Two decades after Hugo Chávez’s first electoral victory, Petróleos de Venezuela Sociedad Anónima (PDVSA) produces 60% less oil and 80% below forecasts for 2018.

For Andrés Rojas, a journalist specialized in economy and energy, at least eight factors have a definitive impact on the drop in PDVSA production:

  1. Legality: the Hydrocarbons Law limits foreign partners by establishing PDVSA as the main shareholder;
  2. Foreign Exchange: the lag in DICOM’s exchange rate amidst a hyperinflationary context and a broad gap regarding the black market rate;
  3. Management: the decisions for purchasing assets and services are centralized in PDVSA, and very little is delegated to partners;
  4. Labor: employee resignations due to poor salaries when compared with wages in Colombia, which are at least five times higher;
  5. Security: constant mugging on oil facilities;
  6. Taxes: the tax load established by Venezuela at 33% of royalties, 50% of Income Tax and taxes on extraordinary and exorbitant profits;
  7. International pressure: the sanctions imposed by the U.S. on any medium and long-term financing by any company registered in that country to PDVSA;
  8. Finance: delays in payments for PDVSA contractors and the State-run company’s financial debt, along with the policy of subsidies in fuel sold in the national market; investments dwindled after the drop in oil prices since 2014.

Economist Luis Oliveros points out that, in 1974, “Venezuela produced 3,040,000 bpd, a level it wouldn’t reach again until 22 years later (…) Between 1974 and 1990, Venezuelan oil production dropped by 27% and this is why in Carlos Andrés Pérez’s second term, and later in Rafael Caldera’s, increasing oil production becomes a priority.”

In the years prior to the presidential election of 1998, Chávez turned his criticism of PDVSA into one of his main campaign banners, focusing his speeches in what he called “a State within the State.” For him, it was inconceivable that Venezuela was bound to the oil company, and it was mandatory that the company served the coming government.

The more political power Chávez gained, and the more institutions and State powers fell under his control, the less operational and financial autonomy PDVSA had, until it finally became the main financier of his economic and social policies: that was the beginning of the “petrodiplomacy” era.

After the oil strike of 2002, Chávez accelerated his strategy of control, speeding up the operational decline. The strike helped him achieve his main desire as a candidate: eliminating the company’s autonomy, subordinating it to his government.

The Petro-State

The oil boom that Chávez, and partly Nicolás Maduro, enjoyed between 1999 and 2016, has been estimated at $900,000 million. In fact, between 2006 and 2012, the Bolivarian Revolution managed the same oil revenues handled by the governments of Rómulo Betancourt, Raúl Leoni, Rafael Caldera (in his first government) and Carlos Andrés Pérez (in his first government) put together.

A collection of mistakes

Nowadays, a series of accumulated mistakes has destroyed production in scarcely five years, slashing it at least by half (varies according to the source) from 2.82 million bpd in October 2013,  to anywhere between 1.1 and 1.4 million bpd in October 2018.

For Ernesto Tovar, a journalist specialized in covering energy topics, “The problems have been accumulating since the reversal of the Apertura Petrolera, in 2005 by order of Chávez to Rafael Ramírez, then chairman of PDVSA, when the arrogance of the chavista leadership thought that the barrel at exorbitant prices would be enough to pay for the president’s many excesses and whims regarding the management of public finances.”

In this sense, he points out that the battlefronts keep increasing: “Financial and political sanctions imposed by the United States on the main hierarchs of the Venezuelan government, which include PDVSA’s capacity to do business; the company’s commercial and financial debt with the Republic and his foreign partners and providers, without liquidity or capacity of indebtedness to invest in maintenance of its expanding oil and gas production. There’s also an alarming loss of human capital and know-how, due to internal political persecution and mass resignations.”

PDVSA, not just oil

Chávez’s absolute control over PDVSA led the company to diversify its non-priority activities. Specialists identify another cause for the collapse here. Activities not related to oil turned the industry into a “gargantuan, inefficient structure with numberless tasks,” ranging from the development of huge social plans, to paving roads.

Petrocaribe to control the OAS

Secondary sources hold that, between 2006 and 2016, Venezuela sent 92,000 bpd to Petrocaribe member countries. Even Rafael Ramírez, former chairman of PDVSA, once claimed that the supply to Petrocaribe covered 42% of the energy needs of the 18 States in the agreement.

