Saturday, November 03, 2018

Before the Storm -This article was published in the November 2018 issue of the EXPLORER, the magazine of the American Association of Petroleum Geologists https://www.aapg.org

Before the Storm

Venezuela’s PDVSA 1998


Looking at the ruins of the Parthenon today, perched high on the Acropolis of Athens, it is difficult to imagine that those pollution-tainted marbles were once the pinnacle of a civilization that gave us the principles of philosophy, mathematics, logic and democracy. On any given day, the multitudes of tourists that visit the site each year need to close their eyes and mute the city noises of today’s Athens and imagine the Parthenon as it was to be able to picture Pericles addressing the Athenians.



Looking at the ruins of what is left today of Petroleos de Venezuela S.A., it is difficult to imagine that, like the Parthenon, it once stood proudly as Venezuela’s beacon of modernity. PDVSA was the rarest of specimens: a successful state-owned corporation and one of the most widely praised integrated oil and gas companies.


In this essay, I will go back in time and, with the benefit of hindsight, try not only to describe what PDVSA was like in its heyday but also to identify virtues and flaws. Since I spent 16 years of my professional life in PDVSA, my views are not entirely devoid of bias and opinions, but I have done my best to err on the side of truth as I see it rather than try to be neutral.

I have chosen PDVSA in the year 1998 as the “family portrait” from which to derive the analysis. This is the year in which Hugo Chavez, then a retired army officer and a failed putschist, was elected as president of Venezuela in a runaway election. One might argue that 1998 was the last year in which PDVSA enjoyed relative independence from political interference, and the beginning of the downward slope that has taken the company to the dire straits in which it finds itself today.

The Nationalization


Before we look at 1998, let us briefly jump back to 1975, the year in which the then president of Venezuela, Carlos Andrés Pérez, in an environment of high oil prices, pushed legislation through Congress to nationalize the oil industry and expropriate the private companies that had operated the industry since its inception at the beginning of the 20th century. At the time, the little-known truth to Venezuelans was that the country’s oil production was in decline and significant new investment was needed to recover the dynamics of the industry. As a result of the nationalization process, PDVSA was created as a holding company to manage all oil-related operations in Venezuela. 

Ramon Espinasa, PDVSA’s former chief economist and now an industry analyst, argues that the reasons behind the successful transition and the consolidation and growth of the national oil industry are many, but the most important are as follow: 
  • PDVSA, although a state-owned company, was subject to private law – a corporation whose shares were the property of the nation. Being under private law, PDVSA and its subsidiaries were subject to the Commercial Code, with the transparency and accountability safeguards that this entails. The distant relationship ensured that the government had no direct interference in the operation of the company.
  • At the time of nationalization, it was decided to keep the structures of the transnational companies that operated in the country, which became PDVSA’s affiliates. In the same way, the systems of checks and balances were maintained to ensure the transparency of the national corporations. These structures were gradually merged until, in late 1997, there was only one operating company. 
  • By 1975, almost all the personnel, at different levels, were Venezuelan. The nature of a private law company allowed PDVSA and its affiliates to ensure competitive salaries with the international oil industry and thus preserve the most qualified personnel, at least in the initial stages.
  • PDVSA was allowed to retain the net after-tax earnings to finance its investments. Also, a legal reserve of 10 percent of annual gross income was established to fund PDVSA’s expenditures. The company was able then to grow steadily, financing its investments and paying taxes similar to those paid in other oil countries.
In 1975, the Venezuelan oil industry produced 2,346 thousand barrels per day, down from a production peak of 3,708 in 1970, and crude oil reserves were of the order of 18,390 million barrels. It had four large refineries built by the foreign oil companies during the 1940s and ‘50s to process light and medium oils that would satisfy the residual fuel oil market of the Eastern Atlantic Coast of the United States but were not adequate for the changing transportation market.

Fast Forward


PDVSA circa 1998 is a proxy for the evolution of the Venezuelan oil industry since its nationalization. This is a loose analogy, as numbers are a poor representation of an organization’s people, its strategy and its execution, but it gives at least a fair sense of the company and its dynamic at that juncture in time.

