PDVSA's 'Operational Emergency'

There is something really funny that happens all the time after countries go though oil nationalizations or re-nationalizations as Venezuela is re-discovering the hard way. The path is simple. Oil is declared the national treasure that the often hated foreigners, headed by the United States, want. Controlling that oil becomes a symbol of national emancipation and assertiveness.

Then reality sinks in. Oil in the ground might as well be on the moon. It takes very complicated technology to extract it. Pemex, the tightest of all national companies, has discovered it a long time ago. On the Mexican side of the Gulf of Mexico with even better reservoirs, well depths and sophistication do not come close to the ones on the US side.
Venezuela’s Hugo Chávez the new populist to ride oil to glory ignores the fact that the oil that feeds his machismo was produced exactly by the technology of the “devil”. Ideologies of any kind always have a hard time with the technological demands of reality.

On July 18, 2007, Luis Vierma, the exploration and production vice president PDVSA, the state oil company, admitted in Venezuela’s National Assembly that his company is undergoing a “significant operational emergency”, because the first tender for drilling rigs, part of the “oil sowing plan” was never awarded and the second tender “did not have positive results.”

Only 22 companies out of 63 that were invited completed the process and 12 were awarded bids to supply PDVSA with 27 drilling rigs and their maintenance within 180 days after the process was closed. But according to Vierma only five of the 12 companies complied with bringing the equipment to the country.

The upshot is that from a goal of having 191 active oil drills in 2007 to produce a purported but never proven 3.3 million barrels per day of crude oil, it is now estimated that only 120 drilling rigs will be operating by the end of the year, which translates into a 36% gap.

But Vierma’s appearance in front of the National Assembly did not stop in just explaining PDVSA’s dire situation.

He was summoned to be questioned about presumed management irregularities in the acquisition of the drilling rigs amounting to hundreds of millions of dollars, another hallmark of policies for the people: rampant corruption.

Vierma first deflected any responsibility on the “irregularities” and assured the Assembly that he had nothing to do with the matter. PDVSA’s Board of Directors and Legal Consultancy recommend to him when and what to sign. He mentioned that Rafael Ramírez, the Minister of Energy and Petroleum is part of the Legal Consultancy.
But then Vierma expanded his views.

“At this point in time (after having nationalized the industry three decades ago) PDVSA does not own a cement truck or a drilling rig produced in the country. We depend on transnational companies, the suppliers waiting for the right moment to charge us.
Venezuela is headed towards technological independence, but it will take us a long time. It cannot be done with a magic wand.”

Vierma talked about the transnationals’ “silent sabotage” that provide drill rigs to local companies and refuse to participate in tenders organized by PDVSA. The main reason for this is that 10% of the contract, according to the new tender law, must be allocated to “social development.”

Then Vierma went for the clincher. He said to produce oil is not like “sewing or singing,” because the oil business “is very complex, because we have to locate profitable oilfields, many times at more than 20 thousand feet deep.”

“In spite of 100 years of oil activities and 30 years of nationalization, we do not have a single electrical logging truck, no hydraulic fracturing, and not one drilling rig that may be operated efficiently by Venezuelans and therefore we have to depend on the transnational companies.”

He pointed out that the companies, “those that have not wanted to participate in these processes, are waiting for us to slip, what do I mean by that? They know that we will not find drill rigs with national companies and that when the water reaches our neck, they will say that now the rigs showed up, but I am not going to charge you 70 or 75 thousand dollars per day but $130,000 per day, as one bid recently. That is what is happening.”

The solution? “ We are making up an affiliate that will be called PDVSA Servicios, but for that to become a reality will take “a long time…it cannot be done with a magic wand, it will take us 10, 12 or 15 years, to have that technological independence that we do not have today, something that the transnational companies know.”

What all this mean is this: In spite of Venezuela’s repeated claims of 3.3 million barrels per day production the actual figure is much closer to 2.5 million barrels per day as reported by both the EIA and the International Energy Agency, one of the reasons that oil prices are not coming down any time soon.