PDVSA, Venezuela's oil gem far from its golden age

Friday, November 17, 2017

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CARACAS, Venezuela (AFP) — A pillar of Venezuela's economy, PDVSA was in its heyday one of the five top oil companies on the planet.

The state-owned enterprise has now failed to make interest payments on some of its debt, meaning it has entered “selective default,” just like the government.

The fate of the company, founded in 1976, is closely tied to that of Venezuela, which is dependent on oil and sales of its heavy crude for some 96 per cent of its export earnings.

Its bonds represent 30 per cent of Venezuela's external debt — estimated at around US$150 billion — which the government is seeking to renegotiate.

President Nicolas Maduro owes the difficulties to a fall in oil prices — which have halved since 2014 — and US government sanctions which prohibit any US person or bank from buying the country's debt.

But many economists, like Cesar Aristimuno, blame a drop in production, which is at its lowest level since the 1990s, excluding a strike observed between December 2002 and February 2003.

Currently Venezuela produces 1.9 million barrels per day, compared with 2.3 million barrels in 2016.

Before the late President Hugo Chavez came into power in 1999, that figure stood at 3.1 million barrels per day.

Revenues mirrored the decline, from US$122 billion in 2014 to US$72 billion in 2015 — to US$48 billion in 2016.

It's a stark contrast from a decade prior, when the industry newsletter Petroleum Intelligence Weekly ranked PDVSA as one of the world's leading companies, with even more power than giants Shell or Chevron.

So why such a tumble?

Experts point fingers at a lack of investment and exploration, and inadequate maintenance of oil installations.

“PDVSA is virtually the only source of foreign exchange in the Venezuelan economy, and the Government has spent everything without looking at oil investments,” said Risa Grais-Targow, the Eurasia research group's Latin America director.


The group's windfall was primarily used to finance huge public spending and a budget deficit of around 20 per cent of its GDP.

“PDVSA is ruined. Why? Because it has become a bank,” said Jose Gonzales, director of the consulting firm GCG Advisors.

Beginning in 2005, the enterprise has fed a government fund to the tune of some US$130 billion, according to economist Orlando Ochoa.

To build up the fund the budget was prepared using an oil-based price lower than in reality, Ochoa told AFP.

According to oil services company Baker Hughes, Venezuela has only 39 active wells, compared with 83 in October 2013. This threatens the “ability to improve production,” said expert Jesus Casique.

Prices have been rising in recent months and Venezuelan crude now exceeds US$55 per barrel — the highest level since 2015, even though it is far from its average price in 2014 of US$88.42.

But PDVSA has lost efficiency: the group has seen its workforce explode from 40,000 to 150,000 employees in 18 years, and producing a barrel rings up at US$40, Gonzales said.

Corruption is another scourge, with a court probe underway over 10 contracts worth US$35 billion that were over-billed upwards of 230 per cent, for example.

PDVSA is also at the heart of Venezuela's geopolitical alliances: 36 per cent of its production is used to repay loans to China and Russia, as well as sending crude oil to Cuba and the Caribbean under cooperation agreements, according to Aristimuno.

Only a small portion of the fuel feeds into the domestic market, where gas prices are the lowest in the world — a kilogramme of meat costs as much as 75,000 liters (19,812 gallons) of gasoline.

That's why, Aristimuno says, the country depends more than ever on the 750,000 barrels a day the US is buying — just as Washington increases pressure on the Maduro government.

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