In 1998, Venezuela’s production was 3,279 thousand barrels per day of crude oil, 170 thousand barrels per day of liquefied petroleum gas and 3,965 million cubic feet per day of natural gas, which amounts to a total output of 4,133 thousand barrels per day of oil equivalent, out of reserves of 76,108 million barrels of crude oil and 146,573 billion cubic feet of natural gas – a significant increase compared to 1975.

Equally, in 1998 PDVSA had a net crude oil refining capacity of 3,096 thousand barrels per day, of which 1, 620 thousand barrels per day were in Venezuela (including Isla Refinery in Curaçao), 1,222 thousand barrels per day in the United States and 252 thousand barrels per day in Europe; this was the result of PDVSA successfully pursuing, during the ‘80s and ‘90s, the so-called “Internationalization Strategy.” The strategy called for the acquisition of refining capacity in principal markets to ensure collocation of its increasing volumes of medium and heavy oil, while in parallel investing heavily in Venezuela to transform its refineries to eliminate residual fuel oil and increase production of high-quality white products, as the world’s market demanded.

The CITGO group of refineries in the United States (nine refineries), Nynas Petroleum in Swede, Belgium and the UK and Ruhr Oel in Germany, formed a valuable set of assets: 45 percent of crude oil exports and 85 percent of the Venezuelan heavy oil was processed in these refineries.

By 1998, PDVSA was on the road to becoming an energy company, long before such denominations were in vogue: first, the government had assigned to PDVSA the management of the troubled national petrochemical industry and later the control of the coal mines on the western side of Venezuela. Also, PDVSA had finally created an affiliate exclusively dedicated to the development of the natural gas industry, and through the use of proprietary technology, Orimulsion, had developed a niche market of under-boiler fuel based on a portion of its vast heavy hydrocarbons resources in the Orinoco Belt.

All of this evolution required technology and well trained personnel. The technology was the responsibility of the Venezuelan Institute of Petroleum Technology, or INTEVEP, the research laboratory that registered more than 300 patents between 1976 and 1999, and employed around 160 researchers with doctorates and more than 200 with master’s degrees by 1998. The training and education were carried out mainly by the International Center for Education and Development, or CIED, an educational institution that evolved to become a corporate university, and had the capacity to cater to 2,000 people per day, providing a wide range of courses through all of its sites across the nation, from basic technical training to advanced executive education.

In the ‘90s, with the blessing of the government, PDVSA designed and executed the “Apertura Strategy,” namely, devising business models that would allow for the participation of private capital in the development of upstream projects as well as involvement in the internal market distribution chain. The business models took many forms: operational contracts for marginal fields, profit sharing contracts for risk exploration and joint ventures for the development of integrated projects for the Orinoco Belt.

By 1998, this strategy had attracted 55 companies from 18 different countries, including 12 Venezuelan companies, collecting U.S. $2 billion ($3 billion in today’s money) in signing bonuses and commitments to invest up to $20 billion until 2001 ($30 billion today). As a result, PDVSA awarded or created 33 operating contracts, four joint ventures in the Orinoco Belt, eight profit sharing risk exploration contracts, as well as multiple foreign and Venezuelan companies participating in the lubricants and gasoline retailing business. The strategy encompassed a veritable cornucopia of actors and investments that permitted the nation to envision a bright future in synchrony with its abundant hydrocarbons resource base.

An Illusion Shattered



By the end of 1997, PDVSA had become a very complex corporation, and under pressure from rising costs, low prices and the growing role of foreign companies in the industry, it embarked on a major reorganization of its oil and gas business. PDVSA decided to merge its three integrated oil and gas operating affiliates (Corpoven, Lagoven and Maraven) into one, creating business divisions in their place, under the management of a now empowered PDVSA. The reorganization, although undoubtedly necessary from a business point of view, left in its wake a number of fault lines in the form of discontent among personnel and the forced coexistence of diverse corporate cultures – a legacy from pre-nationalization days whose importance was underestimated and did not bode well for the years to come.