Supporting the Cuban Revolution

On October 30, 2000, Venezuela and Cuba signed the Integral Cooperation Agreement (CIC for its initials in Spanish) for an original period of five years. Chávez’s government promised to finance the sale of crude to the island, including a daily supply of 53,000 barrels in exchange for goods and services (specifically, medical assistance).

This agreement was modified in 2006, increasing the shipments to Cuba to 90,000 bpd. The agreement was then expanded and extended to 2020. According to Oliveros, “This agreement is frequently criticized for its lack of transparency; so far there are no official figures regarding how Cuba pays, how the Cuban personnel in Venezuela is paid and how many of them are in the country. Unofficial figures indicate that, by 2015, Cuba’s debt with Venezuela surpassed $13 billion.”

Less efficiency every day

Ernesto Tovar says that, in 2006, when crude production was 2.82 million bpd and the workforce stood at 53,000 employees, PDVSA had a productivity of 53 barrels per worker. In 2016, when the company produced 2.37 million bpd (a million more than today) that relation scarcely reached 16 barrels per worker.

By 2018, when workforce estimates are unknown, if the payroll size is the same as in 2016, we would be talking of scarcely 9.5 bpd per worker.

Plummeting production

Tovar also points out that, in 2005, a plan called “Siembra Petrolera” was presented to the country and the global oil market, promising to increase production to six million bpd by 2019.

The reality is quite far from that goal, which sounds like a dream for today’s PDVSA. Production has plummeted since late 2017. Refining operations scarcely process some 300,000 bpd, ravaged by failures in their various process units, shutdowns, lack of materials and parts, and even workforce decline.

Complex future

Specialists on the energy topic agree that decision-making in the Venezuelan oil industry during the past two decades has been focused on exercising as much control as possible on revenues and, although this isn’t the only cause of the collapse, the institutional decay was key.

For Tovar, “That mixture of arrogance and mismanagement was the same that forced service providers such as Schlumberger or Halliburton to abandon their operations, in a context of political and financial crisis, without a glimpse of corrections on the part of Maduro’s government, which so far has insisted on keeping a military officer in charge of PDVSA, surrounded by figures from the president’s inner circle.”

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26 COMMENTS

  1. In a normal, capitalist country, a failed corporation would declare bankruptcy, assets would be sold off with a big haircut for creditors, officer’s stock options would go to zero, employees would be “let go”, and more efficient companies would fill the void for customer goods and services.

    IMHO, in the PDVSA clusterfuck there are a few gems that might be worth saving, namely, CITGO and the infrastructure and personnel that seem to be able to supply feedstock to Valero, Chevron, and CITGO. In a Triage approach, these gems would be protected, the remainder divided into what can realistically be resuscitated, and what should be allowed to die.

    But, in the words of a well-known American corporate savior, “To solve big problems you have to be willing to do unpopular things.” — Lee Iacocca

  2. The article is good and gives many of the reasons for the disaster at PDVSA. However, there is one word missing which turns out to be the key word: CORRUPTION. When combined with technical ineptitude and managerial mediocrity and neglect, corruption has been the main force in bringing PDVSA crashing down. The gangs led by Ali Rodriguez, Rafael Ramirez, Eulogio del Pino and Manuel Quevedo have robbed PDVSA and the Nation of no less than $100 billion, plus wasting another $200 billion in oil and non-oil related activities, the product of the insanity of Chavez and the stupidity of Maduro.

  3. Latest estimate of potential from offshore Guyana fields is 750,000 bpd, with plenty pf promising geological structures still to be explored. In a very few years, Guayana’s production may exceed Venezuela’s. Who’d have thunk it? Will desperate Chavistas, backed by Russian “freelancers”, try to grab from Guayana what they can no longer produce for themselves? Will the U.S. navy be called in to protect Guyana’s offshore production facilities? Will Guayana develop its own politics of self-destruction? The only certainty is unanticipated change.

    • “Will Guyana develop its own politics of self-destruction?”

      I fully expect some Guyana insiders are going to get very, very rich.

      Same as in Venezuela and elsewhere in the world.

      Because they can.

  4. This is riculous. The premise of this post is wrong from the beginning. Chavez destroyed PDVSA because of the nature of the troglodytes “in charge”. Rampant corruption, complete lack of knowledge of the industry and typical Chavista disdain for work, are what turned PDVSA into the pathetic limping company it is today. For them only politics is what counts, not economics. They continue to have the ridiculous and inherently dishonest belief that politics puts food on the table….. it’s work that brings you that, not B.S.

