Paralysis at PDVSA: Venezuela's Oil Purge Escalates

 

An alleged crackdown on graft in Venezuela, seen by critics as an effort by President Nicolas Maduro to consolidate power, has sown panic across the country's energy industry and all but paralyzed state-run Petroleos de Venezuela SA, or PDVSA, according to people at the company and across the sector.

 

The ongoing purge, in which prosecutors have arrested at least 67 executives including two recently ousted oil ministers, now threatens to further harm operations for the OPEC country, which is already producing at near 30-year-lows and struggling to run PDVSA units including Citgo Petroleum, its U.S. refiner.

 

Further trouble for the all-important industry could cause yet more economic chaos in the once-prosperous Andean country, which is currently grappling with a profound recession, soaring crime and violence, crippled public services and the world's steepest inflation rate.

 

Many of those detained have not yet been replaced, as the once world-leading company, already struggling with a brain drain, wants for qualified personnel. Executives that remain, meanwhile, are so rattled by the arrests that they are loathe to act, scared they will later be accused of wrongdoing.

 

"In PDVSA, nobody dares sign anything now, not even a Christmas card," said one executive at a joint venture between PDVSA and a foreign firm in the Orinoco oil belt, asking to remain anonymous.

 

Interviews with around 20 current and former PDVSA employees, executives at foreign firms, traders and PDVSA clients say fear is compounding problems including the loss of talent, mounting debts, equipment shortages, rampant theft and chronic underinvestment.

 

Venezuela's Oil Ministry and PDVSA did not respond to a request for comment.

 

Oil accounts for over 90 percent of Venezuela's export revenue and provides the hard currency for Maduro's socialist government. Yet the country, which sits on the world's largest crude reserves, is now producing under 2 million barrels per day (bpd).

 

A political tool even before Maduro mentor Hugo Chavez became president in 1999, PDVSA has increasingly become an extension of Venezuela's beleaguered government, critics say, with lackeys and soldiers now filling posts, including the top job, that once required industry expertise.

 

In what some executives call a "witch hunt," some mid-level managers are now using the purge as an excuse to fire anti-government employees or even disliked colleagues.

 

"You say anything against anyone right now, and they believe you," said one PDVSA employee, calling from a relative's phone to avoid potential eavesdropping.

 

The purge comes years after industry analysts and opposition politicians began criticizing PDVSA management for widespread graft. A report by the opposition-led Congress last year said at least $11 billion went "missing" at PDVSA between 2004 and 2014.

 

For years, the government decried such accusations as "smear campaigns" against socialism and in favor of a U.S.-backed coup.

 

But Maduro, expected to run for reelection next year, recently changed tone. He now blames "thieves" and "traitors" for an economic crisis so severe that disease and malnutrition are spreading unchecked by a broken public health system.

 

Arrests, including that of former oil ministers and PDVSA bosses Eulogio Del Pino and Nelson Martinez last month, have targeted officials once thought untouchable. Attorneys and opposition figures criticize prosecutors for providing little evidence of crimes.

 

Maduro last month appointed a general to take the reins of PDVSA and the oil ministry. The new oil czar, former housing minister Major General Manuel Quevedo, has no experience in the energy sector.

 

Quevedo has yet to produce a detailed business plan, but has vowed to boost production by 1 million bpd - roughly the volume lost in the last four years.

 

"If we can build almost 2 million homes, we can recover production!" he said in a recent speech to employees, urging them to name and shame "squalid" pro-opposition colleagues.

 

Critics within the sector say Quevedo's words betray ignorance of what it would take to revive the foundering industry. They say there is no proof that the general even oversaw construction of that many houses.

 

Already, Quevedo decreed that all contracts with PDVSA be reviewed in a "clean up." While it is unclear what the review will entail, it has already spooked clients and partners who fear for the integrity of existing contracts.

 

DELAYS AND CONFUSION

 

There is also growing concern about PDVSA's dwindling ability to finance payments and operations, especially with inexperienced executives now at the helm.

 

Some PDVSA employees say boat shortages are so acute in western Lake Maracaibo that workers often cannot get to platforms. Late payments have led tanker operators to halt around 18 vessels needed to carry oil and refined products, two sources said.

 

PDVSA's crown jewel, Texas-based Citgo, has not been spared.

 

Most of its board was arrested in Caracas last month, and Asdrubal Chavez, a cousin of the late president, was appointed to replace his jailed predecessor. So far, Chavez is managing Citgo from Caracas, two sources said, causing delays and confusion.

 

Citgo did not respond to a request for comment.

 

Even much of the day-to-day office work at PDVSA has ground to a halt. One PDVSA worker said simple expenses like taxis are now off the table.

 

"They've suspended training courses," said another employee.

 

Combined, the woes are prompting analysts to question just how low Venezuela's oil production will fall.

 

The International Energy Agency predicts output will fall at least 500,000 bpd to 1.5 million bpd in 2018. Analysis firm Medley Global Advisors forecasts a decline of as much as 550,000 bpd, citing risks including "PDVSA's militarization and purge of what remains of its technical capacity."

 

A steep drop would heighten chances that cash-strapped Venezuela defaults on some $60 billion in foreign debt. Maduro's government has sought to restructure the debt, but has continued to make payments, albeit with delays.

 

Even if production rebounded, PDVSA does not stand to reap a windfall. A growing portion of exports are being used to repay loans from allies, like China and Russia, who have thrown vital lifelines to Maduro's government.

 

Meanwhile, foreign companies in Venezuela, including U.S. oil major Chevron Corp. and Russian energy giant Rosneft , are frustrated. They see little progress on longstanding demands, from more operational control at joint ventures with PDVSA to better security at isolated oil fields, according to people close to the firms.

 

"We've lost hope of resolving our problems," said one executive. "We're on hold."