By 1998, PDVSA’s long journey since its inception was, by most accounts, a success. However, its technical and commercial evolution was not entirely celebrated within a country that felt the oil industry continued to be privileged territory. The OPEC quota policy, for example, was always a contentious issue between Venezuela’s oil ministry and the company technocrats. Other, more significant sources of irritation were oil workers’ salaries and benefits; the isolation of the industry from general society – in particular, from the communities in operational areas; the discussion around the investments overseas; and, importantly, the controversy surrounding the growing role of foreign capital in the upstream side of the business. To be sure, this irritation was not limited to politicians – it extended to academics, business people and the general public.

PDVSA managers were raised in a culture that strove first and foremost for technical prowess and, in hindsight, were ill-equipped to be sensitive to the possible political nuances of their activities and decisions. In modern management speak: PDVSA was not very adept at managing its stakeholders. In turn, paradoxically, society at large cared very little about understanding the business of the oil industry, so long as it was generating enough revenue for the country to share.

When Hugo Chávez came into office in 1999, in an environment of low oil prices, he did not arrive alone. He brought with him a prejudiced opinion of the oil industry and its workers, borne of years of tension and misunderstanding, as well as a cadre of advisers made of PDVSA’s historical adversaries. Not surprisingly, the PDVSA establishment was apprehensive about its new political masters. The two forces were bound to clash sooner or later, and after some skirmishes, the tensions exploded destructively in the widely reported but little understood PDVSA crisis that boiled up in the spring and winter of 2002.

After 20 years, little remains of the PDVSA described here. As a Venezuelan, I still struggle between the sadness of paradise lost and the realization that the utopia was flawed and that the loss was inevitable. State-owned enterprises are prone to failure, either through inefficiency or as victims of political meddling, and PDVSA turned out to be no exception.

In Athens, the ruins of the Parthenon bear witness to a bygone golden age. In Venezuela, the possibility of progress that once was its oil industry is almost impossible to identify among the rubble in a country entangled in political and economic turmoil. Venezuelans seem to have forgotten the principles that guided their aspirations and dreams for decades and are now being forced to deal with a world of shattered illusions.


A history-based series, Historical Highlights is an ongoing EXPLORER series that celebrates the "eureka" moments of petroleum geology, the rise of key concepts, the discoveries that made a difference, the perseverance and ingenuity of our colleagues – and/or their luck! – through stories that emphasize the anecdotes, the good yarns and the human interest side of our E&P profession.

Friday, October 19, 2018

PDVSA 1998: Antes de la Tormenta

El Texto que aquí comparto fue publicado originalmente en el portal PRODAVINCI y es el resultado de  reflexiones que mi amigo , Hans Krause, promovió con motivo de las dos décadas de la llegada del chavismo al poder.




Cuando uno mira hoy las ruinas del Partenón, colgadas de lo alto de la Acrópolis en Atenas, es difícil imaginar que esos mármoles manchados fueron una vez el pináculo de una civilización que nos dio los principios de la filosofía, las matemáticas, la lógica y la democracia. Los miles de turistas que visitan el lugar cada año necesitan cerrar los ojos y silenciar los ruidos de la ciudad de la Atenas de hoy, para poder imaginar a Pericles dirigiéndose a los atenienses en un día cualquiera.

Aunque la analogía pueda parecer pedante para el lector, y probablemente lo sea, mirando las ruinas de lo que queda hoy de Petróleos de Venezuela SA (PDVSA), es difícil imaginar que, al igual que el Partenón, alguna vez ella fue el faro de la modernidad de Venezuela. PDVSA fue el más raro de los especímenes: una corporación estatal exitosa y una de las compañías integradas de petróleo y gas más elogiadas.

En este ensayo retrocederé en el tiempo y, con el beneficio de la retrospectiva, no solo describiré cómo era PDVSA en su apogeo, sino también tratar de identificar sus virtudes y sus defectos. Ya que pasé 16 años de mi vida profesional en PDVSA, mis puntos de vista no están libres de sesgos y opiniones, pero he hecho todo lo posible por errar del lado de la verdad como la veo, en lugar de tratar de ser neutral.

