Nicolás Maduro’s Venezuela is falling apart.
Can anything save its oil-starved economy?
Among his first targets: the technocrats at PDVSA, especially the
company’s deeply knowledgeable then-chairman and CEO, Luis Giusti, who’d led
the drive to reopen the country’s oil sector. “Chávez saw Giusti as a potential
rival. In fact, Chávez used the slogan ‘PDVSA is part of a state within a
state,’” said Juan Fernández, a former PDVSA manager who would also fall afoul
of the strongman. Giusti, alarmed by Chávez’s plans for the oil company,
resigned just as he took office in early 1999; he was then replaced by a
revolving cast of political appointees. The departure of Giusti, who’d spent
three decades in the Venezuelan oil business and had won international plaudits
for overhauling and modernizing the state-run firm since taking over in 1994,
would prove to be bad news for PDVSA’s fortunes.
Chávez’s goal was to exert control of PDVSA and maximize its
revenue, which he needed to fund his socialist agenda. But achieving the latter
required cooperating with the rest of OPEC, which, as in the 1980s, wanted to
cut production in order to raise prices. The problem for Chávez was that many
of the PDVSA’s then-managers wanted to increase
production, by continuing the development of Venezuela’s
technically challenging heavy oil fields. To do so, they needed to reinvest
more of the company’s earnings rather than hand them all over to the
government. So the managers had to go.
Unfortunately for Venezuela, Chávez like many of the people he
appointed to run PDVSA knew nothing about the business that was so central to
the country’s prosperity. “He was ignorant about everything to do with oil,
everything to do with geology, engineering, the economics of oil,” said Pedro
Burelli, a former PDVSA board member who left the company when Chávez took
power. “His was a completely encyclopedic ignorance.”
But Chávez wasn’t the type to let that stop him. In 2001, the
former paratrooper pushed through a new energy law that jacked up the royalties
foreign oil firms would have to pay the government. It also mandated that PDVSA
would lead all new oil exploration and production; foreign firms could only
hold minority stakes in whatever partnerships they struck with the national
company.
In 2002, Chávez took two more steps to turn the once-proud PDVSA
into his private preserve. First, he installed a new president, Gastón Parra
Luzardo, a leftist economics professor who was a fierce opponent of opening the
industry to more private investment. Then, in April, he went on live television
to humiliate and fire a handful of PDVSA managers, replacing them with
political hacks. Together, the moves sparked violent public protests, which
turned into a coup attempt against Chávez.
The president survived the putsch, but his popularity plummeted —
especially inside PDVSA. By the end of 2002, opposition to Chávez had
solidified, and big labor groups called for a national strike in hopes of
pressuring him to leave office. Oil workers backed the effort, setting the
stage for what would turn out to be the critical step in PDVSA’s road to ruin.
During the two-month work stoppage, PDVSA’s output plummeted as
field workers stopped pumping and tanker crews refused to leave port.
Venezuela’s oil production fell from close to 3 million barrels a day before
the strike to levels as low as 200,000 barrels a day in December 2002.
Crucially for Chávez, however, the international oil companies
refused to join the protest. “The multinationals kept producing during the
strike,” said Monaldi of Rice University. “That is what saved him,” by blunting
the economic impact of the protest.
Chávez immediately fought back. During the strike, he axed scores
of senior executives, including Juan Fernández, one of the organizers of the
protest. In the months that followed, the pink slips kept coming, and by the
time the smoke finally cleared, Chávez had fired more than 18,000 workers. With
them went most of the managerial expertise and technical know-how PDVSA had
managed to preserve during the earlier purges.
This evisceration of the PDVSA’s human capital would prove the
most damaging of Chávez’s many moves against the company. Even his own
government soon realized the harm it had done. Accidents and spills began to
proliferate, and in 2005, a top energy ministry official admitted privately
that it would take at least 15 years to rebuild the technical skills lost by
the mass firings. Another energy ministry official even asked U.S. diplomats in
Caracas to help arrange training in the United States. And in the years since,
the situation has only worsened. Conditions at the company (and in the economy)
are now so bad that employees take home a pittance — just a handful of dollars
a month — and face political pressure to support the regime. Such treatment has
led to the large-scale flight of skilled workers: more than 25,000 since last
year, union officials say. According to Reuters, the exodus has grown so big
that some PDVSA offices have begun refusing to let their workers resign.
“PDVSA was one of the best. They really knew how to operate,” said
one executive at an international oil company with long experience in
Venezuela. “The purge massively screwed them over, bled them of guys who knew
what they were doing on so many levels. And they’ve never recovered.”
