and conduct but on their political connections and loyalties everything else be dammed !! Where the method for contracting goods and services is arbitrary and discretionary and not based on a regimented competitive bid system where the best qualified offer gets chosen……!! Pdvsa’s breakdown is the result of the abandonment of those professional systems for the hiring and promotion of people based on their objectively measured technical credentials and those contracting practices and rules that internartional oil industry regularly uses to award contracts only to the best qualitfied. Also to the adoption of politically and ideologically motivated policies for the sale of Venezuelas oil production not to those that offer the best commercial terms but to those which can help the regime big men get the most flattery in international forums.

    You want to keep good milk from becoming sour you put it in the refrigerator , you want to get the employees of PDVSA management and workers honest place them inside an organization run according to professionally tried systems…!!

  4. “Corruption is made rampant where the method for hiring ..”

    Again, it’s the other way around.

    The twisted “methods for hiring”, the “ineptitude”, etc, are all due to corruption, in the first place.

    The best and the brightest are kicked out in corrupt companies. Too honest.. What’s left? Today’s Kleptozuela, where only a small minority is not into some Guiso of sorts.

    Try and do business, any business, in Kleptozuela….. See how many people you have to bribe, if you’re not getting kick-backs yourself. That’s why millions of us left the country, besides insecurity and crime.

    • People forget that from 1976 to 2002 (some 26 years) the oil industry was ran on a meritocratic basis , with minimal corruption and according to management standards that were recognized among the best in the oil world , this was the result of applying systems ,policies and standards for hiring promoting its personnel and for contracting and marketing which met the highest standards of the best run oil businesses …..!! all this while the oil industry was controlled by public entities that wisely restrained themselves from ‘killing the goose that laid the golden eggs’

      Corruption can be controlled if the right systems practices and policies of modern businesss are applied to any organization be it public or private provided their operations are shielded from partisan political meddling and the pols corrupt clientelar practices !! it is the latter threat that offers the greatest challenge…!!

  5. Frank, in addition to all mentioned, Venezuela must import some 100-150m bbl./da.of gasoline at intl. market prices to supply the internal market, due to collapsed/collapsing non-maintained refineries. Venezuela’s real net income from oil exports/imports cannot even finance its vastly-reduced vital imports of food/medicine/industrial parts/equipment/etc. much less its intl. debt servicing–rabbits are being pulled out of hats, as intl. reserves maintain an unbelievable/probably fictitious $10 bill. or so for many months now….

    • Very true. I forgot to mention developments in the domestic gasoline market. They only add to the operational disaster.

      • Now, why are these “collapsed/collapsing non maintained refineries”? Ineptitude? Lack of competent Engineers or Financial Gurus available for cheap Worldwide?

        Nope.

        Guisos. Massive Corruption. At all levels, everywhere. Face it.

        That’s why. Stop scratching your heads at technicalities. The day there’s a bit less GALACTIC CORRUPTION, magically, all the experts will make things work for a profit.

        AGAIN: The Know-How is there, everywhere, what’s missing is POLICE, Jail, Thugs in Jail, PDVSA is Rotten to the Core. Comprende?

  6. If I are reading this board correctly, there is a consensus that the government should own and manage the oil resource but the present owners/managers, the chavistas are incompetent and corrupt and are wasting this patrimony while starving the people.Moreover, the Venezuelan public is split with the Chavistas perhaps constituting the largest single party, a plurality, but the vast majority is hopelessly divided into small parties that cannot even jointly run an opposition party much less a government. Is it just me or is it crazy under these circumstances to continue having your goverment own and manage your oil? It strikes me that elections in Venezuela are less about a choice among different policy offerings but more accurately about who controls your oil.

    • Note that the gov’t has been very adept at exacerbating division within the opposition. Through a combination of strategic “overtures” or attacks, plus Stasi-like surveillance used to guide either blackmail or bribes, the gov’t has been very effective at the “divide and conquer” game.

  7. “People forget that from 1976 to 2002 (some 26 years) the oil industry was ran on a meritocratic basis , with minimal corruption and according to management standards that were recognized among the best in the oil world ..”

    Well, I wouldn’t overestimate a ‘meritocracy’ or ‘minimal corruption’ EVER in Kleptozuela, Bill.

    It’s just that they didn’t steal THAT much, as they do today, and some of the PDVSA top executives had minimum standards, while being forced to turn a bling eye on the ‘irregularities’. But hey, most 3rd world countries with riches can live with that. Corruption happens, except in Denmark or Switzerland or Finland, everywhere.

    El detalle is : How much corruption?

    Venezuela, Iraq, Syria, now sing ” We are the Champions — of Corruption — in the Woorldd!!” By all independent accounts, and that’s only public corruption – look it up – Transparency Int;l, etc, How about Private Corruption: THEFT, Embezzlement, I’m talking the Derwicks and many more, who have stolen more Trillions that you’ll ever see (google it up)

    I mean, when it comes to embezzlement and unprecedented THEFT Wordlwide, Historically, I bet, with all the oil, per capita, Venezuela holds today the Gold Medal as Ladrones Mayores en la Historia: Top Crooks in the History of the World.. You see, North Korea or Iraq never had that much money to steal. Chavismo did.

    • Even the best physician in the world will sometimes incurr in medical errors , its a statistical reality , there is no such thing as an absolutely perfect performance , same with corruption , some measure of corruption is inevitable in most organizations , natural part of the human condition , nothing to get riled about (unless you love bragging indignantly about your own righteously perfect standards ) what is important is that corruption be exceptional , not the rule , that it be kept under enough control that the primary goals of the organization can be met …!!

      Corruption is rampant in todays Venezuela , but for many years even though it existed there were areas of activity (such as the now ravaged Pdvsa) where it remained controlled and did not prevent the oganizations from meeting their institutional and business goals ……This ceased to be when the systems policies and pracices for the healthy management of a business (Pdvsa was an institutional business) were destroyed by Chavez political maelstrom allowing corruption to flourish and become destructive and endemic …….!!

      Corruption can be controlled if there is the will to control it …….using the methods and systems that work everywhere in the advanced world to control it ……also not letting its perpetrators go impune for their misdeeds ……..EQUALLY IMPORTANT to appoint and promote officials to positions of responsability who are competent and skilled in the performance of the institutional functions they are entrusted with …..and not allowing partisan politics to interfere with their work……

  8. You all are correct, but there is one word that summarized it “Management”. If you do not have the best professionals to handle your golden eggs industry, you will experience all the things you guys mention…. Let’s put it this way, if you are flying at 10.000 feet and take the pilot out and instead put in the pilot’s seat someone that does not how to fly a plane, the plane is going to crash, as simple as that!

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