Oil Reform Talk Remains Elusive In Venezuela’s Economic Crisis

RIO DE JANEIRO—Plunged into economic, political and social chaos, Venezuela is experiencing what many economists and political and social scientists call the worst crisis in its history. The current political battle between President Nicolas Maduro and the opposition, with growing unrest and protests, is getting the world’s attention, creating uncertainties about the future of the country, where the oil industry plays an important role.

In a country where there are nearly 298 billion barrels (Bbbl) of proved oil reserves, state-owned PDVSA can be seen as the center of the current crisis. Yet, debate about changing the legal framework for the oil industry is not gaining needed attention. This is according to William Adrian Clavijo Vitto, a Venezuelan political scientist at the Universidad Catolica del Tachira in Venezuela and a researcher for the Energy Economy Group at the Federal University in Rio de Janeiro.

“The great political problem of Venezuela is that all of the opposition leaders refuse to talk about reforms that can give PDVSA a more business-oriented profile,” Vitto said. “Even before the Chavism era, Venezuelan politicians have used the oil industry, including strong subsidy policies in gas fuel prices, for the entire population. There is a domestic notion that believes that everyone deserves oil revenue. This is a cultural problem. Venezuela needs to create a debate with more responsibility.”

Vitto said Maduro, considered by some as the most unpopular leader in the Americas with only a 20% approval rating, is not inclined to change the country’s legal framework, which requires PDVSA to have at least 51% participation in all E&P projects. The opposition must not only fight to defeat Maduro, it also needs to put oil legal framework reform on the agenda to help make Venezuela more appealing to investors.

Maduro, who previously served as Venezuela’s vice president, stepped into power in 2013 after winning a special election following the death of Hugo Chávez.

Reuters reported April 24 that there have been no signs that the socialist government will allow the next presidential election—expected late next year—to be brought forward. The government has already disqualified Henrique Capriles. Although Capriles ran unsuccessfully for president twice—once against Chávez in 2012 and during the latest special election—he is considered an opposition favorite to replace Maduro.

By refusing to set a date for upcoming elections Maduro gains time and awaits high oil prices. The revenue would fund social programs, wooing the electorate, according to Vitto. However, the opposition needs to convince the Venezuelan people of the benefits of a more flexible and less interventionist legal framework for the oil industry, regardless of oil prices, he added.

“Unfortunately, I’m not seeing this debate within the opposition,” Vitto said.

“This crisis has exposed how PDVSA was misguided over the last 10 years. Now, the increasing climate of instability is making clear that now the state-owned oil company has to face problems created by low investments in E&P and a draconian nationalization of the oil industry, resulting in an ongoing drop in oil output,” Vitto said.

The analyst pointed out that even during the golden years of the commodity boom cycle—2003 to 2014—Venezuela’s government did not invest in the company’s E&P segment.

“Since 2004, investments in E&P have never exceeded US$14 billion per year. Besides that, PDVSA has 130,000 workers. That makes the costs even higher,” Vitto added. “The company used a great amount of its money to finance public transportation, food supply and basic goods. Now, the check has come, and PDVSA has no money to pay its social obligations.”

Venezuela’s oil output dropped to 1.9 MMbbl/d in 2016. That number represents a 30% drop in production compared to the previous year. Meanwhile, oil companies like Chevron Corp. (NYSE: CVX), Rosneft and others, plus suppliers that operate in Venezuela, saw their investments drop.

Many reports on maintenance delays, low salaries and limited upgrading capacity to convert Venezuela’s extra-heavy oil into exportable crude have hampered production. In 2015, PDVSA was forced to import about 95 Mbbl/d of heavy naphtha and light crude to dilute its oil, according to Reuters trade flows data.

“Time is running out and the current political deadlock can cause serious damages in Venezuela’s oil industry,” Vitto said. “While countries like Mexico and Brazil are working to give their oil industry a business-oriented legal framework, Venezuela is lagging behind because of its structure for investments, political instability, and unpredictable results.”