VENEZUELA: Oil sector decline illustrative of wider economic collapse

Amid stubborn political and economic turmoil, Venezuela’s oil production has halved in less than four years. Despite holding the world’s largest proven oil reserves, the country’s current output of just under 1.2 million barrels per day (bpd) is less than one-fifth of that pumped by Russia, the world’s biggest producer, and lower than output in countries much less well-known for their energy sectors, such as China. While Venezuela was, per head, the richest country in South America as recently as 2001, it is currently experiencing an economic collapse severer than the U.S. Great Depression of 1929 to 1933. As the economy has crumbled, the country’s socialist government, led by President Nicolás Maduro, has tightened its grip on state institutions and stripped the opposition-controlled congress of any real authority. The collapse of the economy and spiralling levels of insecurity have led over a million Venezuelans to flee the country in the past year.

President Nicolás Maduro

The collapse of the country’s oil industry, and in particular its state-run oil giant Petróleos de Venezuela (PDVSA), is a result of various short- and long-term factors. Firstly, a long-running shortage of investment in both exploration and production has led to a rapid decline in drilling, which has fallen by over two-thirds since 2013. Such underinvestment is partly due to the decline of oil prices post-2014, which has substantially cut export earnings and tax revenues, as well as the government’s insistence on maintaining expensive gasoline subsidies for both domestic consumption and allied countries. Secondly, PDVSA has been unable to attract and retain skilled workers, with some 25,000 of its employees, around one-sixth of the company’s workforce, resigning in the year to January 2018. Furthermore, many of those leaving the company are white-collar workers, such as managers and lawyers, who cannot easily be replaced amid the current economic turmoil. Finally, in recent years PDVSA’s management has been dominated by political appointees, many of whom have little experience in the energy sector, and has been run highly incompetently. The most notable example of this came in November 2017 when Maduro named Manuel Quevedo, a former major general in the national guard with no known experience in the energy sector, as oil minister and head of PDVSA.

Despite the ongoing humanitarian disaster, Maduro’s position as president looks secure in the six-month outlook as he has stripped major state institutions of their independence, nullified the opposition-controlled congress and continues to receive the backing of Venezuela’s powerful security services.

Multiple symptoms exhibit the severity of the problems facing Venezuela’s oil sector. Firstly, and most significantly from a commercial perspective, is the sharp decline in output. While the country produced over 3 million bdp as recently as 2006, its current output of slightly less than 1.2 million bdp is Venezuela’s lowest in almost 70 years. Secondly, PDVSA has started importing finished fuels, including petrol and diesel, to supply Venezuela’s domestic market as it currently produces just 78 per cent of its domestic needs. Moreover, as it seeks to fulfil contracts from Russian and Chinese customers, among others, PDVSA has begun considering importing lighter grades of crude from overseas, which require less refining to produce fuels than the heavy grades more commonly pumped in the country, to process in its four refineries. Finally, U.S.-based oil firm ConocoPhillips has started to seize USD2 billion of PDVSA assets on Caribbean islands after it won an international arbitration case at the International Chamber of Commerce (ICC) over former president Hugo Chávez’s 2007 nationalisation of the oil sector. Facilities targeted by ConocoPhillips include the Isla refinery on Curaçao, a logistics and shipping terminal on Bonaire and storage tanks on Sint Eustatius.

Oil workers

With falling output and international oil prices hovering around USD60 per barrel, Venezuela’s oil sector, which has traditionally accounted for 98 per cent of the country’s exports, is producing insufficient revenues to begin to remedy the country’s economic woes. The IMF predicts that inflation will hit one million per cent by the end of the 2018, and the economy is set to shrink 18 per cent in the same period. Despite Maduro being invited to the inauguration of Mexico’s incoming president Andrés Manuel López Obrador on 1 December, Venezuela’s international isolation largely continues. Furthermore, despite the ongoing humanitarian disaster, Maduro’s position as president looks secure in the six-month outlook as he has stripped major state institutions of their independence, nullified the opposition-controlled congress and continues to receive the backing of Venezuela’s powerful security services. Following a failed drone assassination attempt on 4 August, Maduro used the turmoil to detain political opponents and tighten his grip on the security services.

Firms should not consider market entry in Venezuela until the current turmoil is resolved, either through a change of government or a negotiated political solution, both of which are highly unlikely in the short- and medium term. Companies should adjust strategic planning to reflect this political panorama. Businesses seeking to invest in the Latin America region should look…

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