Elegí a PDVSA en el año 1998 como el retrato familiar del cual derivar el análisis. La elección de este año es arbitraria, pero es relevante porque es el año en el que Hugo Chávez, entonces un oficial retirado del ejército y un golpista fallido, fue elegido como presidente de Venezuela con una mayoría significativa. Se puede argumentar que 1998 fue el último año en el que PDVSA disfrutó de una relativa independencia de la interferencia política y el punto de partida de la pendiente descendente que ha llevado a la empresa a la difícil situación en que se encuentra hoy.

La nacionalización

Antes de analizar 1998, volvamos brevemente a 1975, año en que el entonces presidente de Venezuela, Carlos Andrés Pérez, en un entorno de altos precios del petróleo, impulsó la legislación en el Congreso para estatizar la industria petrolera y expropiar a las empresas privadas que habían operado la industria desde su inicio a principios del siglo XX. En ese momento, la verdad poco conocida por los venezolanos era que el nivel de producción de petróleo del país estaba disminuyendo y que se necesitaba de una nueva inversión significativa para recuperar la dinámica de la industria.

Como resultado del proceso de nacionalización, se creó a PDVSA como una empresa "holding" para administrar y coordinar todas las operaciones relacionadas con el petróleo en Venezuela, que pasaron a manos de filiales operadoras.

Ramón Espinasa, ex Economista Jefe de PDVSA y ahora analista de la industria, argumenta que las razones detrás de la transición exitosa y la consolidación y el crecimiento de la industria petrolera nacional son muchas, pero las más importantes son las siguientes:

·           PDVSA, aunque era una empresa estatal, estaba sujeta a la ley privada, una corporación cuyas acciones eran propiedad de la nación. Siendo de derecho privado, PDVSA y sus subsidiarias estaban sujetas al Código de Comercio, con las garantías de transparencia y responsabilidad que esto conlleva. La relación a distancia aseguró que el gobierno no tuviera interferencia directa en el funcionamiento de la empresa.
·           En el momento de la nacionalización, la decisión fue mantener las estructuras de las empresas transnacionales que operaban en el país, que se convirtieron en filiales de PDVSA. De la misma manera, se mantuvieron los sistemas de control y balance existentes pre-nacionalización para asegurar la transparencia de las nuevas corporaciones nacionales. Estas estructuras se fusionaron gradualmente hasta que a fines de 1997 solo existía una empresa operadora.
·           Para 1975, casi todo el personal, a todo nivel, era venezolano. La naturaleza de una empresa de derecho privado permitió que PDVSA y sus filiales aseguraran salarios competitivos con la industria petrolera internacional y así mantener al personal más calificado, al menos en las etapas iniciales.
·           A PDVSA se le permitió conservar las ganancias netas después de impuestos para financiar sus inversiones. Además, se estableció una reserva legal del 10% del ingreso bruto anual para financiar los gastos de PDVSA. La empresa pudo entonces crecer de manera constante, financiar sus inversiones y pagar impuestos similares a los pagados en otros países petroleros.

En 1975, la industria petrolera venezolana producía 2.346 MBD (miles de barriles diarios), por debajo de su pico de producción de 3.708 MBPD en 1970, y las reservas probadas de petróleo crudo eran del orden de 18.390 MMB (millones de barriles). Tenía cuatro grandes refinerías construidas por las compañías petroleras extranjeras durante los años 40 y 50 para procesar petróleos livianos y medianos y que estaban orientadas a satisfacer el mercado de “fuel oil” residual de la costa atlántica de los Estados Unidos, pero que no estaban adecuadas para el cambiante mercado de transporte automotor.

Adelantando la mirada

Miraremos entonces a PDVSA alrededor de 1998 como representación de la evolución de la industria petrolera venezolana desde su nacionalización. Esta elección es una simplificación, ya que los cifras son en todo caso una representación incompleta de la organización y su gente, su estrategia y su ejecución, pero nos dará al menos una imagen razonable de la compañía y su dinámica en ese momento.

En 1998, la producción de Venezuela fue de 3.279 MBD de petróleo crudo, 170 MBD de GLP (gas líquido de petróleo) y 3.965 MMPCD (millones de pies cúbicos por día) de gas natural, lo que equivale a una producción total de 4.133 MBPD de petróleo equivalente, con unas reservas de 76.108 MMB de petróleo crudo y 146.573 BCF de gas natural, un aumento significativo en comparación con 1975.

