PDVSA's crisis a tragedy for Venezuela

Gustavo Coronel
Margarita Island, Venezuela

The crisis under way centering on the Venezuelan government's politicization of state-owned petroleum company Petroleos de Venezuela SA has all the makings of a national tragedy.

Enough damage already has occurred that, even with a change of government, PDVSA's recovery—and that of Venezuela's petroleum industry—could take years.

In understanding the current crisis, it is instructive to reflect on PDVSA's history and role in the country's oil and gas sector.

Venezuelan nationalization rationale

By early 1972, the Venezuelan government had acquired almost total control of the petroleum industry, although it still was operated by 16 foreign concessionaires.

Through a combination of operational and financial regulations, the Venezuelan government was able to dictate to these concessionaires their yearly levels of production and exports and to impose taxes based on a preestablished Fiscal Reference Price that had little or nothing to do with the real sales price.

In this manner, the government knew in advance what the size of its petroleum-derived income would be. At the same time, the investments required by the industry were still the responsibility of the foreign companies. The percentage of the government's fiscal take, as a result of these mechanisms, was about 80% of total generated income.

In spite of this favorable situation, the government decided, 3 years later, to nationalize the petroleum industry. At the time, many observers inside and outside the country felt that what the government was nationalizing were the risks, as almost all the benefits were already on its side. The main risks involved in the decision were financial and organizational.

The financial risks had to do with the required investments, which from then on would be the responsibility of the government, since no fresh capital would be coming from the outside.

The organizational risks were related to the nature of state-owned enterprises that the company or companies would adopt and the traditionally poor performance of the Venezuelan state in managing its companies. Would the petroleum companies in the hands of the state become unproductive, overstaffed, and corrupt, as was the case with other state-owned enterprises?

Clearly, the main reason for the decision to nationalize was not economic but political. For many years, the various governments in the country had been paying much lip service to the need to own and operate directly the principal industry of the nation. The prevailing opinion among political leaders was that the state should fully control this most strategic industry. The financial reasons were not given as much weight.

The risks of politicization of the industry were, likewise, given little consideration. The geopolitical environment had turned very favorable for oil producing countries since the Libyan revolution had weakened considerably the strength of the international petroleum companies. By the end of 1973, the price of oil had jumped to almost $12/bbl from $5/bbl. The Organization of Petroleum Exporting Countries was in the driver's seat.

Nationalization model

The nationalization of the Venezuelan petroleum industry followed a unique organizational model. The 16 companies that had been operating in the country became, after a process of rationalization, four fully integrated affiliates of a coordinating and financial holding company.

These four integrated, operating companies inherited existing organizational cultures. One kept the ways of (ExxonMobil Corp. forerunner) Esso Venezuela, a second inherited the culture of Royal Dutch/Shell Group's Venezuelan subsidiary, a third that of Gulf Oil Corp.'s local unit, and a fourth became an agglomeration of smaller companies.

In this fashion, they were still "competitors," all trying to be more efficient than the others. This allowed the holding company, PDVSA, to compare performances. The great advantage of this model was that it did away with the concept of a state monopoly, which had been disastrous in many other countries. The price that had to be paid was a certain degree of overstaffing, as there were four parallel companies in operation, plus the holding company.

Management of the newly formed companies essentially stayed in the hands of the managers who had operated the foreign companies before nationalization. Over 90% of these managers were Venezuelan, and many had been well-trained abroad and possessed a high degree of sophistication. Through arrangements with the previous concessionaries, about 300 highly specialized foreign technical staff were retained for a few years by the state enterprise.

PDVSA success story

The fears of deterioration and politicization of the Venezuelan oil industry did not materialize for many years. In fact, the transformation of PDVSA from a relatively weak and mostly petroleum-producing company in 1976 to one of the leading energy corporations in the world by 1998 has to be considered as one of the most spectacular stories of success in the international petroleum industry.

In 1976, the first year of operation of PDVSA, proven oil reserves stood at 18.5 billion bbl. This volume of reserves gave the industry about 20 years of life at then-current levels of production. By 1998, proven reserves stood at 340 billion bbl, of which some 80 billion bbl were conventional crudes and the rest very heavy oils from the Orinoco belt, technically capable of being upgraded and sold at a profit.

