The Crucial Challenge of Venezuela’s Oil Industry

By Misión Verdad – Mar 27, 2023

The recently revealed corruption scheme at the heart of PDVSA has once again highlighted the pending issue of restructuring the oil industry. Venezuela’s oil industry has been harassed for years by a general offensive of “sanctions” that have substantially impacted its operation, productive capacity and foreign trade channels, bringing negative consequences for the national economy as a whole.

The “Ramírez Era”
The great weight that the state company exerts on Venezuela’s economic performance by representing the main source of foreign currency income has strengthened the notion that PDVSA is the nucleus of real power in the country. This perception is not recent, and it cannot be said that it is based on false premises. Venezuela’s constitution as a petrostate has shaped its economic and political existence in the last century, putting the oil industry at the center of a conflictive dynamic of distribution of power and resources.

The notion that PDVSA is a kind of “state within the state” is not only multigenerational but has had significant political implications in the trajectory of the Bolivarian Revolution, especially in the industry’s development and management.

The turning point in the Venezuelan political process originating with the abrupt death of President Hugo Chávez in 2013 quite clearly shows the impact that this notion, unchanged over time, has had at decisive moments.

Nicolás Maduro’s rise to the presidency in 2013 began with the complication that a political sector had made PDVSA a fiefdom of power, with Rafael Ramírez at the helm.

Ramírez was the orchestra director of the Venezuelan oil company for 10 years, an arc of time long enough to shape a specific institutional culture that covered all levels of the industry and had Ramírez as a reference.

The notorious cases of corruption that were unveiled after his departure from the presidency of the state company and the ministry of oil and mining in 2014 confirmed how, during his tenure, Ramírez enriched his personal circle. He created a system of discreet embezzlement from irregular crude oil sales, fraudulent contracts and transfer of funds from the industry abroad, which progressively led to the company’s decline.

Ramírez’s break with Chavismo in 2017 would also reveal that the “oil czar,” as previously called by the opposition media, saw himself as an independent power actor with his own ambitions and aspirations, to whom the authority of president Maduro generated discomfort.

The boom in crude oil prices during Hugo Chávez’s last years at the helm of the government made it easier for the mechanics of looting to go unnoticed amid an unusual shower of petrodollars.

The end of the “Ramírez era” implied the first management challenge for Nicolás Maduro’s nascent government: restructuring the oil industry. An industry overloaded with an unmanageable debt of more than $100 billion, pressured by a downward cycle of international prices between 2014-2016 and with a good part of its management unstructured.

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An institutional culture of corruption
Despite the management changes promoted by President Maduro, who brought Eulogio del Pino and later Nelson Martínez to lead the company, the traces of the “Ramírez era” continued to be significant in the industry’s performance.

These restructuring attempts were unsuccessful, leading to anti-corruption offensives that resulted in successive arrests of senior managers and the company’s top executives, who were immersed in corruption schemes. This occurred amid the international price collapse and the foreshadowing of the “sanctions” scheme aimed at precipitating PDVSA’s collapse.

The corruption scandals of the Del Pino-Martínez management were not of a different strain. They were circumscribed to a corrupt institutional culture that permeated all company levels and that had found its own reproduction mechanisms, which intensified when the end of the distribution and looting scheme of the boom times gave way to a predatory logic that extracted profits at the expense of the industry’s operational viability.

The resistance imposed by the aftermath of the “Ramírez era,” plus the context of destructive “sanctions” against PDVSA between 2017-2020, gave rise to new problems that reduced the success of a new bid to restructure and clean up the company.

The obstacles of a new marketing model
The tightening of the US “sanctions” against PDVSA forced the launching of a new marketing model through channels other than the usual ones due to the impossibility of exporting oil under regular mechanisms.

The scheme designed to commercialize Venezuelan crude oil and make an income took several experiences of circumventing oil “sanctions” as a precedent, with Iran being one of the most iconic due to its effectiveness and prolongation over time.

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In this context, exceptional marketing measures were taken, the operational backbone of which lay in a network of intermediaries in third countries, tankers with constantly changing registers, discreet contracts to avoid US persecution and payment gateways that included deposits in banks far off the radar of the US-controlled financial system.

The blockade and boycott of its conventional operations created the main critical issue for PDVSA at this time: delivering oil to the international market. This factor is transversal to all industry processes because it impacts income, investment and production growth.

In addition to crude oil exports, the blockade created other unprecedented obstacles in the dispatch processes to Venezuela that are essential for the company’s performance, such as the import of diluents (naphtha or light crude, necessary to process extra-heavy crude) and additives for the production of fuel for the domestic market.

This scheme has been very complex to implement due to its changing nature, as it involves foreign operations channeled by third parties through discreet contracts with shipping operators.

Venezuela has the most difficulties in the logistics and dispatch chain, that is, in the procedures to physically remove the crude and ensure its arrival at its destination. These procedures must be carried out with the greatest secrecy to avoid possible seizures by the United States.

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The corruption scheme and the economic emergency of current times
The method of operation of the corruption scheme that includes the senior management of PDVSA and the management of Sunacrip, the entity that governs the policy on crypto assets in the Venezuelan state, is still unclear. However, it is logical to infer that the marketing model that had been designed reduced the scheme’s effectiveness, leaving it exposed to mafias that took personal advantage of the scheme and ended up weakening it.