    Sadly, very few people in Venezuela have any idea about the oil industry, yet they always talk about it as if they were experts. In the end all they know, is that they want all the money, because it’s “their” oil.

    • Yes, but work is not compatible with the system in which everything is politicized. That’s the inherent flaw that socialist apologists ignore.

  5. “For Ernesto Tovar, a journalist specialized in covering energy topics – he points out that the battlefronts keep increasing: “Financial and political sanctions imposed by the United States on the main hierarchs of the Venezuelan government, which include PDVSA’s capacity to do business”

    Here we go, blaming the good old USofA …. NO it was, is and will continue to be Socialism-Communism that DESTROYED PDVSA. I’ll bet my bottom dollar that this Tover guy is just another lefty that feels the need, like so many sucio socialistas here, to blame uncle Sam.

    • Btw the “know-how”was lost when Chavez kicked out all those foreign oil companies. PDVSA was doomed after that. Acctualy PDVSA and VZ were doomed the day socialism-communism took power. We can all see what this inhumane criminal political ideology does to a country and it’s people.

      • Btw the “know-how”was lost when Chavez kicked out all those foreign oil companies.
        The loss of “know-how” began well before El Finado kicked out foreign oil companies. The loss of “know-how” began in December 2002 when El Finado began firing PSVSA strikers.

        In the aftermath of the strike, the government fired 18,000 PDVSA employees, 40% of the company’s workforce, for “dereliction of duty” during the strike.

        As a result nearly a century of oil operations in the country, there was quite a lot of Venezeuelan expertise in the oil industry. WAS.

        A number of those fired PDVSA employees went to work for foreign oil companies in Venezuela. When El Finado confiscated the operations of the foreign oil companies, those fired PDVSA strikers working for foreign oil companies got fired.

    • I just can’t believe that the editor published this part of the article knowing it’s statement is completely untrue.
      Could it be that this article direct blaming of the US’s sanctions for PDVSA’s downfall have to do with Sr. Toro’s support for Torino Capital and it’s backing of Manuel Rosales?

  6. Duncanvd,

    In the case of Cuban exported Communism-Socialism, I don’t think that the ideology remains important any longer. This is simply a model of government designed to remain in power, in spite of the disastrous negative consequences to the people. These governments are parasites that ultimately consume their hosts. This is why they must always expand and incorporate new healthy hosts (Mexico?) to exploit in order to maintain members of the club who have already destroyed their nation’s productive capacity.

    • Ask el pueblo and the useful idiots running LatAm if ideology is important. The ideology they promulgated for the last century now prevents them from saying or doing anything against the establishment left anywhere, no matter how profound their failure.

      Has any LatAm leader offered anything other than weak talk against chavismo? How much more starvation will it take for them to act?

      • “How much more starvation will it take for them to act?”
        Imho thousands and thousands of dead people in the streets is what’s needed before any real action is taken.

  7. Tovar also points out that, in 2005, a plan called “Siembra Petrolera” was presented to the country and the global oil market, promising to increase production to six million bpd by 2019.

    That was neither the only nor the earliest Chavista PDVSA “plan” to increase oil production. Statement of the Embassy of Venezuela Before the (U.S.) Senate Committee on Energy and Natural Resources (March 4,2004).

    Venezuela’s Plans for the Future:
    Having made such a successful and complete turnaround in 2003, we are now ready to
    look to the future. PDVSA’s 2004-2009 business plan is both ambitious and realistic. The plan
    calls for an increase in crude oil production capacity from the current 3.8 million barrels per day
    to more than 5 million barrels per day by 2009.
    While this increase will be achieved principally
    from substantial investments by PDVSA, there will also be sizable investments by foreign oil
    companies ‘ including U.S. companies in Venezuela. Under the business plan, a total of $37
    billion will be invested in the Venezuelan energy industry over the next five years. Foreign
    companies will account for 26 percent of this total. PDVSA’s plans provide tremendous
    business opportunities for U.S. companies.

    “Plan” is in quotation marks because such plans were never carried out. “Plans” to increase oil production were just more example of Chavista hot air- “We will do this.” Yeah, right.

  8. Before El Finado took control of PDVSA in 2002-03, it was one of the better-run government-owned oil companies. PDVSA came into being in 1976.

  9. When CAP nationalized the OIL INDUSTRY, that was the beginning of the end. Forget about any public company being well run, only in your imagination.

  10. Good article. It covers a lot of ground with a lot of common sense, sparing us a lot of the technical aspects of the oil industry which aren’t the underlying reasons to begin with.

