Outlook grim in Venezuela’s essential oil industry
May 4, 2013, 2:38 PM
MORON, Venezuela (AP) – Only the filthy water from broken sewer pipes keeps the dust down in front of Ramon Boet’s shop, which sells statues of saints and other religious objects.
In the distance, massive tankers pull up to a half-century-old refinery that processes much of the oil that earns Venezuela more than $100 billion a year.
“It doesn’t help us at all,” Boet, 58, says as a blackout snuffs the lights in his shop in this Caribbean coastal town. He closes before dusk. Too many robbers.
The oil flowing from the El Palito refinery sells for more than five times what it cost when President Hugo Chavez took office in 1999. Yet when Chavez died in March he left Venezuela’s cash cow, its state-run oil company, in such dire straits that analysts say $100-a-barrel oil may no longer be enough to keep the country afloat barring a complete overhaul of a deteriorating petroleum industry.
The situation is more urgent than ever, analysts say. The price of crude has slumped in recent weeks and Chavez’s heir, Nicolas Maduro, appears to have done little to address declining production, billions in debt and infrastructure deficiencies that have caused major accidents including a blaze that killed at least 42 people at Venezuela’s largest refinery last year.
Maduro has retained Chavez’s oil minister and the head of state oil company Petroleos de Venezuela S.A., Rafael Ramirez. And he appears intent on continuing to send cut-rate oil to members of the 18-nation Petrocaribe alliance, for which Venezuela is hosting a summit on Saturday.
Ramirez said Friday that Maduro would use the meeting to propose creating a special economic zone for group members.
PDVSA, which accounts for 96 percent of the country’s export earnings, no longer “generates enough income to cover all its costs and finance its commitments,” said Pedro Luis Rodriguez Sosa, an energy expert at the Institute for Advanced Studies in Administration in Caracas.
He said that “you can see PDVSA is in trouble” at the $100-a-barrel level because of the many millions lost to gasoline subsidies and spending on domestic social spending and PDVSA’s use as a “geopolitical tool” to maintain regional alliances.
Venezuela has the world’s largest oil reserves but PDVSA’s production, earnings and income all appear to be on a downward slide and its debts to suppliers rose 35 percent. Its debt to the Central Bank of Venezuela reached $26.19 billion last year, a nearly eight-fold increase in two years.
The government makes no apologies. It says it is employing the country’s most important natural resource for the good of the people and promises increased production and revenues in the immediate future.
Ramirez said that PDVSA’s efforts remained focused on developing the remote Orinoco belt, site of the world’s biggest oil reserves, with the aid of oil firms from China, Russia, the U.S., Italy, Vietnam, Malaysia, Japan and Spain. Venezuela hopes to lift overall production to some 3.32 million barrels a day, 200,000 more than last year.
“We’re in a process of trying to attract investment in dollars other than ours,” Ramirez said, assuring reporters that PDVSA would work with private investors to not take on more debt to make new investment.
Outside experts, however, are deeply skeptical. They say PDVSA is badly mismanaged and that even a radical overhaul would take years to show results.
Rather than reinvesting enough profits in exploration and maintenance, Chavez dedicated oil revenues to social spending such as building hundreds of thousands of homes and free medical clinics for the poor, they say. Last year PDVSA said it spent $28.83 billion, nearly a quarter of its income, on various state programs.
PDVSA also loses billions subsidizing gasoline for Venezuelan drivers, who pay less to fill up their tanks than people anywhere else in the world.
“The government of Venezuela today uses PDVSA as its petty cash box to lead populist social programs,” said Jorge R. Pinon, associate director of the Latin America and Caribbean Program at the University of Texas, Austin. “Whatever capital is left in PDVSA is being mismanaged, mismanaged because they’re just not focused on running the company. … They’re focused on building hospitals and schools.”
On top of that, state oil company PDVSA dedicates 42 percent of its production to favored partners in the Caribbean and to consumption inside Venezuela, where gasoline is almost free, which means it can sell less than 60 percent at market price.
Ramirez said that a rise in daily domestic oil consumption to 650,000 barrels this year is expected to drive down exports by 7.8 percent to 2.36 million barrels a day, inevitably damaging revenues for PDSVA and the broader Venezuelan budget.
The alliance’s Caribbean and Central American member nations receive hundreds of millions of dollars annually in deeply discounted oil, part of Chavez’s bid to project Venezuela’s influence in the region. Socialist ally Cuba is the largest recipient.
Maduro made his first major foreign trip as president to Cuba last weekend, recommitting to sending it some 130,000 barrels of oil a day.
Now, Maduro must wrestle with the consequences of Chavez’s energy and economic policies, which included a campaign spending spree last year ahead of Chavez’s re-election.
In order to control capital flight, Chavez imposed controls that require any business that wants to import goods to purchase dollars directly from the government, which rations them out in relatively small amounts at an artificially set official exchange rate.
Even with gasoline at roughly $100 a barrel over the last six months, the government hasn’t been meeting the demand for dollars. That’s created frequent and worsening shortages of staple goods such as flour, sugar and cooking oil.
And despite promises to increase the flow of dollars it pumps into the economy, independent economists don’t see how it can be pulled off. Crude prices fell about 10 percent over the last three weeks and analysts say they could stabilize at $90 a barrel.
At the same time, official figures show Venezuela produced 3 million barrels a day last year, a 95,000 barrel-a-day decline from 2011. Independent organizations such as OPEC estimate Venezuela’s production could actually be around 2.7 million barrels a day.
Ramirez has played down questions about the company’s performance, and PDVSA says it invested billions in exploration last year, drilled 2,010 wells, more than double the previous year, and projects increased production to reach 4 million barrels a day in 2014 and to 6 million by 2019.
Venezuelans such as Zaida Eleonora Mejicano are skeptical of such talk and are impatient to see the benefits.
Mejicano used to travel around Venezuela buying gold jewelry that she resold in Moron, her hometown. Now, she says, she’s amazed by the deterioration of the quality of life. She can’t travel anymore for fear of being robbed.
“You can’t get anything here. Here women have to wait in line four, five even six hours for a stick of butter,” she said. “I’ve always worked hard but now one’s afraid to even travel. Things are really ugly here.”
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AP writer Michael Weissenstein contributed to this report.
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