At the end of 2017, oil expert Francisco Monaldi wrote an article titled “PDVSA’s Death Spiral”. So far, 2018 has proven him right. The state-owned company Petróleos de Venezuela (PDVSA), historically the heart of the economy and the main source of Venezuela’s foreign exchange, is on its way to an unprecedented collapse.
PDVSA’s downward trajectory accelerated this year with no sign of a course correction by the government. After Maduro’s controversial “re-election” on May 20, one of the president’s first moves was to appoint General Manuel Quevedo, a military man with no experience in the industry, to head the struggling state oil company.
“Manuel Quevedo, do whatever you need to do, I want a socialist PDVSA,” Maduro declared when announcing the appointment. In making his announcement, Maduro, for the first time, publicly recognized PDVSA’s production troubles. But, of course, according to Maduro, the government’s incompetence and misguided policies are not to blame for the state of PDVSA. Instead, he claimed, the drop in production is the result of “the mafias” that exist within the industry, as well as the role of the United States.
Independent experts and specialized international reports reject Maduro’s blame shifting. During a recent interview on my radio program, I spoke to Rafael Quiroz, an oil economist with a long career in academia.
The Universidad Central de Venezuela professor explained that oil production has been falling steadily since 2011. The decline worsened in the last two and a half years, and has accelerated in the last 10 months. According to Quiroz, PDVSA is on the verge of collapse due to three main factors: 1) inadequate investment in oil exploration and production; 2) the company being assigned tasks outside its operational capacity, such as building houses and importing and distributing food; and 3) the hiring of inexperienced staff and workers.
Quiroz cited two data points that underscore the extent of PDVSA’s crisis. First, crude refining capacity has dropped dramatically. PDVSA is currently operating at 34% of its capacity, producing 1.3 million barrels per day, a little over half of the 3.5 million barrels per day the company was generating when Chávez came to power 20 years ago.
Second, the company is running low on cash reserves and was recently unable to make payments on several bonds in the international market. According to Quiroz, the International Chamber of Commerce (ICC) decision against PDVSA, which forces it to compensate ConocoPhillips $2.04 billion dollars for assets seized in 2007 by Chávez, may very well be the nail in PDVSA’s coffin. Should ConocoPhillips move ahead and seize oil shipments and assets outside Venezuela, it will take a serious chunk out of the company’s much-needed—and already declining—profits.
At the same time, the number of active fields that PDVSA is drilling is dropping. According to oilfield service company Baker Hughes, in May 2018 alone, active drilling units in Venezuela dropped 67.8% to 28 units; five years ago 87 units were fully operational.
According to a report issued by the International Energy Agency (IEA), Venezuela’s production capacity dip to just 1.38 million barrels per day by the end of this year, the lowest average production since 1950.
The PDVSA debacle became visible with Maduro in power, but the seeds were planted during Chávez’s term. In June 2013, when Maduro officially assumed office, an article written by Felix Rossi Guerrero—Venezuela’s OPEC representative in the 1980s—predicted the massive deterioration to come.
In the article, titled “PDVSA at the crossroads”, Rossi Guerrero argued that the Maduro government should push for a full set of policies to strengthen PDVSA’s operational capacity while cleaning up its financial books. To that end, the author proposed a set of changes. Among them were the removal of politics and political concerns from the management of PDVSA; the reinvestment of export earnings in exploration and general maintenance; the gradual phase-out of Venezuela’s domestic gasoline market subsidies (the author calculated them at $15 billion in 2012); and finally, the reduction of the flow of subsided Venezuelan oil to other countries.
Those steps were never taken and PDVSA—and by extension the country—finds itself in the crisis is it in today. Nevertheless, Rossi Guerrero’s recommendations are still as valid today as they were five years ago. Unfortunately, as the recent appointment of Quevado and Maduro’s blame shifting demonstrate, the recovery of the oil industry is not a priority for the regime.