In 1976, Venezuelan refineries processed about 1 million b/d of oil with a yield of 62% of fuel oils and very modest percentages of gasolines. By 1998, the refineries of PDVSA were processing 3.1 million b/d, while gasoline and other light cuts represented over 75% of the yield. PDVSA now owns interests in or controls eight refineries in the US, nine refineries in Europe, and seven refineries in Venezuela and Curacao. By owning refineries abroad, PDVSA has secured outlets for its crudes, especially those heavy crudes that are more difficult to market.

As time went by, important investments had to be made in exploration, production, refining, transportation, petrochemicals, research, and all other sectors of the industry. The fiscal take of the government became somewhat lower, percentage-wise, than that in 1976. However, it became greater in dollar terms. The state obtained $12.40/bbl in 2000 vs. $8/bbl in 1976. In 1976 total petroleum income was $9.1 billion, increasing to $53.7 billion in 2000.

When all costs were deducted, net earnings of PDVSA in 2000 were $19.4 billion, and the state took $15.4 billion—representing a state take of 79%, leaving the rest of the money in the PDVSA system for reinvestment.

As illustrated by these numbers, the performance of PDVSA during its 27 years of operation has been extremely good. Like every corporation, it has had good years and bad years, but when viewed in an integral manner, there is little doubt that the quality of its management has been first-class, a fact that has been recognized by publications of high prestige in the international petroleum community.

Political control of PDVSA

All these years PDVSA has been an island of excellence in the middle of an ocean of inefficient and generally corrupt Venezuelan state companies and agencies.

PDVSA is the only state-owned enterprise in Venezuela that turns out a profit. The others are cost centers for a state that staggers under the burden of 1.3 million public employees. In fact, the size of the government already is financially unviable. It has taken on commitments that cannot be honored with the income at its disposal.

Instead of cleaning up its act, however, the government currently in power decided that PDVSA was not performing satisfactorily, that its management was "unpatriotic," and that the corporation had to be truly "nationalized." It engaged, therefore, in an all-out effort to obtain total political control of the corporation.

In order to obtain this objective, it tried to impose on PDVSA a board made up of persons better known for their loyalty to the government than for their managerial qualities. In fact, the government has changed the president and the board of PDVSA five times in less than 4 years. It is evident that a world-class corporation that has to compete with the likes of ExxonMobil, Shell, and BP PLC in the international markets cannot afford to have such instability at the highest management levels.

The effect of this gross political intervention in PDVSA has been disastrous, especially in the last 2 years. The morale of the organization has plummeted. The managers and technical staff of PDVSA have been the object of systematic verbal abuse on the part of the president of Venezuela, while political "commisars" have been placed inside the organization to watch and report to the government any signs of dissidence against the so-called "Bolivarian Revolution."

The naming, in early 2002, of a new PDVSA president, who had made diatribes against PDVSA's managers a life-long occupation, triggered a rebellion of those managers that produced, surprisingly, in April 2002 the temporary ouster of President Hugo Chávez from power. As a result of these events, still another president of PDVSA was named, Alí Rodríguez Araque, former secretary general of OPEC. At first, this move seemed to work. Rodríguez is a suave, mild-mannered person who tried to improve the mood of the organization.

Oil strike

In a matter of a few months, however, things occured that put PDVSA's managers on a new collision course with the government. These things had to do with the impunity with which PDVSA's political commisars went about their tasks, in spite of protests from the managers. These people spied on the organization, acted outside formal channels of authority, and became a "state within the state." They did not report to Rodríguez but directly to President Chávez. When they opened the doors of PDVSA to unauthorized groups of government followers to conduct political events, the managers again rebelled.

As before, they did not ask for salary increases or better work conditions, but they did ask for respect for the institution. This time, however, their rebellion had a more pronounced political significance, because it coincided with a national civic strike that had the clear purpose of forcing the government to resign. The petroleum strike became a component of a larger civic movement. As a result of the strike, oil production went down to about 200,000 b/d from 3 million b/d during the first 2 weeks of December. Tankers stopped transporting oil. Refineries were shut down. Offices were vacated. Within days gasoline started to disappear from gas stations all over the country.

Today, after more than 80 days of strikes, oil production has crept up to about 1.4 million b/d by opening the most accessible reservoirs. But tankers are still out of service, refineries are not in operation, and car lines outside gas stations can be up to 3 miles long. The government is importing gasoline but in volumes that are totally insufficient for normal consumption. More than 12,000 managers and technicians of PDVSA have been fired so far, and more probably will be fired in the near future.

As this article goes to press, 800 doctorate-level researchers with CIED, the institute for research and development at PDVSA, are being dismissed, and its internationally known industry training center is being closed down.

