Trouble with Petreolos de Venezeula?

By John Farmer.

By now we have been exposed ad nauseum by the proposed plan for us to buy oil from Venezuela on the endless credit plan, however, can Venezuela actually deliver the goods? An article in the Economist (Oil's dark secret - issue of August 12th) makes interesting reading.

Venezuela's national oil company - Petreoleos de Venezuela, or PDVSA as it is known, was ceated out of the nationalisation of their oil industry in the 1970s. Former foreign concessions became free standing divisions within PDVSA; many of the existing managers and staff remained in place. Relatively free from political interference, the company developed a reputation of competent professionalism. Less than a tenth of their oil fields actually spout oil, the remainder require gas and water pumped into the ground to force the oil out. Moreover, the oil produced is more viscous and acidic than the norm, and so harder to handle. It has been estimated that Venezuela has to add 400,000 b/d (barrels per day) of capacity just to maintain output, which they did. In the 1990s they undertook to expand capacity to 6.5M b/d by increasing their own output, and inviting foreign companies to invest in marginal fields.

Then along came Hugo, and the troubles began. In December 2002, the managers, along with half of PDVSA's 40,000 eomployees went on strike for 2 months, largely in protest against the cut in re-investment budget and political interference. Hugo eventually sacked them all, and PDVSA at a stroke lost almost all of its most experienced and qualified professionals. In addition, it is estimated that 400,000 b/d were lost permanently. Gone was operational independence.

The results are predictable. Re-investment has slumped further, cronyism is rampant, and production has dropped by 50% according to estimates (PDVSA claims 3.5M B/D, there is no way to confirm this independently, most estimates put it at 1.6M B/D and slipping). The Financial Times reported earlier this year that Venezuela's shortfall forced it to strike a $2 billion deal to buy about 100,000 barrels per day of crude oil from Russia to avoid defaulting on contracts - a claim Hugo says is false. Who do you believe?

As the US (and the caribbean) are one of the major customers for Venezuelan oil, it is no doubt ironic that the shenanigans of Hugo have in part contributed to the high cost of gas, to which he is now offering to subsidise (using Russian oil, if the Financial times is to believed)!

Poor Venezuela, surely they deserve better.

I do hope Minister Miller is paying attention, as their subsidised oil socialism is clearly not sustainable under current conditions.