This past weekend, Venezuelan President Nicolas Maduro announced the appointment of a military official to head up PDVSA, a desperate move that could have far-reaching consequences for the oil company, the country, and the global oil market. According to Maduro, Major General Manuel Quevedo, who has no experience in the oil sector, will replace PDVSA president Nelson Martinez as well as the oil minister Eulogio del Pino. The decision is allegedly an anti-corruption move, but it is more likely a move to gain support from the Venezuelan military as the country becomes increasingly unstable.
President Maduro has been “steadily making the military his co-pilots to ensure that they sink or swim together and that he is coup-proof,” Helima Croft, head of global commodity strategy at RBC Capital Markets, told Bloomberg. Removing PDVSA’s leadership in favor of the military will likely deepen the country’s problems, including its declines in crude oil production.
Removing PDVSA’s leadership in favor of the military will likely deepen the country’s problems, including its declines in crude oil production.
Venezuela is also making new threats to the U.S. Maduro said his government is willing stop exports to the U.S. and instead send the crude to customers in China and Asia. At Quevedo’s swearing-in ceremony on Tuesday, Maduro stated that he is prepared to suspend exports in order to strike back at the U.S. for Washington’s “financial persecution” of Venezuela. “The day (the U.S.) doesn’t want us to sell our crude to them we will have no problem selling all of our oil in Asia,” Maduro said.
The U.S. has already cut its dependence on Venezuelan oil, with imports in August reaching their lowest level since 2003. Still, falling production in Venezuela is reducing global supply at a time when OECD inventories have been declining and OPEC and its non-OPEC allies are poised to extend their output cuts through the end of 2018.
Purge at PDVSA
Stacking PDVSA with military officials may help President Maduro avert unrest in the short run, but it will likely accelerate the deterioration of the state oil company. Sources told Reuters that the purge could “quicken a white-collar exodus from PDVSA and worsen operational problems” even as production has already dropped to its lowest level in more than three decades.
“They’re getting rid of the old executives, who although socialist and working under catastrophic management, at least knew about oil,” opposition lawmaker Angel Alvarado told Reuters. “Now we’re going to have totally inexperienced hands.” The former PDVSA president Nelson Martinez as well as the oil minister Eulogio del Pino both spent their careers working at the oil company.
The shakeup at PDVSA comes roughly a week after the Venezuelan government arrested more than 50 officials from the state-owned oil company and its U.S.-based subsidiary, Citgo. The purge at Citgo was also done in the name of rooting out corruption, but it is another sign of a desperate government looking for scapegoats. “We’re going for a total restructuring of PdVSA,” Maduro said on Sunday. “It is time for a new oil revolution.” Some of those arrested included naturalized U.S. citizens.
The current political purge has echoes of the 2003 sacking of more than 18,000 PDVSA employees by the late President Hugo Chavez, a move that directly contributed to the erosion of the country’s oil production. The exodus of crucial technical talent and the increasing politicization of PDVSA hampered the company’s operations. When Chavez took power in 1999, Venezuela was producing approximately 3 million barrels of oil per day (mbd). By the time of his death in 2013, output dropped well below 2.5 mbd.
The removal of top oil officials is the culmination of a months-long effort to turn PDVSA directly into a political arm of the Maduro government.
The removal of top oil officials is the culmination of a months-long effort to turn PDVSA directly into a political arm of the Maduro government. In August, Reuters reported that PDVSA employees were under pressure to attend pro-government rallies, while political appointees were gaining more authority at the expense of long-time oil executives. Reuters interviewed more than two dozen current and former employees, concluding that the political meddling had pushed PDVSA to a breaking point.
Oil production losses to accelerate
PDVSA’s output is falling, its rig count is at a historical low, and the company’s refineries are barely operating. The removal of experienced professionals has frayed relationships with outside companies. “Most of the time executives don’t answer phone calls or emails. It’s surprising how young and unprepared some managers are,” a representative of a foreign firm holding a supply contract with PDVSA told Reuters.
The militarization of PDVSA will almost certainly worsen the situation. “These are negative changes,” Asdrubal Oliveros, director at Caracas-based consultancy Ecoanalitica, said in a WSJ interview. “You’re militarizing the industry and generating more uncertainty” for investors, he said.
Moreover, the recent debt default is likely the beginning of a protracted battle with creditors over missed payments. PDVSA is the main economic lifeline for the entire country. Against this backdrop, dwindling oil production will make it even more difficult for Venezuela to come up with the money to pay bondholders.
Dwindling oil production will make it even more difficult for Venezuela to come up with the money to pay bondholders.
The lack of cash and the deteriorating state of the nation’s oil production are twin problems that are causing a vicious cycle. PDVSA has reportedly diverted oil from its Petropiar joint venture with Chevron to supply domestic refineries amid shortages without any plan for repayment, according to Reuters. Also, the lack of cash will limit PDVSA’s ability to import diluent for its heavy oil production. The company will not likely be able to maintain existing operations, let alone invest in new projects. In short, the cash crisis is accelerating the country’s decline in output, which in turn is eroding the economic foundation of the country. At the same time, the president is responding by militarizing the oil company, a development that will likely contribute to further production losses.
Venezuela’s production declines as OPEC cuts
Venezuela’s participation in the OPEC deal is somewhat of a moot point since its oil production is substantially below its promised production target.
The turmoil at PDVSA and the energy ministry comes just days before the OPEC meeting in Vienna. Major General Manuel Quevedo will represent Venezuela, replacing Eulogio del Pino. A year ago, Venezuela was one of the most vocal supporters of the OPEC cuts as it desperately needed higher oil prices. However, Venezuela’s participation in the OPEC deal is somewhat of a moot point since its oil production is substantially below its promised production target. A year ago, Venezuela pledged to cut output by 95,000 barrels per day (b/d) to 1.972 million barrels per day (mbd). By October 2017, output had plunged to 1.863 mbd, according to OPEC’s secondary sources data. With or without a deal, Venezuela’s oil production is certain to decline even more.