Del mismo modo, en 1998, PDVSA tenía una capacidad neta de refinación de petróleo crudo de 3.096 MBPD, de los cuales 1.620 MBD estaban en Venezuela (incluida la Refinería Isla en Curazao), 1.222 MBD en los Estados Unidos y 252 MBD en Europa; esto como resultado de que PDVSA ejecutó con éxito, durante las décadas de los 80 y 90 del siglo XX, la llamada "Estrategia de Internacionalización”. La estrategia giraba alrededor de la adquisición de capacidad de refinación en nuestros principales mercados, con el objetivo asegurar la colocación de sus crecientes volúmenes de petróleo mediano y pesado. En paralelo, se invirtió fuertemente en Venezuela para transformar el parque de refinación nacional, para así minimizar la producción de fuel oil” y aumentar la producción de derivados de alta calidad, como demandaba el mercado mundial.

El grupo de refinerías CITGO en los Estados Unidos (9 refinerías), Nynas Petroleum en Suecia / Bélgica / Reino Unido y Ruhr Oel en Alemania, formaron un valioso conjunto de activos: el 45% de las exportaciones de petróleo crudo - 85% del petróleo pesado venezolano - se procesaba en estas refinerías.

Para el año 1998, PDVSA estaba en camino de convertirse en una compañía de energía, mucho antes de que esas denominaciones estuvieran de moda: primero, el gobierno había asignado a PDVSA la gestión de la problemática industria petroquímica nacional y luego el control de las minas de carbón en el occidente de Venezuela. Además, PDVSA finalmente había creado una filial dedicada exclusivamente al desarrollo de la industria del gas natural y, mediante el uso de la tecnología propietaria, Orimulsión, había desarrollado un nicho de mercado de combustible de calderas basado en una parte de los vastos recursos de hidrocarburos pesados en la Faja del Orinoco.

Toda esta evolución requirió de tecnología y personal bien entrenado. La tecnología fue responsabilidad de INTEVEP, el laboratorio de investigación que entre 1976 y 1999 registró más de 300 patentes, con alrededor de 160 investigadores con títulos de doctorado y más de 200 con títulos de maestría. La capacitación y la educación fueron llevadas a cabo principalmente por CIED, una institución educativa que había evolucionado desde sus humildes comienzos, CEPET, hasta convertirse en una universidad corporativa, y que tenía la capacidad en todas sus sedes a nivel nacional para atender a dos mil personas por día, brindando una amplia gama de cursos, desde la formación técnica básica hasta la educación ejecutiva avanzada.

En los años 90, con la bendición del gobierno de entonces, PDVSA diseñó y ejecutó la "Estrategia de Apertura", diseñando innovadores modelos de negocios que permitirían la participación del capital privado en el desarrollo de proyectos aguas arriba y la participación en la cadena de distribución del mercado interno. Los modelos de negocios así diseñados adoptaron muchas formas: contratos operacionales para campos marginales, contratos de participación en las ganancias para la exploración a riesgo y empresas mixtas para el desarrollo de proyectos integrados para la Faja del Orinoco.

Para 1998, esta estrategia había atraído a 55 empresas de 18 países diferentes, incluidas 12 empresas venezolanas, que recaudaron USD 2 mil millones (USD 3 mil millones de 2018) de bonos de firma, y compromisos de inversión de alrededor de USD 20 mil millones hasta 2001 (USD 30 billones de 2018). Como resultado, PDVSA otorgó o creó 33 Contratos Operativos, 4 Empresas Conjuntas en la Faja del Orinoco, 8 Contratos de Exploración a Riesgo, así como múltiples empresas extranjeras y venezolanas que participan en el negocio de distribución y venta de lubricantes y combustible. El resultado de la estrategia abarcó una verdadera cornucopia de actores e inversiones, que le permitieron a la nación visualizar un futuro brillante en sincronía con su abundante base de recursos de hidrocarburos.