International marketing is being placed in the hands of a small, Miami-based outfit linked with controversial financier Marc Rich, and there are increasing rumors that the process of acquisition of gasoline cargoes, handled by a relative of a high officer of the new PDVSA, is far from transparent.

PDVSA offered for sale to Nigeria its major US subsidiary, the Tulsa-based refiner-marketer Citgo Petroleum Corp., but was turned down. Now it will be offered to Petronas, the Malaysian state petroleum company. The sale price is said to be around $10 billion, about half of the company's book value. Venezuelan public opinion is up in arms against this attempted sale, as its only objective is to provide cash-short Chavez with more spending money for his "revolution."

The direct costs of this petroleum strike have been enormous. The government already has lost sales in the order of $4.5 billion. The poor quality of the operations conducted by the staff that remains available to PDVSA has produced significant environmental damages as well as damages to plant and equipment that run into the millions of dollars. The foreign companies operating in Venezuela under contracts with PDVSA are losing an estimated $7 million/day, TotalFinaElf SA and ENI SPA being among the most affected.

However, these losses pale in comparison with the loss in prestige, reliability, and credibility that PDVSA has suffered in the eyes of traditional clients and of the international petroleum comunity at large. This is probably the worst of the tragedies that PDVSA has suffered.

Government strategy

What has been the strategy of the government in answer to this strike? The government obviously sees it as an opportunity to do what it wanted to do in the first place: to exercise absolute political and financial control over PDVSA.

Chávez administration officials seem to believe that they can obtain total control while managing PDVSA better than has been the case up to now and that they can lower operation costs significantly. Operating costs in 2000 were some $10 billion, about $7/bbl. In addition, PDVSA bought about $20 billion of oil on the open market, in order to supply markets the company could not supply with its own oil due to OPEC's quota restriction.

The government seems to believe that it can save costs by reducing the size of the company, by not buying oil on the open market, and by selling important assets deemed "unproductive," such as Citgo and some refineries. This would entail losing important markets that might never be recovered. However, the government apparently feels that a PDVSA of, say, up to 2 million b/d is all the country needs—or rather is all that is needed to finance its revolution.

In order to accomplish this objective, the "new" PDVSA has started a reorganization that, the government claims, has been recommended to them by McKinsey & Co. However, this management consulting company has denied the authorship of this reorganization plan.

In essence, the plan calls for the disappearance of PDVSA as we know it today and:

• The creation of an operating company for Eastern Venezuela.
• The creation of an operating company for Western Venezuela.
• Having a minimal coordinating staff in Caracas.
• The elimination of marketing, trading, acquisition, and training companies and temporary suspension of activities of the petrochemical company, the local marketing company, and CIED, as well as the marine fleet.

The regional operating companies will be integrated. They will have their own, independent functions for exploration and production and refining-marketing, as well as technical and administrative services and support staff as required. In the headquarters in Caracas, there will be a minimum support staff dealing with human resources, planning, finance, international business, and administrative services.

When one examines this plan, several things become apparent:

• It has been put together in a hurry, without a process of consultation with the members of the organization that will be affected.
• It seems to be driven by the need for a smaller company, abandoning the objective of PDVSA being a global corporation but one having a more parochial profile.
• It is designed for easy political control, with more operators and fewer thinkers.
• This PDVSA will be more like the Nigerian state oil company or Pertamina than like, say, Shell or even Petroleos Mexicanos. As such, it would no longer be the major player on the international petroleum scene that it was until last year.

To complicate matters further, there is an intense struggle for power going on inside the current organization.

PDVSA Pres. Rodríguez is being challenged and called a "traitor" by an anarchic group that calls itself the "Military Civic Movement 13th of April." This group is led by former Vice-President of the Republic Adinas Bastidas and asks, among other things, that PDVSA be managed by the workers and the military and to reject the proposed reorganization of PDVSA as presented by Rodríguez. This anarchic group is very influential with Chávez, as it represents the government party, MVR, in contrast with Rodríguez, who represents another political group.

This is the confusing scenario with which we will be faced if there is no political change in Venezuela in the near future. If the government is changed—through the early elections that a major portion of the population is requesting—then an alternative scenario could be possible. In this scenario, the managers and technicians who are now out of PDVSA would return, and the company would revert to its original mode of operation, based on apoliticism, meritocratic management, and proper use of financial funds.

Even if this scenario materializes, however, the progressive recuperation of PDVSA would take no less than 2 years. This is why the crisis at PDVSA is a great tragedy, not only for PDVSA but for Venezuela.