Since Hugo Chavez assumed the presidency in 1999 Venezuela’s state-operated oil industry, Petrleos de Venezuela (PDVSA) has deteriorated significantly. Internal squabbling, charges of executive corruption and poorly managed production operations have plagued Venezuela’s national oil company. Strategic planning, research and development, and production are at their lowest levels since Venezuela nationalized the oil sector in 1976.
PDVSA has had seven presidents since 1999, all of whom have lacked a knowledgeable expertise of the oil industry and were appointed for its political loyalties. On several occasions, PDVSA has fallen short of OPEC oil production quotas, necessitating the purchase of Russian oil to fulfill their obligations. However, such deficiencies are largely overlooked as Chavez apportions a considerable share of oil revenues to social subsidies, further solidifying his political base of support and hampering oil sector reinvestment. Venezuelan oil nationalization as a political instrument has set back the oil industry dramatically.
Searching for Rigs
However, since the beginning of 2007 internal PDVSA problems have been compounded by rare revelations of company error and poor strategic planning by company executives, specifically as it relates to the hiring of sufficient quantities of oilrigs. Speaking before the National Assembly last week, PDVSA director, Luis Veirma, informed legislators that Venezuela currently has 120 active rigs, falling well short of last year’s target of 191. Although many states are having difficulties acquiring drilling rigs due to the continued growth of exploration internationally, rig contractors are reluctant to operate in Venezuela due to new rules requiring contractors to donate 10 percent of the value of their contracts to social welfare projects, which have largely kept Chavez in political office.
Political Loyalties Trump Industrial Competence
Moreover, political tensions between radical Chavez loyalists, and the less ideological technocrats that operate PDVSA have caused internal management disorder within the company, with unwitting mid to senior level managers often bearing the brunt of political obtrusiveness. Venezuelan opposition newspapers have reported that several mid ranking managers have been forced out of PDVSA in recent months due to questions surrounding their loyalty to the Chavez administration. Similar purges occurred in 2003 when nearly half of PDVSA’s workforce was terminated for their alleged involvement in the short-lived 2002 political coup.
The opposition daily newspaper, Tal Cual, reported last week that similar political affiliation and Chavez-loyalty tests were being performed on engineers at Sincor, a former venture of Total and Statoil, that was recently ceded to the Venezuelan government. We anticipate purges within Sincor, likely hindering the companies operations through the elimination of qualified personnel for political reasons.
Looming National Oil Protests
PDVSA’s production capabilities may be hindered further in the coming weeks as union leaders continue to threaten large-scale protests at production facilities throughout the country over employment benefits that executive managers have failed to approve as previously agreed upon. Any work stoppages will hinder production capabilities and rattle the international oil markets further.
The general state of decline within PDVSA is demonstrated by the country’s overall drop in daily crude oil production since 2003. Although official Venezuelan production figures show the country producing around 3 million barrels per day (bpd), global energy agencies, including the Organization of Petroleum Exporting Countries (OPEC) say Venezuelan production has been around 2.5 million bpd since this time period. However, the Paris-based International Energy Agency has recorded output at 2.37 million bpd, down about 230,000 from 2006.
PDVSA Production Future and US Supply Impact
We anticipate an even larger decrease in production into 2008 as PDVSA struggles to operate newer fields in the Orinoco Belt that were formerly controlled by Exxon Mobil, ConocoPhillips and Chevron. PDVSA’s capability to turn the Orinoco Belt’s low quality oil into around 570,000 bpd of lighter oil remains unclear. The process is complex and likely beyond the means of PDVSA’s depleted scientific and engineering ranks. Moreover, foreign oil companies remain hesitant to invest heavily in the country, following numerous expropriations of private investment and pending constitutional changes that could dramatically alter the framework for foreign investment and private property rights throughout the country.
Although Venezuela remains one of the leading suppliers of oil to the United States, exporting 1.4 million bpd in April (US Department of Energy figures), anticipated falling production levels would impact export to the US, likely increasing US reliance on shipments from Russia, the Middle East, and West Africa.
Chavez has maintained high levels of public support largely through the numerous social services Venezuela’s oil industry profits allowed the state to deliver. However, dipping oil prices during parts of 2007 have decreased Venezuela’s oil income by an estimated 24 percent, eliminating US $ 15 billion from state coffers. Despite these temporary price decreases, Chavez continues to stake PDVSA’s future on oil prices climbing to US $100 a barrel. As we previously stated, we predict the price of Brent crude oil to remain above $75 a barrel for the remainder of 2007 and into 2008.
