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Petroleos de Venezuela: Past, Present and Future

By Gustavo Coronel

March 22, 2004 - In 1975, Venezuelan President Carlos Andrés Pérez felt that the time to nationalize the Venezuelan oil industry had come. All throughout that year there was an intense and highly democratic national debate over the pros and cons of such a measure. Those who were in favor felt that Venezuela could not be truly independent unless it had control over the industry, which provided most of the income to the nation. Those who were against argued that the State was an inefficient administrator and that the oil industry in State hands would rapidly become politicized and corrupt. At the end, those in favor of nationalization prevailed since few Venezuelans dared to risk being called unpatriotic. I was one of those who opposed nationalization since I was very much afraid that the oil industry in public hands would become unproductive. After all, this is what had happened in Indonesia, Bolivia, Argentina, Mexico, Peru, even Italy and France. Why should Venezuela be any different? Well, to my surprise, the government listened to us, the professional managers of the oil industry and, as result, the nationalization model finally adopted by Venezuela was a very original one. Venezuela did not create one single State oil company but four different integrated, operating oil companies under the holding company PDVSA. In this manner the country avoided the concept of a State monopoly, which is almost always disastrous, and retained the capacity to compare performances among four different companies, each one trying to excel. Although there was a price to pay for this concept of multiple companies, in terms of duplication of personnel, the net result was very positive since the holding company, PDVSA, was able to compare performances and keep the four operating companies on their toes.

As a result of this most unorthodox nationalization model, PDVSA became, for almost 25 years, a leading international energy corporation. It consistently ranked among the top five international oil companies, both private and public. PDVSA's management was highly respected by the international petroleum community and its clients developed a high sense of trust in the capability of the corporation to supply their needs, both in time and in quality. In time, I almost became convinced that I had been wrong in doubting the capacity of a country to nationalize an industry without ruining it. PDVSA was a success!

But wait! In 1999 Hugo Chávez became president. His campaign platform had included new ideas on PDVSA. This company, he said, was still managed by the former employees of the multinational companies and these employees were not loyal to the nation but to their old bosses. This had to change, he said. He also said that the internationalization strategy of PDVSA had been a major failure and those companies like CITGO had to be sold, since they were of no use to Venezuela. Although he named as the new president of PDVSA a professional manager, Roberto Mandini, he also named as vice-president a mentally disturbed and inept manager called Hector Ciavaldini, who acted as political commissar. Mandini only lasted six months in this sick environment. From then on, with Ciavaldini as president, PDVSA was on its way to disaster. In the five years of Chávez's mismanagement PDVSA has had six presidents and boards, an absurd situation, since a corporation of this size and importance, having to compete with the likes of Exxon and Chevron-Texaco, cannot change presidents like changing shirts. PDVSA has been subjected to a purge never before experienced by any corporation. Chávez has fired about 20,000 managers and technicians, 50% of the professional staff, during the last two years, in his desire to control the organization politically. This he has accomplished. Today, PDVSA belongs to Chávez. But, at what price! He has converted PDVSA from a first world, world-class corporation, into a third world, mediocre outfit. The current president is a former 60's marxist guerrilla, without managerial skills and without a basic command of the international business language. His board is comprised of second-rate managers, named to their positions because of their loyalty to "the revolution" but without solid managerial or technical credentials. The company has been left without financial expertise, to the point that the 2002 financial statements required by the shareholders and by the U.S. Security Exchange Commission contain numerous inaccuracies which have been the object of multiple questions by the U.S. organization but not by the local authorities, which know even less about the oil industry than the mediocre PDVSA management. At this point in time the financial statements for 2003 are being put together, but all indications suggest that this is a near to impossible task. This total managerial disorder in PDVSA has already shown tragic results. We must keep in mind that a strong organization suddenly subject to poor management keeps working by sheer inertia, so that there is no sudden collapse. PDVSA is still producing, still refining, and still exporting hydrocarbons. However, the statistics already tell the tragic reality.

PDVSA now produces an average of 2.4 to 2.5 million barrels per day (b/d). This represents a loss in production of about 800,000 barrels a day, as compared to the production of PDVSA before Chávez. The current production of PDVSA is only of 1.6 million b/d since the other 900,000 b/d of production come from the operating contracts PDVSA has with multinational companies. This means that PDVSA, as an oil production company, is shrinking violently while the loss is being compensated partially by the multinational companies. For the "nationalistic revolution" of Hugo Chávez this represents a major defeat. It indicates that the control of Venezuelan oil production is returning to the hands of the multinational oil companies. It is paradoxical that the managers who Chávez accused of being loyal to the multinational companies kept PDVSA as a major worldwide corporation, giving immense benefits to the nation, while the "super-patriots" that he named to lead PDVSA are presiding over its surrendering to multinational control.

Today PDVSA only refines 70% of its normal capacity. It only exports 70% of its normal potential. It only produces 66% of its normal capacity. It only exports 75% of the budgeted volumes, helped by the inventories, which will disappear in the short term. The petrochemical business has practically disappeared. Gas production is only half of what it should be and this is becoming lethal for the domestic market.

The destruction of PDVSA by Hugo Chávez has been duly documented by a first class witness called . . . Hugo Chávez. In his speech to the Venezuelan National Assembly, the so-called State of the Nation, early this year (see the text in the Web site of the Venezuelan Embassy in Washington), the mentally unbalanced Chávez admitted that he had created the PDVSA crisis by naming the ignorant Gaston Parra to the presidency of PDVSA. "I knew" he said, proud of his move, "that this would not be accepted by the managers of PDVSA. I created the crisis," he added, "in order to capture the company." Wonderful strategy! But, what about the nation? I could have never imagined, in my worst nightmares, that PDVSA would become the toy of a semi-illiterate, socially resented dictator. Today, this is the case.

What about the future? PDVSA has two main possible futures: one under the current dictatorial and populist Chávez government and one under a new, really democratic, transparent government. In the first scenario PDVSA will progressively become a third world, modest oil company, producing about 1.5 million b/d for a few years, increasingly outsourcing operational areas to multinational companies. Under a new government PDVSA would require operational rehabilitation and a sizeable investment to put the production capacity back to the levels of five years ago. In parallel, appointing professional managers and technical staff should restore the credibility of the company. A deep cleaning job would be indispensable since the extent of mediocrity among managerial and technical staff is already considerable. In the best of cases, however, PDVSA will need close to five years to be restored to pre-Chávez levels. What Chávez has done to PDVSA represents a crime against the Venezuelan people that is difficult to quantify. We are talking about immense material damage and an even worse damage in terms of national credibility and pride.

Hugo Chávez has thrown Venezuela back 30 years and they are years lost forever.

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