Una ilusión destrozada

Para fines de 1997, PDVSA se había convertido en una corporación muy compleja, bajo presión del aumento de los costos, los bajos precios y el creciente papel de las compañías extranjeras en la industria. Fue así como entonces PDVSA acomete una importante reorganización de su negocio de petróleo y gas. PDVSA decidió fusionar sus tres filiales operadoras integradas de petróleo y gas (Corpoven, Lagoven y Maraven) en una sola, creando en su lugar divisiones de negocios bajo la administración de una PDVSA que ahora va más allá de su misión coordinadora. La reorganización, aunque sin duda fue necesaria desde el punto de vista empresarial, dejó a su paso una serie de grietas organizacionales asociadas con el descontento del personal y la coexistencia forzosa de diversas culturas corporativas, un legado de los días de pre-nacionalización cuya importancia fue subestimada, y que resultó no ser un buen presagio para los años por venir.

Para 1998, el largo periplo de PDVSA había resultado, según la mayoría de las cuentas, en un éxito. Sin embargo, a pesar de su indudable evolución técnica y comercial, no todos fueron elogios en un país que consideraba que la industria seguía siendo un enclave. La política de cuotas de la OPEP, por ejemplo, siempre fue un tema polémico entre el ministerio de energía y minas de Venezuela y los tecnócratas de la compañía. Otras fuentes de irritación también contribuyeron al roce: los salarios y beneficios de los trabajadores petroleros; el aislamiento de la industria de la sociedad general, en particular de las comunidades en áreas operativas; la discusión en torno a las inversiones en el extranjero; y, lo que es más importante, la controversia creada por el creciente papel del capital extranjero en las actividades de exploración y producción. Sin duda, esta irritación no se limitó a los políticos, sino que se extendió a los académicos, a los empresarios y al público en general.

Los gerentes de PDVSA se formaron en una cultura que perseguía ante todo la excelencia técnica y, en general, estaban mal equipados para ser sensibles a los posibles matices políticos de sus actividades y decisiones. En el argot de la gerencia moderna: PDVSA no era muy hábil en la gestión de su entorno social y político. A su vez, paradójicamente, a la sociedad en general le importaba nada o muy poco entender el negocio de la industria petrolera, siempre y cuando este produjera suficientes ingresos para que el país los disfrutará.

Cuando Hugo Chávez llegó al poder en 1999, en un entorno de bajos precios del petróleo, no llegó solo. EL nuevo presidente trajo consigo una opinión prejuiciada sobre la industria petrolera y sus trabajadores, derivada de años de tensiones y malentendidos, así como también se rodeó de un grupo de asesores compuesto de adversarios históricos de PDVSA; no en vano, la clase dirigente de PDVSA sentía desconfianza de sus nuevos amos políticos.

Hoy entiendo que las dos fuerzas estaban destinadas a enfrentarse tarde o temprano. En el 2002, después de algunas escaramuzas, las tensiones explotaron de manera destructiva en el contexto de una crisis social y política generalizada. PDVSA ya no se recuperaría.

Veinte años han pasado desde 1998 y muy poco queda de la PDVSA que describo aquí. Como venezolano me debato entre la tristeza causada por el paraíso perdido y la comprensión de que la utopía era defectuosa y que su pérdida era inevitable. Las empresas estatales son propensas al fracaso, ya sea por ineficiencia o como víctimas de la injerencia política, y PDVSA no fue una excepción.

En Atenas, las ruinas del Partenón dan testimonio de una época dorada. En Venezuela, la posibilidad de progreso que una vez fue su industria petrolera es casi imposible de identificar entre los escombros en un país enmarañado en la agitación política y colapso económico generalizado. Los venezolanos parecen haber olvidado los principios que guiaron sus aspiraciones y sueños durante décadas y hoy se ven obligados a lidiar con un mundo de ilusiones destrozadas.

Monday, April 09, 2018

VENEZUELA'S OIL MYTHOLOGIES HAVE HINDERED ITS DEVELOPMENT


Cultural myths — and by extension, the suppositions they inspire — have played a major role in shaping Venezuela's relationship with and management of oil resources throughout much of the last 100 years, writes nonresident fellow Luis Pacheco. To achieve sustainable economic and social development, Venezuela must move beyond such beliefs and establish a new approach that is more attuned to current times. 