While some of his underlings clearly understood the havoc he was
causing, Chávez either didn’t know or didn’t care; determined to finance his
ongoing socialist revolution and use cheap exports to buy friends abroad, he
kept turning the screws on the oil industry. Using legally questionable
methods, he started siphoning off billions of dollars in PDVSA revenue to pay
for his social programs, including housing, education, clinics, and school
lunches.
While this strategy may have paid off politically in the short
term, it was extremely dangerous: for the more cash the government took out of
PDVSA, the less money the oil company had to invest in maintaining production
or finding new resources. Since oil fields gradually produce less oil over time
as they get tapped out, countries constantly need to dig new wells and
rejuvenate shrinking reservoirs with injections of water or gas.
Thanks to their geology, Venezuela’s oil fields have enormous
decline rates, meaning the country needs to spend more heavily than other
petrostates just to keep production steady. But as Chávez channeled more income
into other areas, PDVSA was forced to mortgage the future to pay for the
political present.
In 2005, Chávez once again turned on the foreign firms. He raised
royalty rates yet again and billed the companies for billions of dollars in
bogus back taxes. Then he began forcing foreign companies to cede the bulk of
their operations to PDVSA, a process U.S. Embassy officials described at the
time as “creeping confiscation.”
Every year, “Chávez systematically did something” to the
international firms, “whether raising their taxes or forcing them to sell oil
for local currency,” Monaldi said. These provocations exasperated foreign
executives; even officials from the China National Petroleum Corporation
grumbled to U.S. officials about Caracas’s interference. ExxonMobil and Conoco
threw in the towel and left. (This spring, Conoco finally won a $2 billion
arbitration award against PDVSA for the expropriation of its assets.) Yet many
others, such as Chevron, found Venezuela’s gargantuan potential so tempting
that they accepted the punishing new terms.
Despite the presence of these holdouts, Chávez’s increasingly
erratic behavior further reduced the investment needed to get the heavy oil out
of the ground. So did the government’s use of PDVSA’s revenue to fund social
programs and to pay off Venezuela’s sovereign debts. “During the highest oil
boom in history, when every other country in the world increased investment,
Venezuela did not, and production kept declining,” Monaldi said.
For all Chávez’s abuses and mistakes, Venezuela’s oil industry
managed to stagger along for a surprisingly long time. Production held
virtually steady from 2002 (just before the strike) to 2008, when global oil
prices peaked at almost $150 a barrel. That year, Venezuela earned about $60
billion from oil. (These production numbers come from OPEC; the government’s
own estimates are higher and viewed skeptically by the rest of the industry.)
The higher prices more than made up for the slight decline in
production — between 2002 and 2008, Venezuela’s output fell from 2.6 million
barrels a day to 2.5 million — allowing Chávez to keep spending and masking the
need for a major overhaul of the industry. But even high crude prices couldn’t
hide the deeper economic dysfunctions caused by Chávez’s efforts to build what
he called “21st-century socialism.”
Shortages of common consumer goods became endemic. A country that
was once an exporter of agricultural products had to start importing lots of
government-subsidized food — another common feature of the resource curse. “In
2007, there were already intermittent shortages,” said Patrick Duddy, who
served as U.S. ambassador in Caracas from 2007 to 2008 and again from 2009 to
2010. “There was, at times, no milk of any sort on the store shelves, not
fresh, not powdered, not condensed — and this was when oil prices were soaring.
It was startling.”
Increasingly desperate, the government soon found yet another way
to strip-mine PDVSA: by using whatever management expertise it had preserved to
run other parts of the economy that were breaking down. By 2007, for example,
PDVSA had been dragooned into producing and distributing milk; later, the firm
began importing other basic foods, from cooking oil to rice and beans. The
company’s work in these areas may have provided the country with some
short-term relief, but it further distracted PDVSA from what should have been
its core business.
Reality finally came crashing down in the summer of 2014, about a
year after Chávez died from cancer and was succeeded by Maduro. Oil prices
collapsed from a high of more than $100 a barrel in the summer to less than
half of that by January 2015. By the end of that year, Venezuelan oil was
selling for less than $30 a barrel, even as the budget was predicated on prices
of $60 a barrel. By this point,
Venezuela had become nearly wholly dependent on oil revenues,
which made up about 95 percent of its export earnings. Cheaper oil tipped the
economy into recession in 2014 and a full-blown crisis in 2015, with GDP
shrinking by almost 6 percent and inflation exploding. And because Venezuela
had neglected to diversify its economy, the country was out of options.
