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Petroleos de Venezuela: The third best business in the world

By Gustavo Coronel

August 27, 2004 - Rockefeller used to say that the best business in the world was a well-managed oil company and that the second best business in the world was a badly managed oil company. Had he lived long enough to see the current Petroleos de Venezuela, he would have added: and the third best business in the world is a badly managed, nepotistic and corrupt oil company in times of high oil prices.

Mery Mogollon, a Venezuelan journalist, reports on a recent board meeting of PDVSA as follows: "José Luís Prieto, vice-president of PDVSA, former Defense Minister and father-in-law of Chávez's daughter, was named Director of Human Resources. . . . Asdrubal Chávez, a Chávez cousin, was named Director of Marketing and Supply. Two critical areas of the oil business were placed directly under presidential control."

As an oilman of many years I have never seen any clearer signs of nepotism and corruption in the Venezuelan State-owned oil company. Nepotism, because Chávez is stacking the high ranks of this company with his relatives. Corruption because they are unfit for these jobs. Mr. Prieto knows about human resources what I know about military theory: nothing. Chávez, the cousin, has been shifted from Human Resources management to Marketing management and tomorrow he could be shifted to Exploration without a sprinkle of knowledge about any of these areas.

Venezuelans have the right and the duty to protest against this abuse of power on the part of Hugo Chávez. Playing politically with PDVSA and using this all-important company as a resting place for his family is a crime that should be punished by the General Comptroller, by the Attorney General and denounced by the Ombudsman. The problem is that these gentlemen do not represent the people of Venezuela. They are friends of Chávez and they will not utter a word against him. Mr. Isaías Rodríguez, the Attorney General, who holds a position, which theoretically represents the interests of the people of Venezuela against the abuses and corruption of the government, was Chávez's vice-president before coming into this job. As his vice-president he was 100% loyal to Chávez. Can anyone imagine that next day he would be 100% loyal to the people, against Chávez?

Coming back to PDVSA, the naming of Chávez's cousin as Marketing Director, says Mogollon, has not changed the configuration of the internal nest of corruption in this area of the business. The selling of Venezuelan oil and products, she claims, is still in the hands of the so-called Barreto Clan. This clan is made up of some twenty persons, assisted by about nine traders or brokers outside PDVSA. This so-called clan controls all the sales and prices of crude oil and products. A PDVSA employee, Nelson Nunez, who denounced this situation, was immediately obliged to keep silent. The corrupt and former friend of Chávez, Gustavo Perez Issa, was removed from PDVSA only after ending up in the losing side of an internal power struggle.

Selling oil through traders had never been allowed in PDVSA, since this mechanism lends itself to all kinds of corrupt practices. Similarly PDVSA had never bartered its oil. Today PDVSA barters oil for Cuban doctors, Brazilian cows and whatever is politically expedient for Chávez. Traders working for PDVSA, says Mogollon, do not look for the best deal for PDVSA but the best deal for them and their PDVSA internal contacts. The lack of transparency, says Mogollon, is more acute in the case of products, since these are marketed mostly through these traders, which have their own commercial interests at heart. According to Mogollon, the mastermind behind these activities is a Mr. Aires Barreto, a former PDVSA executive, who now seems to live in Toronto but handles this activity for PDVSA without being accountable to the organization. I knew Barreto many years ago, when he was a likeable, decent engineer. I have not seen him in years and I guess time could change people in more ways than one. I wish he could put to rest these doubts about his integrity but he prefers to keep silent.

The people of Venezuela require an explanation of this anomalous situation within PDVSA. Until we know how the Venezuelan oil is sold, we have to assume that it is being sold through corrupt mechanisms, such as those described by journalist Mogollon.

This situation is bad enough but there is much more. According to journalist Jose Suarez Nuñez, PDVSA has already failed for the third year in a row to supply the Securities and Exchange Commission (SEC) with the financial disclosures that they are obliged to present to that organism. They are required to do so, since they have financial obligations with US investors. Of course, the company has also failed to disclose its financial and operational situation to its owners, all of us Venezuelans. With total disdain, the inept managers of PDVSA have abstained from presenting us, the people of Venezuela, with the results of their work. Nobody in Venezuela knows how PDVSA is doing financially or operationally. The draft of the document they were planning to send to the SEC, but which was never sent, speaks of an average production of 2.45 million barrels per day (b/d), although the Minister of Mines and Energy Ramirez and the PDVSA president Rodriguez have kept saying publicly that the production of PDVSA is 3.2 million b/d. The figure of 2.4 million b/d is confirmed by OPEC that says that Venezuela is producing about 500,000 b/d below its quota of 2.9 million b/d. I guess that these discrepancies prove that these people, the top officers of the Venezuelan State in oil matters, are systematic liars. Never before had the Venezuelan oil industry had two lying, untrustworthy persons at the helm.

The current PDVSA management cannot tell us how much is the cost of producing the oil. They cannot tell us the cost of refining the oil. A company that does not how much production it has, how much is its cost of production or its cost of refining is a sorry company. PDVSA is a Mickey Mouse type of company and we, the Venezuelan people, should have the right to ask for the immediate removal of the inept managers of the company and of the inept Minister of Mines and Energy. This is what should happen, if we were in a transparent and truly democratic political regime. With the government in the hands of a Mickey Mouse type of regime this is not likely to happen. As a result the losses of PDVSA and of the nation have become gigantic as time goes by. The fact that the price of oil has grown by leaps and bounds has masked this collapse of the financial and operational performance of PDVSA. But the losses are real.

The other criminal aspect of PDVSA's operation is the manner in which they are handling the national oil income. The increasing stream of dollars coming into the hands of PDVSA has neither clear path nor accountability of any kind. The money is flowing into the hands of the Chávez government and is being used without any controls or transparency. The formula for corruption created by Robert Klitgaard applies to PDVSA. He said Corruption was equal to Monopoly of power plus Discretionality minus transparency (C= M+D-T). In PDVSA the power is absolute in the hands of the regime, the discretionality is total and the transparency close to zero. Corruption, then, must be very high. The money generated by oil is going into hands, which are using it in a disorganized, arbitrary and corrupt manner. The money goes to social objectives, which are the product of improvisation, to political propaganda, to nurture insurrectional groups, to privileged minorities close to the center of political power. Never before in our recent history had we witnessed such an orgy of disorder in the management of public resources. PDVSA claims to he spending some USD $10 billion this year, as follows:

* $1.7 billion in social projects
* $2.0 billion in a special fund without known purposes
* $2.6 billion in buying back of bonds, a murky affair
* $4.0 billion in oil investments, impossibility with the disorganization they show

Where is this money really going? Where has the money gone? This immense amount of money is being wasted, pilfered under our noses, while Venezuelan children stay abandoned, while hospitals and schools lack the most basic needs and the streets stay full of garbage.

Yes. PDVSA is the third best business in the world.

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