Luis Pacheco: Petroleum, collapse, and redemption

Dead Houses

By Luis Pacheco

President of the ad hoc PDVSA board of directors

In his novel “Casas Muertas”, Miguel Otero Silva tells the story of a Venezuelan town undergoing migrations to cities and oil producing areas. Nowadays, people are not running from rural towns to cities but from Venezuela and at an unprecedented rate in Latin America.

In 1955, Miguel Otero Silva (MOS) published Casas Muertas (Dead Houses), a tale about a town in the Venezuelan planes called Ortiz and its transformation due to disease and migrations to the cities and oil producing areas.

Carmen Rosa Villena – the protagonist of this story – leaves Ortiz filled with fear and hope in search of a new life in modern Venezuela. This modernity emerged, grew, and developed thanks to the presence of petroleum. This situation is narrated and described in detail in Otero Silva’s other novel Oficina N°1.

Six decades later, without a MOS to chronicle the events, the Venezuela that grew thanks to and in spite of oil has transformed into Dead Houses all across the nation. People are no longer running from rural towns to cities or oil fields but from the country and in unprecedented flows in Latin America (more than 4 million, according to the OAS).

Production drop

In 1998, Venezuela produced 3.4 million barrels of oil per day (MMBOPD) hitting record highs since the days prior to the oil industry’s nationalization in 1975. In June 2019, Venezuela has produced 745 MBOPD, according to secondary sources (OPEC Monthly Oil Market Report – July 2019).

The country’s refineries, once world-class industrial sites, are processing less than 20% of their nominal capacity. The low amount of gasoline currently consumed is imported at high prices. Over 1.8 trillion cubic feet of gas are burned every 24 hours in the country’s eastern region, a giant environmental – in addition to economic – offense.

State-owned company PDVSA, once revered in the oil world, is but a mere shadow of its previous glory, with workers joining their fellow countrymen abroad.

This unusual production collapse, in all activity, over the course of 20 years, is unique within the Organization of Petroleum Exporting Countries (OPEC). It has granted Venezuela the dubious distinction of being the oil producing nation with the worst performance at a moment in which oil producers are competing for market shares and oil prices are fighting volatility.

Difficult to explain

The fact that the Venezuelan industry, once the crown jewel, is in this situation, is an unexpected and bitter surprise for most Venezuelans and a hard riddle to solve for strangers.

The scenario is even more disconcerting is we consider that Venezuela has the greatest amount of extra-heavy resources in the world, as well as the largest reserves of proven conventional crude in Latin America, in addition to a significant potential for onshore and offshore natural gas production.

Many analysts have tried to explain this enigma and, in fact, have found plausible explanations, ranging from excessive state intervention – and the resulting corruption – to a lack of technical capacity and, most recently, a lack of investment following the oil price fall in 2014.

In the 1990’s PDVSA, with reluctant government support, implemented a strategy to attract foreign companies that would invest in the entire value chain. Growing market opportunities in Asia and Latin America, as well as Venezuela’s broadening resource base, presented an opportunity to use the oil industry as a driver of growth for the rest of the economy.

This strategy was guided by two main principles: the country had more untapped resources than capacity to develop them and the need to introduce technology and competition into an industry that was showing signs of inefficiency as a result of its monopoly.

More dead houses

With the arrival of Hugo Chavez to power in 1999, Venezuela’s oil industry entered a stage that saw a mixture of all the worst features of the nation’s relationship with oil. The government, emboldened by high oil prices (2004-2014) shamelessly repeated every mistake made by past administrations: exchange control, currency overvaluation, destruction of the country’s production apparatus, and acquisition of unpayable foreign debt.

In addition to that, it renegotiated most of the existing contracts with foreign companies and expropriated those that did not consent to the changes. Oil contractors, considered political adversaries, were also nationalized.

PDVSA was turned into the government’s political arm, becoming an instrument in its geopolitical strategy in the region and a source of extrabudgetary funds for its social programs; the oil industry became a means to obtain political favors under a false nationalistic discourse.

Lack of investment in the sector

Meanwhile, that period of high prices did not bring new oil projects. Old production fields languished over a lack of investment and technical know-how and, contrary to what other producing nations did during the boom years, Venezuela did not invest enough in its own oil industry. The country, whether due to negligence or because high oil prices were merely disguising the inherent crisis, watched in silence.

As prices began to crumble in November 2014, the oil sector and PDVSA in particular, were in despair. There were catastrophic accidents in refineries and drilling platforms; oil spills, loss of refining capacity and, consequently, a need to import gasoline for the domestic market and, most revealing of all, the rapid fall of production capacity and the apparent inability or unwillingness to bring it back up.

A complex crisis

Nowadays, Venezuela – undergoing hyperinflation and a deep political crisis – has continued its nosedive, and with it its oil sector. The apparent socialist paradise turned out to be just a Potemkin Village, with painted porches paid by the oil revenue, but no substance behind.

You would think that, after what they have been through over the past years, Venezuelans should have learned the lesson that having abundant underground resources does not guarantee that the society will develop harmoniously and that having the State control oil revenues has brought more heartaches and an aberrant State-society relation.

The idea that state control of the so-called strategic industries, including oil, it is the best option for development, however, persists in the DNA of Venezuelan politics, even for new generations that regard this particular “godsend” as a birthright.

Global warming, the shifting global energy mix, the development of shale oil, the new OPEC (with a precarious alliance between Russia and Saudi Arabia), the emergence of competitive alternative energy sources, and so on, are factors that we could not possibly imagine in the early 21st century. Long gone are the days in which Venezuelan oil was sought by the global oil industry. Now, with an industry in shambles, cut off, and weakened by strict and inadequate legislation, we must climb quite a steep hill in a short amount of time.

Back to being world leaders

If we wish to get back to being relevant players, given that oil still offers a window of opportunity, we must free ourselves of failed ideas: state monopoly, rigid legislations, centralized control of the revenue, the damaging divorce between state and society, etc.

The human, financial, and technological resources necessary for that reconstruction will only emerge if we are capable to structure legal, social, and fiscal conditions that will make us competitive with the rest of the oil world.

On the other hand, while the country discusses how to get out of its current predicament, and tries to calculate how many barrels of oil it will need for such a colossal effort, our competitors and allies carry on towards a future where it seems we have little participation.

The lesson of these “Dead Houses”

For this and many other reasons, oil will no longer suffice to develop an economy that is competitive in the 21st century. Oil, like coal, will keep losing relevance. At which rate? We don’t know. The old advice of planting oil has not been of much use, but we must use it, at least as a catalyzer for development.

The best way of redeeming ourselves in this hell that is Venezuela nowadays is to break free from the ghosts that tie us to the past. Our myths are filled with heroes on horseback that – now immortalized in bronze in town squares – are incapable of adapting to the hurricane of change we face. It is our duty to create new narratives that enable us to access modernity without leaving behind more dead houses.

For more information, check Energía16

See also:  Venezuelan oil exports to China drop following U.S. sanctions

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