PDVSA likely to be at center of any Venezuelan changes, speakers say

Venezuela’s national oil company likely will be a strong focus if reforms are launched successfully to repair the badly damaged national economy and living conditions, speakers at an Oct. 18 Brookings Institution discussion generally agreed. But some also questioned whether Petroleos de Venezuela SA (PDVSA) itself has been damaged so badly by years of neglected operations that foreign partners will demand significantly improved working terms before signing new agreements.

“Venezuela can’t recover oil production without finding ways to produce with PDVSA because it’s so corrupt,” said Ricardo Hausmann, who was the Inter-American Development Bank’s first chief economist from 1994 through 2000 and now directs Harvard University’s Center for International Development. “You can’t expect ConocoPhillips, ExxonMobil, and Chevron to come back if they’re going to be expected to work through PDVSA.”

Miguel Angel Santos, a senior research fellow at the same Harvard University center who previously spent more than 10 years doing corporate finance and business development in Latin America, said, “This is not a crisis Venezuela will get out of by simply changing some Excel files.” Either a very strong authoritarian government or a reform regime with authority from a legitimate election will be necessary to implement the necessary reforms, he suggested.

The political landscape will be important, another speaker conceded. “But Venezuela is not going to export its way out of this crisis,” said Luisa Palacios, who heads the Latin America department at Medley Global Advisors in New York and previously worked for several international banks. She noted “300,000 b/d of production declines affect exports. The rig count is at about 2012 levels. The oil industry will be at the heart of what Venezuela will do, but it will require a rebalancing of PDVSA and the private sector’s relationship.”

Higher crude oil prices will be necessary, but they will not be enough to help Venezuela recover from its present overall turmoil, she continued. “It will need to make reforms similar to what Brazil made with [national oil company Petroleos Brasilero SA]. Fortunately, its reserves are mostly onshore so that will be relatively easier,” Palacios said. “It faces a big problem in having to import diluent to increase that production because the oil is so heavy. It will take 12-18 months to turn things around at PDVSA.

‘A complete change’

“There will have to be a complete change in the private sector’s relationship with PDVSA,” she maintained. “Selling its stakes in joint ventures won’t be enough. The political landscape will need to be changed.”

A fourth speaker, Francisco Rodriguez, chief economist at Torino Capital LLC who previously headed the Andean research term at Bank of America-Merrill Lynch where he was a director and senior economist for 5 years, said, “It’s possible that many of these agreements would need to be approved by the national assembly, which would raise real questions for foreign investors.”

That national assembly, which is controlled by opponents of the current national government, passed a resolution in a Sept. 23 emergency session declaring that Venezuela has gone through a coup d’etat under the governments of Hugo Chavez and his successor, Nicolas Maduro, and its constitutional order has broken down. It also called for new Supreme Court judges and members of the National Elections Council to be named days after the NEC suspended a recall of Maduro because of alleged petition signature irregularities.

Pressure for a new government could grow because conditions are so bad, some speakers said. Such transitions have led to authoritarian regimes in the past elsewhere in Latin America, they indicated. “I think international markets are closed to Venezuela because nobody in his right mind would invest in a country that is being run so badly,” Rodriguez said.

Hausmann said, “Venezuelans are going hungry now, and they’re going to remember how it felt. I don’t know how people feel about Chavez and his political legacy, but I believe they won’t want to follow the policies that led to this place. This could turn out to be a teaching moment for the people in Venezuela.”

Santos, who recently traveled around Venezuela speaking with political leaders and assembly members, said, “There are words like privatization and lifting price controls being spoken now that would have been used 5 years ago. People in the slums who were political orphans before understand what price controls can mean now. They just want to know what their roles in the process will be. They’ve just gone through some very rough times, but they’re concerned the reforms could be even rougher.”

Contact Nick Snow at nicks@pennwell.com.

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