The new case of corruption in PDVSA, catalyzed this time by the incentives for corruption generated by the “sanctions” against the industry, shows that restructuring the Venezuelan company continues to be a persistent challenge. This challenge has become more pressing since, without a sustained oil cash flow over time, it seems difficult to consolidate the economic recovery and reactivation cycle that began in 2021.

The problems associated with controllership, control of resources and supervision of industry flows have reached their climax with the latest corruption scandal, have endangered the successes of the economic recovery achieved so far and the very operation of the exceptional trade scheme that allows exports to continue.

Given the seriousness of the scheme and its scope, the bid to restructure the industry has been equivalent since the economic future of the country depends on said restructuring being carried out effectively and firmly, suppressing the elements of the institutional culture of impunity still present and readapting a marketing model that requires a substantial adjustment of its control and monitoring structure.

In summary, after the successes achieved in economic, political-institutional and geopolitical matters, the restructuring of the oil industry still needs to be completed so that President Maduro can harmonize his political-economic management model, strengthening it in the medium and long term.

International circumstances
In addition to the domestic level, the restructuring of the industry is vital under the new energy rearrangements that have been occurring after the formal escalation of the war in Ukraine a year ago.

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Venezuela has been left too exposed to the Western orbit after Russia redirected its energy exports from Europe to the Asian market in response to comprehensive “sanctions” by Western powers.

Even Saudi Arabia now has China as its first customer for its exports. Additionally, there are no large oil reserves to be developed in the Western world, and somehow, Venezuela continues to be a reference point in this field.

In this rearrangement, which has resulted in a bargaining war and intense competition for market shares amid an excess supply, PDVSA’s adaptation is a state matter of extreme priority. In addition, as the Mexico Talks continue to stall, the aforementioned exposure to Western markets grows since the blockade is not expected to be lifted in the short term.

Venezuela has deepened its oil relationship with trusted partners in the multipolar world. And for this strengthening, the cleaning up of the industry from corrupt elements operating in key PDVSA processes, which has affected the generation of income and the horizon of possibilities to build the necessary confidence to attract investments for infrastructure and production, is key to increasing production and fully stabilizing the industry.

Proof of this was the recent visit to Venezuela by the president of the Russian state oil company Rosneft, Igor Sechín.

Rosneft was sanctioned in 2020 for its relationship with PDVSA. The partnership between the Russian oil company and PDVSA, in the form of minority participation in joint ventures such as Petromonagas, Petromiranda and Petrovictoria, was taken over by the company Roszarubezhneft, directly attached to the Kremlin.

But now, with Russia under sharper Western “sanctions,” Rosneft is back.

From this meeting came the announcement of Russia’s willingness to help increase crude oil production in Venezuela and consider possibilities of increasing exports to the market. This inevitably puts a magnifying glass on the logistics and dispatch processes in Venezuela.

On the other hand, Venezuela is making new efforts with Iran to strengthen its fleet of ships. Last February, the contract with Iran to manufacture two new ships was announced. The ships will be built by Iran Marine Industrial Company (Sadra) at its Bushehr shipyard in Iran.

Looking at the proportion of Russia, Iran and Venezuela as blockaded countries and under new practices outside of commercial formality, it is evident that a parallel energy system is taking shape to the detriment of the commercial scaffolding created by the countries that have orchestrated the blockades.

This may take shape and scope further, and even Venezuela could continue to increase its export quota from this new “stealthy trade order.”

Critical aspects of the restructuring
The industry demands a strong investment that is not possible in the current conditions of blockade and corruption schemes recently addressed. Nevertheless, some advances in terms of operational adaptation, narrowing of joint ventures and new moves make it possible to draw up a map of critical points that must be considered and where the emphasis of restructuring should be strengthened.

PDVSA has purchased 2.8 million spare parts from Iran for Venezuelan refineries. This means that, in terms of refining, the country has left US dependency. However, the long process of technological adaptation and change in the procurement system will continue to be complex.

Regarding gas, Trinidad and Tobago obtained a license from the US government for joint gas operations with Venezuela. Colombia is also requesting an exemption to receive gas from Venezuela.

According to PDVSA sources, Venezuela could recover some 500,000 barrels per day of production in a few months if it solves its “deferred production due to infrastructure deficit” problems. This category includes recoverable oil fields or fields operating until recently that have been stripped of essential supplies.

The production to be recovered must be consistent with the possibility of placing crude oil abroad. However, the crude oil subject to these recovery possibilities is fundamentally light crude oil located in the south of Lake Maracaibo in the Tomoporo Reserve (Trujillo state).

The mature Barinas and Apure fields contain light crude, some of which may be recoverable. The question of light crude oil is inherent to the allowance of national refineries, the use of light crude oils as diluents for heavy crude oils and its high commercial value.

Venezuela must maneuver a risky export stealth process. Any fluctuation in dispatches impacts production flow, making it variable. Its ability to “withstand” these variations is based on its storage capacity. For the long term that the blockade and the variations of the “stealth” export process are expected to be, the country does not need to depend on rented tankers for offshore storage.

In 2020, PDVSA had more than 35 million barrels of crude oil stored on land and offshore. On paper, the company has approximately 70 million barrels of onshore storage capacity across Venezuela. Still, nearly half of that storage capacity has been shut down over the past decade due to a lack of maintenance and deterioration of midstream infrastructure such as pipelines and pumps. Additionally, this issue concerns the strategic security of the country.

In any case, advancing the industry’s recovery is the first step to consolidating all the progress made and configuring a perspective of stability in production and exports in the medium term.

(Misión Verdad)

Translation: Orinoco Tribune

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