The one relative bright spot in Venezuela’s oil industry today is
the superheavy Orinoco fields, jointly operated with foreign firms since the
1990s-era opening of the sector. Crude production in the Orinoco actually grew
during the first half of this decade, and even now production declines have
been modest.
That’s a sharp contrast to steep output declines at traditional
oil fields solely operated by PDVSA. But even the superheavy fields are
struggling to keep production levels close to steady. Before it can export the
heavy bitumen, PDVSA needs to blend it with light oil, and since at least 2010,
Venezuela’s own light oil production has been falling.
That forces the state energy company to spend much-needed cash
importing light oil. Venezuela also imports gasoline which it gives away to
consumers for a paltry 4 cents a gallon. And it loses money when purchasers
reject its cargoes of crude oil for their poor quality, an increasingly common
problem.
In other cases, it doesn’t even get paid: While the country now sends
China 400,000-odd barrels a day, for example, Beijing considers them repayment
for Caracas’s debts.
Meanwhile, despite the collapse of its oil industry, Venezuela
continues to buy foreign oil to ship, at a loss, to the regime’s ideological
cousins in Cuba — a bitter legacy of Chávez’s plan to use Venezuela’s oil
riches to buy friends in the neighborhood.
All these problems cost PDVSA and Venezuela huge amounts of cash.
Selling oil at a discount, shipping it off to China (and Russia) to pay off the
national debt, and subsidizing Venezuelan drivers cost the company, and the
country, more than $20 billion a year, Monaldi estimated.
Among other things, this massive shortfall has made it
increasingly difficult for PDVSA to pay service companies such as Halliburton
and Schlumberger, which help it drill for oil. Last year, the two companies
wrote off more than $1.5 billion in unpaid bills owed by PDVSA. And since
they’re not getting paid, they’ve slowed their work on the mature oil fields
that were once Venezuela’s livelihood. That means even less light oil — which
makes all the industry’s other problems even harder to solve.
That toxic mix collided last year, when production suddenly
collapsed by 30 percent, marking a net decline of 2 million barrels a day since
Chávez launched his plan to use Venezuela’s huge oil endowment to build a
socialist paradise. The oil ministry now is reportedly bracing for a further
fall during the rest of this year, to as low as 1.2 million barrels a day.
The only way Venezuela, which is broke and stripped of talent, can
possibly fix its oil industry today is by relying more on foreign companies.
Even if they were given a free hand, however, it’s not clear that international
firms could turn things around anytime soon; the lack of investment in recent
years hasn’t helped the health of Venezuela’s oil fields.
“If you messed up the reservoir by overproducing or
underinvesting, then you just can’t pick up where you left off,” the
international oil company executive said. “They’ve probably done some long-term
damage to the reservoirs.”
But Caracas seems unwilling to even test the proposition and
continues doing everything it can to alienate the very businesses it needs so
badly. In April, for example, government agents arrested two Chevron executives
who reportedly refused to cooperate in overbilling for oil supplies. The two
were held for months while facing possible treason charges, which carry a
prison sentence of up to 30 years.
Real reform would require a wholesale change in the country’s
economic management: getting hyperinflation under control, establishing a
stable and realistic exchange rate, and building an enforceable legal framework
that could offer foreign investors some semblance of predictability and
protection.
Of course, it’s impossible to imagine Maduro doing any of those
things, especially after recently winning (or stealing) another term. And his
re-election carries additional short-term risks for the tottering Venezuelan
oil sector. The United States is considering additional sanctions that could
limit exports of U.S. crude and refined products to Venezuela or even ban the
purchase of Venezuelan crude by U.S. refineries.
Either move, or both, would deal yet another body blow to an
industry already on its knees. What likely can’t be put back together again is
the state oil company. “There is no money in the world that can bring that
back,” Burelli said. “You might be able to rebuild an oil sector full of
private players but not PDVSA.”
Ultimately, Caracas’s bid to nationalize the oil industry and
assert its sovereign rights to the country’s black gold has all but ensured
that less and less of that wealth will be left for Venezuelans.
With no other vibrant economic sector, the only way to fund the
government is by increasing oil production, which would require investing up to
$10 billion a year for a decade, Burelli suggested and the only way to attract
that kind of investment is by offering international companies favorable terms.
That means a bigger cut for them and a smaller cut for the state.
As Burelli put it, “To resurrect the oil sector, somebody will
have to invest in it on their terms, not our terms, and that will not generate
revenue. So, what will we live off?”
This
article originally appeared in the July 2018 issue of Foreign Policy magazine. Keith
Johnson is a senior staff writer at Foreign Policy.
Norb Leahy, Dunwoody
GA Tea Party Leader
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