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Venezuela's PDVSA reduced to rubble

By Jose Toro Hardy, translation by Miguel Octavio

Jose Toro Hardy, who was an outside Director of PDVSA during the second Caldera administration, wrote this article today in El Universal that I think is worth translating. In very simple words Toro Hardy summarizes what everyone already knows about the state of the country’s oil industry (I wonder what his brother, the country’s Ambassador to Great Britain, would tell an Englishman that asked him about the veracity of his brother’s article):

PDVSA is suffering the consequences of a revolutionary cataclysm. After firing more than 20,000 workers with an average of fifteen years working for the company, the Government threw away in the waste basket some 300,000 years of experience and knowledge that those workers had accumulated. The results have been what was expected. Let’s see some details:

Production volume is falling in dramatic ways. Although the Ministry of Energy and Mines asserts that production is at 3.3 million barrels a day, the true numbers that come from abroad, from either OPEC, or the International Energy Agency. Production is currently around 2.5 million barrels of oil a day.

Curiously, private investors that arrived with the oil opening (so criticized by Commander Chávez) are what has saved the day for the Government. Production from those projects has increased some 600,000 barrels per day to reach close to one million barrels a day. Meanwhile PDVSA’s own production has fallen from 2.7 million barrels a day to 1.5 million barrels.

Production by those private investors comes from the strategic associations of the Orinoco Oil Belt and from the marginal oil fields. However, in the case of the first, royalties are only 1% during the first 8 years, while in the case of the marginal oil fields, PDVSA has to pay a fee per barrel produced by the operators. The result is that the production that is increasing is the one that adds the least fiscal contribution to the Nation. The production that contributes the most, that of PDVSA, is collapsing.

Each year, due to normal production activities, the country’s oil production potential falls by approximately 25%. To replace these reserves, as well as expand the production potential according to plan, some US$ 5 billion in investments is required. Since those investments have not been made, PDVSA’s production is falling with giant steps. In the budget for 2004, the Government estimates a production of some 2.8 million barrels of oil a day. In the face of and absence of investments, that number may fall around two million barrels of oil a day.

The value of our exports is also falling abruptly. Our refineries are no longer capable of producing oil derivatives of higher value. As an example, last year 13 tankers of reformulated gasoline were exported monthly to the US. So far this year, there are news that only one such shipment has left, in the whole year. And it was returned when it arrived at its destination because it did not comply with all of the quality standards. But even less complex products and of less value, such as the case of diesel fuel, have been affected. Recently Shell returned a shipment of Diesel sold to Brazil because it did not meet specifications.

PDVSA was not able to meet on time the requirement that it present its annual report to the SEC in the US, which implies that financial markets are closed. And the fact is that no serious auditing firm wants the responsibility of auditing PDVSA’s finances. Moreover, facing an avalanche of accidents of all sorts, that have ended the extraordinary safety record that used to characterize the company, nobody wants to insure PDVSA either.

I am also informed that of the thirteen PDVSA tankers, six are broken down and others have lost their certification to navigate in international waters.

Many of our young and vital oil fields of Monagas State are suffering damage that may be irreversible, as a consequence of the fact that they are not being operated adequately in the reinjection operations with gas. Meanwhile, oil production in the Western part of the country has suffered a true collapse.

Such a situation is now affecting our affiliate CITGO in the US. To fulfill its commitments with CITGO, PDVSA had been mixing light crudes from the East of the country with crudes of less value produced in the West. But since the production of the latter has collapsed, PDVSA is trying to cancel supply contracts that had been in place for 25 years, since it believes it can obtain better margins selling those light crudes to third party clients.

And let us not speak of the brutal corruption that has taken over the “PDVSA of the people”. It is said that even whole shipments have disappeared. What a disaster!

The panorama is desolate. The revolution has managed to reduce to rubble what until recently was the second largest oil corporation in the whole world.

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