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Mining & Energy

Venezuela’s PDVSA Post-Chávez: Will partnerships with the private sector and Chinese experts boost oil production?


President of Petróleos de Venezuela S.A. (PDVSA) Rafael Ramírez

President of Petróleos de Venezuela S.A. (PDVSA) Rafael Ramírez

Throughout 2012, and especially after President Hugo Chávez’ death in early March 2013, Venezuela’s national oil firm, Petróleos de Venezuela S.A. (PDVSA), has taken measures beyond anything done in the past decade to raise its lagging production. While the likely impact merits cautious analysis, the drivers of the Bolivarian Republic’s scramble for increased oil revenues are clear.

The Bolivarian state has run into a dollar crisis, on top of a litany of other chronic ills. The state urgently needs to find a new balance such as cutting outsized populist spending and increasing revenues. Still, for the foreseeable future, Venezuela’s only possibility for significant new revenues—barring a record oil price rise as Chávez enjoyed—is for PDVSA to increase production. Post-Chávez chavismo is acutely and nervously aware of this reality.

Focus on Mature Fields, Enlisting the Private Sector

By all indications, PDVSA’s immediate focus for boosting output is in applying enhanced oil production (EOP) methods to reinvigorate mature fields. After decades of conventional exploitation, production has fallen or been abandoned at thousands of wells. Although the game-changing potential of Venezuela resides in the large-scale development of its “extra-heavy” oil fields in the Faja Orinoco region, Venezuela has exploited the “heavy” oil of Lake Maracaibo, Monagas and other regions for nearly 100 years.

A similar program to exploit mature oil fields was enthusiastically and repeatedly pushed by Chávez in 2007-2008 on his Sunday “Aló Presidente” program, where he introduced Chinese visitors said to be involved in a plan in which Chinese equipment and engineers would supervise production of 30 percent of national oil production by 2015. A Chinese joint service venture with PDVSA was signed on April 4, 2008,[1] but it never materialized into any concrete action.

Despite the lack of momentum on the Chinese plan, a mature-field-first strategy is reasonable. EOP in Venezuela is relatively simple due to its geology, and with modern exploration methods, the amount of remaining oil in and around mature fields is often underestimated. The possibility of certified oil reserves being larger than expected has proved very lucrative for PDVSA’s partners.[2]

Mature fields also are in developed regions with the necessary infrastructure—pipelines, ports, refineries, etc.—to support oil production along with the towns, roads and electrical grids to support workers and families. This is significant since Venezuela has been unable to maintain infrastructure in major cities or build the complex greenfield projects that many remote Faja fields require.

PDVSA—strained managerially and technically and in need of capital—needs significant assistance. Once Chávez died, “PDVSA socialista” began vigorously enlisting private domestic firms in a national effort to raise production. Conferences with goods or services providers were held in Sucre, Zulia, Falcón, Anzoáteguí, and Monagas states.

On July 20, 2013, approximately 320 businesspeople attended a meeting in Puerto Ordaz to discuss PDVSA’s 2019 Faja development plan. The Cámara Petrolera de Venezuela (Venezuelan Petroleum Chamber), Federación de Cámaras y Asociaciones de Comercio y Producción de Venezuela (Federation of Venezuelan Chambers and Associations of Trade and Production), Federación de Industriales, pequeños, medianos y artesanos de Venezuela (Federation of Small, Medium and Artesanal Industrialists of Venezeula) and others participated. [3] The PDVSA documents and plans from these meetings[4]—and statements by private sector leaders—show that the process represents a new level of collaboration unlike Chávez’ previous China scheme.[5]

Obstacles to Success

The disrepair of PDVSA facilities is striking, with the Amuay refinery disaster last year highlighting the many failures and costing some 40 to 50 lives. Still, in the last one to two years, PDVSA’s board has apparently begun focusing on jump-starting investment in mature fields. For example, PDVSA built a new flexible-pipeline facility and installed significant expanses of pipe around Lake Maracaibo to connect old fields and distribute gas for the high-pressure injection necessary for enhanced oil extraction.

Now, PDVSA has called for private domestic firms to bid on “reinvigorating” production at thousands of wells. This is reminiscent of a major opening by the old PDVSA in the 1980s to private foreign and domestic firms to boost production in Lake Maracaibo. Those projects were then re-nationalized by Chávez in 2010.

Even though the recent series of meetings between PDVSA and the private sector are full of promises by PDVSA to end past problems, PDVSA President Rafael Ramírez is known to be no more generous on contract terms with domestic, international or even Chinese firms than Chávez was—and to be just as likely to withhold payments due to firms and to oppose the repatriation of foreign-firm funds. For these reasons, it is possible that, out of necessity, the Maduro administration would prefer a new head of PDVSA. However, the departure of Ramírez could be problematic for the already precarious company if several key managers left with him.

Beyond personalities, a caution on this new private-PDVSA partnering is that the Venezuelan government and PDVSA simply do not have cash to pay, and PDVSA owes huge sums to its partners. The country is enmeshed in a dollar-shortage crisis as the government prepares to face municipal elections in December. The temptation to raid PDVSA cash and managers—starving the goose that lays the golden eggs, Chávez style—is immense but would wreck PDVSA’s minimal-yet-unprecedented efforts.

Beijing’s Frustration and Demands

Beijing’s assistance in providing short-term cash and the expertise it could provide to develop both the Faja fields and regional infrastructure are important factors in PDVSA’s recovery. A few months ago, in difficult talks for another loan-for-oil, Beijing made undisclosed demands that caused Venezuela to walk away.