    “Secondary sources hold that, between 2006 and 2016, Venezuela sent 92,000 bpd to Petrocaribe member countries. Even Rafael Ramírez, former chairman of PDVSA, once claimed that the supply to Petrocaribe covered 42% of the energy needs of the 18 States in the agreement.”

    Perfect socialism. Take from the rich and give to the poor. And screw the rich. They can take care of themselves, or die. No need at all to comprehend how “the rich” got rich. Esqualidos! Useless! Always trying to destroy the poor, the people, the salt of the earth. Obviously the way they got rich must be the way the socialists view things, and that’s the only way to view things. There’s only one way to get money: they stole all of it! Ergo, there is nothing to comprehend about “the oil industry”. It is just a fountain of money! That’s so very obvious!

    Only in this instance, “the rich” was all of Venezuela. Now the leaders of La Revolucion” are rich. Perfect socialism.

    One more notable quote from the article: “Economist Luis Oliveros points out that, in 1974: “Venezuela produced 3,040,000 bpd, a level it wouldn’t reach again until 22 years later (…) Between 1974 and 1990, Venezuelan oil production dropped by 27% and this is why in Carlos Andrés Pérez’s second term, and later in Rafael Caldera’s, increasing oil production becomes a priority.””

    Apparently the foreign oil interests knew before the official announcement in 1976 that nationalization would occur, and had begun damage control in 1975, in advance of that event. A couple of guys here have commented about loss of know-how (Boludo) and corruption (Gustavo). Hand-in-hand. The know-how lost was to know enough to fend off corruption. With nationalization and “change of management” corruption was no longer opposed.

    To put that in other terms, the work ethic of the management and directors of Esso, Creole, Shell, and other majors, were invited to leave the country – intentionally. Maybe the main target was the money obtainable through corruption, but as so many have said here about the futility of planning for the future as long as the regime remains dominant, the planning to obtain money through corruption would be only a pipe-dream, grabbing it would be a futile attempt, as long as the majors remained in control, with all their honest inclinations, accounting personnel, and accountability to shareholders.

  11. All comments about the many flaws of Chavez managemente of the oil industry may be true , the company was destroyed from the inside and the outside but lest we forget long before chavez took over the industry and before the oil industry was nationalized there was an oil company run direct by govt apppointed hacks who did things so badly that come nationalization in 1976 they were given the name of Pelaven (a play on the venezuelan word for Pelar gajo, or make a botch of things) , in meetings between different pdvsa affiliates when roll was called Corporven acknowledgethemselves as Pelaven , they were the laughing stock of the othere companies whose much more competent and expert professionals really knew their job , which points out to the basic fact that you have to have an organization gathering the expertise to know how to DO THINGS RIGHT , you lack that sooner of later whatever your ideology your going to be broke ……., some years after nationalization Corporven was redone to become an exemplar of efficiency and competence using professionals from both Lagoven and Maraven even if retaining most of the original employees …….We have to undersstand that EXPERTISE is the key to doing things …..(Dr Coronel can tell us a bit about this story, he was part of the rescuing of Corpoven)

  12. International pressure: the sanctions imposed by the U.S. on any medium and long-term financing by any company registered in that country to PDVSA;

    To put the blame on the US for the sanctions is a bit too much. PDVSA is doomed by its own actions; please do not deflect the blame.

  13. There is remarkably little comment about the rise and fall of the apertura petrolera which should probably be somewhere to the front of the stage.
    Between 1999 and 2006 Venezuelan production fell from around 3 mmbbls per day to somewhere between 2.5 and 2.8 mmbbls per day (depending on source). Over the same period the foreign oil companies through the redevelopment of old fields (OSA’s) and the build-up of Orinoco HO production (Strategic Associations) ADDED 1.2 mmbbls per day. The fall in PdVSA’s own-operated production during this period was little short of catastrophic. They lost close to half of their own-operated production in six years. Not content with this successful demolition, PdVSA took over control of the OSA’s (2006) and the SA’s (2007), so that those projects could benefit from a similar class of management expertise.

  14. At the time of his firing by Chavez, PDVSA head honcho Luis Eduardo Giusti López had recently been voted by his peers as the best NOC CEO in the world. Interesting to contemplate what might have been had Giusti been allowed to continue in his post unfettered. The changes that have occurred under the chavistas at PDVSA are a perfect example of “throwing the baby out with the bath water”. Once political loyalty became more important than technical competence in day to day operations, the decline and demise of PDVSA became inevitable.

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