BAKER INSTITUTE FOR PUBLIC POLICY - ISSUE BRIEF 02-05.18


Friday, March 09, 2018

Venezuela and the Pitfalls of Resource Wealth - Published in Human Capital, America's Review. March 9, 2018


The underdevelopment of Venezuela’s massive oil resource has been a puzzle to some commentators for many years. Luis A Pacheco PhD, a nonresident fellow at the Baker Institute Center for Energy Studies, gives a deeper perspective on why the country has so far failed to tap its oil potential.

State-owned Petroleos de Venezuela SA (PDVSA) produced an average of 3.4mn b/d of crude oil in 1998, a historic high since the nationalization of the oil industry in 1975. By December 2017, it was producing just 1.6mn b/d. This collapse in production, unique among Opec nations, gives Venezuela the dubious distinction of being the worst-performing oil producer at a time when others are jockeying for market share, and prices are highly volatile. The oil industry was once the jewel in the crown of the Venezuelan establishment, so the fact that it is in its current condition is a bitter surprise to most Venezuelans and a puzzle that is hard for outsiders to understand. The situation is even more mystifying when we remember that Venezuela has the largest unconventional heavy oil resource in the world, the largest conventional proved reserves in Latin America and significant natural gas potential on and offshore.

Myth 

Many analysts have tried to explain the puzzle of Venezuela’s oil sector and have found plausible explanations ranging from excessive state intervention and the ensuing corruption to lack of technical wherewithal and – of late – lack of investment because of low oil prices since 2014.
But why is it that Venezuela – or its political class – ignores lessons from its own history, as well as that of other countries, and mismanages its natural resources? There is no single or simple answer to that question, but part of the explanation lies hidden in the fabric of society and its myths.
From a very young age, Venezuelans are taught that their country possesses immense natural wealth. It is literally made of oil, gas, gold, diamonds and sandy beaches and is spread across diverse geographies. It is, in short, a Latin American paradise. When this is taught in the historical context of Venezuela being one of the world’s most successful economies between the 1920s and the 1970s, the sense of entitlement – even hubris – that the society has acquired is easy to understand.

Origin 

Venezuela’s oil industry came into being in the early part of the 20th century with discoveries on the eastern shore of Lake Maracaibo in the west of the country. The prolific nature of the oil basins in the west and east of Venezuela soon made it a preferred destination for US and European oil companies and transformed a backward agricultural society into a thriving modern economy, when compared with its less-well-endowed neighbors.

This economic expansion was not without hiccups. During the first half of the 20th century, Venezuela was ruled by a series of dictatorial military regimes that used the new wealth not only to develop the country but also to keep their political opponents in check – and sometimes through violence. It is, therefore, no surprise that oil – and specifically the foreign oil companies – became associated in the public mind with military regimes and synonymous with foreign exploitation and cronyism among the elites. This mythic structure runs deep and still colors how Venezuelans look at their country’s most important industry. Because of this, or because for the major part of the 20th century Venezuelans believed that oil reserves would run out quickly, successive governments have looked at oil not as an industry but as a provider of funding for the development of other industries. This approach also fostered in some the belief that the oil industry was a fast-money scheme that somehow perverted an otherwise virtuous society.

In the mid-1970's, when the nationalization of the oil industry coincided with a steep rise in oil prices, one could see the myths at work. The oil industry was owned and operated by Venezuelans but was still viewed with suspicion by society – and mainly by politicians. In return, the oil industry isolated itself from the mainstream, in the belief that it was protecting its operational efficiency from contamination. The government, awash in oil money that reinforced the myth of Venezuela being a rich country, invested in large and mainly inefficient projects while financing popular social programs and amassing a large foreign debt to balance the budget deficits that ensued as the oil bonanza came to a halt, leaving production capacity neglected.

