PDVSA´s Lost Decade…

Venezuela’s Minister of Energy and Petroleum and president of the state-owned company, Petroleos de Venezuela, Rafael Ramirez, presents PDVSA’s 2011 earnings report. | Photo: AFP/Getty Images

DESPITE RECORD OIL PRICES, VENEZUELA´S STATE OIL COMPANY CAN´T GROW OIL OUTPUT

CARACAS – Rafael Ramirez, president of Petroleos de Venezuela SA (PDVSA), had plenty to smile about when he released the company’s 2011 results in April.

Revenue rose a full 31 percent to $124.8 bi-llion during the year, while net income jumped 43 percent to $4.6 billion, Ramirez said. The results were good enough to put PDVSA in second place on Latin Trade’s list of the region’s largest companies, right behind Petrobras.

“Few companies in Latin America have this level of revenue,” boasted Ramirez, who is also the country’s oil minister.

PDVSA has one advantage that no energy company can beat: it has access to the world’s largest oil reserves. Venezuela’s proven oil reserves come in at nearly 300 billion barrels, surpassing even Saudi Arabia.

However, the company has been slow to develop these riches. And even though the company’s top and bottom lines grew last year, the improvement was exclusively due to a 39 percent increase in the price of the country’s market basket of crude and oil products. If prices had stayed the same, or dipped, the company’s results would have been very different. And therein lies the problem, analysts say.

“PDVSA is a company in crisis,” said Fernando Sanchez, vice president of the Society of Venezuelan Petroleum Engineers. “In the last ten years, they haven’t been able to grow production. Its refineries are operating at 69 percent capacity and there is a deficit in natural gas production.”

Although the company maintains that its output is 2.9 million barrels a day, most analysts and the Organization of Petroleum Exporting Countries (OPEC) disagree, pegging production at about 2.4 million barrels a day.

This is nearly a quarter less than the output level when President Hugo Chavez took office in 1999.

And declining or stagnant production has occurred in spite of a burgeoning payroll and financial debt. The company, whose production accounts for more than 90 percent of the country’s exports and whose revenues bankroll Chavez’s socialist revolution, now employs more than 121,000– a five-fold increase since a 2002-2003 strike.

Bank debt has also grown, to $32.5 billion, up nearly 10-fold since 2008.

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“Rising oil prices have so far offset declining oil production,” said Pietro Pitts, who heads Caracas-based Latin Petroleum, an oil consulting firm. “The company seems to be content to be in a holding pattern right now.’’ Ramirez didn’t respond to repeated requests for an interview.

Critics say part of PDVSA’s problem is that Chavez has diverted much of the company’s resources to his social programs. PDVSA now manages and funds many of the country’s so-called social missions, sapping attention from the company’s core oil and natural gas businesses.

Last year, the company targeted $17.9 bi-llion for oil and natural gas investments. However, that figure was dwarfed by the company’s donations of $4 billion to the government’s public housing program, $11.6 billion to social programs, and $14.5 billion to a non-transpa-rent government development fund, which has been used to buy Russian fighter jets.

The company oversees many of Chavez’s pet projects, ranging from agriculture to low-income housing to food imports. Nearly 15 percent of the company´s workforce is now employed in non-energy endeavors.

Making matters worse, the company has neglected maintenance and upkeep of its physical plant, said Jose Bodas, secretary general of the FUTPV, one of PDVSA’s largest oil unions.

Outages continue to plague the company’s four main domestic refineries, resulting in production shortages, and forcing PDVSA to up its imports of gasoline and gasoline components from the United States, among other countries.

“The company isn’t investing enough in maintenance,” said Bodas, who claims that nearly 70 employees have died in industrial     accidents since 2004. “New workers aren´t being properly trained or equipped.”

PDVSA plans to boost output to 4 million barrels a day by 2015, and 6 million by 2019, Ramirez said earlier this year. Much of the new production is slated to go to China, where   PDVSA has announced plans to build up to three new refineries. Chinese refineries presently can’t process Venezuela’s heaviest crude, which makes up the bulk of its oil exports.

“They’ll be lucky if they can boost output to 4 million barrels a day by 2018,” Sanchez said. “They had the same 6-million-barrel-a-day goal in 2006, and 2012.”

PDVSA’s main hope for growing production is in the Faja, a wide belt of extra-heavy oil that runs along the north bank of the Orinoco River. The Faja is estimated to hold up to 250 billion barrels of recoverable crude. The oil, which has the viscosity of tar, is easy to extract but must be refined to higher blends before being processed and exported.

“The Faja is the future of Venezuela,” says Pitts. “However, they aren’t moving quickly on its development, which seems to be at a standstill. Production there hasn’t increased at all.”

Compounding analysts’ concerns, Chavez nationalized four heavy oil ventures in 2007, leading ExxonMobil and ConocoPhillips to exit the country. Although other companies such as Chevron, Total SA and Repsol remain, Chavez has eschewed fresh investments from private companies in favor of agreements with state oil companies from China, Belarus, Vietnam, Cuba and Uruguay.

Many of these new partners don’t have heavy oil expertise and lack the necessary technology. In some cases, they lack the financial wherewithal to develop their tracts. Another stumbling block involves PDVSA’s need to build more upgraders, or refineries, to process its heavy crude and make it saleable. Each upgrader costs billions of dollars, and that’s money that PDVSA seemingly doesn’t have.

What’s more, the private companies that possess the needed financial muscle and expertise, like Repsol and Chevron, both have regional problems to contend with right now, distracting from their efforts, Pitts said.

“Repsol has its issues in Argentina, while Chevron has its problems in Brazil,” said Pitts. “That means that they aren’t focusing as much as they could on Venezuela.”

Besides being slow to harness its rich heavy oil reserves, Venezuela has made little progress in developing its natural gas reserves, which are the largest in South America. The country continues to import natural gas from neighboring Colombia to meet a deficit of the fuel.

Meanwhile, cooking gas shortages persist in many parts of the country.

Taken together, these problems leave the company with little to celebrate, Sanchez said. He added, “The last ten years have been PDVSA’s lost decade.”

 

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