Since then, Beijing, deeply distrustful of the capacity and credibility of Venezuela and PDVSA, has made demands including an unprecedented “partnership” in planning Venezuelan mining and petroleum sectors. While the government and PDVSA are in dire need of assistance and are now clearly accepting Beijing’s conditions, this type of a partnership would decimate Chávez’ promise for resource sovereignty.

Beijing now has its vision of how to proceed—and, given the dollar crisis and other problems in Venezuela, it now has the leverage to achieve its vision. Over the past century, Venezuela’s oil sector was integrated with that of the United States, but U.S. demand for imports is not growing. Objectively, Venezuela’s oil export future is in East Asia, where the demand lies—and with China in particular.

Moving Forward

Given the many plans to increase PDVSA’s depressed production, and the unmet production target projections, the recent push should be approached with caution. At the same time, it should be remembered that Venezuela’s low production in the last decade is an anomaly among OPEC’s “price hawk” faction, to which the Bolivarian PDVSA belongs. Even regimes such as those of Libya’s Muammar Gaddafi and Iraq’s Saddam Hussein maintained high levels of production, and often under sanctions.

There is, in the end, one fundamental reason why PDVSA might not be able to reverse its miserable performance of the past decade—the excessive and undisciplined raiding of its funds and managerial talent by the Office of the President of the Republic to win elections. If President Nicolás Maduro and President of the National Assembly Diosdado Cabello can resist this addiction, there is no reason that Venezuela, a state literally floating on oil, could not increase its production and sustain the country economically.

[1] See http:pdvsa.com and search for “Empresa Mixta de Servicios entre China y Venezuela consolidará soberanía operacional” Note, PDVSA’s web site does not offer URL’s to directly accessing particular articles
[2] The experience of Harvest Oil in this regard is notable. See: http://globalbarrel.com/2012/06/23/venezuelan-faja-surprise-usas-harvest-sells-not-to-china-but-indonesia/
 
[3] The BRV publication “Informe Venezuela” gives an overview of this event. See: http://www.oncp.gob.ve/jdownloads/Informe%20Venezuela/2013/07%20Julio/INFORME_VENEZUELA_25-07.pdf
 
[4] To access these documents go to http://wp.me/p1BBDd-h5
 
[5] For a report on, for example, the PDVSA meeting with the private sector in Zulia (the second in the series) see http://pdvsa.com and search for “PDVSA y Cámara Petrolera evaluarán factibilidad de fábricas de tuberías flexible y ranurada, 16-05-2013”
Tom O’Donnell, PhD, a former Fulbright Scholar in Caracas, analyses global energy, especially oil, in international relations, and blogs at http://GlobalBarrel.com.
 
Source: America’s Quarterly – The PDVSA Post-Chávez: Will Partnerships with the Private Sector and Chinese Experts Boost Oil Production?
 
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About Tom ODonnell

My expertise is in the global petroleum sector, in particular OPEC and other oil-producing states of Latin America and the Middle East, and the policies of the US, China and EU. In OPEC, I’ve especially focused on Venezuela, Iran, Algeria, Iraq. (See articles on my professional/academic home page TomOD.com) This summer, I return to Venezuela (5 July – 12 Aug) to continue research on the country’s immense but lagging heavy-oil potential, and oil’s role in that troubled country’s domestic and foreign affairs. This study includes not only the policies of the Chavez government, but the various plans of opposition politicians as well. I teach in New York City, in Graduate International Affairs (GPIA) at The New School University, where my spring 2010 seminar was Geopolitics of Global Oil. I also commuted weekly to The Ohio State University to teach From Saudi Arabia to Venezuela (in Middle East Studies and International Studies and Diplomacy). I also taught a new undergrad course Environmental Economics at New School. In Fall 2011, at GPIA I’ll teach both a new seminar on the “Arab Spring” revolts effects on geopolitics and energy, and on Latin American Development. I recently spent two years (Jan 2008- Jan 2009) in Caracas as a US Fulbright Scholar (2008) and visiting professor at the Centro de Estudios del Desarrollo, (Center for Study of Development) at the Central University of Venezuela (CENDES-UCV) researching oil affairs and the Bolivarian state, making contacts and giving many talks. I’ll be back with my old friends and colleagues at CENDES this summer (my CENDES profile). Besides this new blog, I have a bit of a reputation for my public speaking and seminars aimed at energy professionals, the public and academics; and I also consult on energy geopolitics, the global oil sector, environmental and nuclear issues. In nuclear physics, I’m author or co-author of some 38 peer-reviewed papers on research at U.S. and overseas universities and national labs, listed in my CV.

Discussion

5 thoughts on “Venezuela’s PDVSA Post-Chávez: Will partnerships with the private sector and Chinese experts boost oil production?

  1. At Chavez’s death, many were doubting China’s capacity to maintain a strong presence in Venezuela. This is an excellent article which shows how dependent PDVSA is on China’s cash and expertise and how China is making the most of its loans-for-oil.
    Please read my blog on China and Venezuela relations, especially in the energy sector:
    Blog The Dragon’s Trail – China and International Affairs
    http://dragonstrail.wordpress.com/2013/04/29/china-in-venezuela-loans-for-oil/

    Like

    Posted by Fsimon05 | September 30, 2013, 12:17 am

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