Decline 

The Venezuelan economy went slowly but surely into decline in the two decades following nationalization. It did not find its footing again, haunted as it was by memories of the recent oil bonanza and the inability of successive governments to make the necessary adjustments. The one exception to this happened during the administration of Carlos Andres Perez, who made a valiant start at tackling the problems before being impeached.

Paradoxically, in the hands of PDVSA, the oil industry not only survived but thrived, becoming a big player in the global market. In the 1990's, PDVSA – with the reluctant support of the government – implemented a strategy to attract foreign companies back to invest across the oil value chain. The reasoning behind this was that the combination of demand growth in Asia and Latin America and the size of the Venezuelan resource base presented a unique opportunity to use the oil industry as a growth generator for the whole economy. This strategy and its success fed into the old myths about the industry, further increasing tensions between the ‘petroleros’ and broader society. PDVSA was ill-equipped to identify this tension, let alone ease it.

The end of the 20th century brought back with it the old ghosts – the oil price tumbled, creating yet another crisis for the Venezuelan economy at a time when it was still reeling from a run on its banking system. In the wake of the crisis, the 1998 general election put in place a new administration led by Lt Col Hugo Chavez, a former paratrooper who had led a failed government coup in 1992.

The Chavez administration, being a combination of the old left and nationalist elements, soon came into conflict with an oil industry that was regarded as being too autonomous and not adequately aligned with political objectives. Following a series of skirmishes during the first two years of the new administration, the tension finally exploded in 2002-2003 amid a general strike that dragged PDVSA into the political arena and the country into economic crisis.

Purge 

President Chavez, who was both deposed and reinstated in early 2002, decided to purge PDVSA of what he perceived to be political enemies. He then proceeded fired around 20,000 company employees at the beginning of 2003, including most of the management and technical teams, and – incredibly enough – none of them seemed to see it coming.

Such a decision would severely affect the operational capacity of any company, let alone PDVSA, but the blow was softened by two external factors. On the one hand – and paradoxically – the presence of the foreign oil companies allowed for a rapid recovery of production levels. On the other side, oil prices set off on a sustained rally that papered over most of the cracks and hid the gradual loss of production capacity and general mismanagement.

The government, emboldened by high oil prices, repeated the mistakes of the 1970s with a vengeance between 2004 and 2014. It forcefully renegotiated most of the existing contracts with foreign oil companies, expropriating the assets of those that failed to acquiesce to the changes, and removed oil contractors that were deemed to be political adversaries. These activities transformed PDVSA into a political wing of the government, which in turn used the company to leverage its geopolitical strategy for the region and to provide extra-budget funds for its social programs. The government allowed currency overvaluation under strict exchange controls, turning Venezuela into a port economy while building a mountain of foreign debt.

When we look at the Chavez government’s record over the mentioned period of high oil prices, we notice that no new oil projects were developed, and that old fields were left alone to decline because of a lack of investment and technical know-how. Venezuela failed to invest anywhere near enough in its upstream or downstream oil industries at a time when other oil-producing countries were reinvesting profit from the price bonanza.

PDVSA came undone as oil prices started to crumble in November 2014. There were catastrophic accidents at refineries and on drilling rigs, oil spills and a sharp loss of production capacity without the apparent ability or will to recover it. To make things worse, a loss of refining capacity created the need to import refined products for the highly subsidized domestic market. In parallel, and in what appears to have been a political purge, there were rapid management turnarounds at PDVSA. The company worked its way through three presidents in less than six months and saw to the prosecution of three former PDVSA presidents and at least 80 managers on corruption charges.

Where are we now?

The collapse of Venezuela's oil sector is the collapse of an economy that has few other potential sources of growth. The economy is 35pc smaller than it was in 2013 in terms of total GDP and 40pc smaller in terms of GDP per capita.

The story is not over. Venezuela, caught in hyperinflation and a deep political crisis, continues to spiral down with its oil sector. The socialist paradise has turned out to be a Potemkin Village where the facades were painted with oil rent, and there is almost no substance behind them.

In the meantime, the political leadership remains hostage to failed ideas of state economic control and the Sisyphean task of growing out of oil dependence as society becomes ever-more addicted to oil. The old myths that tie the country to the ghosts of its past threaten to stand in the way of a brighter future.