February 2021 – @alvaroriosroca – In March 2018 we commented on what would end up happening in Venezuela. The regime was already starting to hand over and hand-grant, to private capital, some productive assets and some incentives to revert a failed model. They could and can do it openly, but this denotes a defeat for the ideological issue and the supposedly successful model of the SSXXI that they so much tout. https://eldeber.com.bo/opinion/repartija-anticipada-de-pdvsa-en-venezuela_37571
The adage applies. “Necessity does have the face of a heretic”. Venezuela’s situation has become unsustainable in terms of economy, productivity, exports, Venezuelan diaspora around the world (estimated at 4.5 million), unemployment, hyperinflation and lack of dollars, shortages and high cost of food and medicines, collapse of public services such as fuel, water and electricity.
International organizations no longer consider Venezuela an “Emerging Economy” (similar to most of its South American peers, for example), but rather a “Frontier Economy” (similar to Caribbean islands, Central America and some African countries).
Faced with this situation a power group within the government has managed to make an economic turnaround as of September 2019. It has promoted the free importation of goods and that several currencies can circulate in the economy. Venezuela has a much smaller economy, but now it is the private sector that is more empowered.
A brief historical review of the oil situation in Venezuela, its almost only source of foreign currency, is necessary to understand. When President Chávez arrived (1998), Venezuela produced 3.3 Million Barrels per day (MMBD). A true oil country. During the national civic strike (2003) production had already fallen to 2.8 MMBD. Then came the famous nationalization in 2007 and the seizure of power by President Maduro (2013). By 2020 production fell to 0.596 MMBD and as of January (2021) it is at 0.5 MMBD.
Remember the bonanza of international oil prices between 2006 and 2015 that gave it dantestic revenues despite the drop in production. To the above, now add the sanctions imposed on PDVSA by President Trump, which, under the slogan of maximum pressure, sought to reduce Venezuela’s production to zero. All these factors explain the very complex situation that the country is going through.
80% of the economy is dollarized and the Venezuelan currency “El Bolivar” which was first strong and then sovereign, is now basically non-existent. Thus, several companies, including food, cement, cable, etc. That had been nationalized, have been and are being sold or transferred to the private sector.
We all know the disastrous, inefficient and corrupt management of PDVSA. Refineries and plants that do not work, non-existent exploration, oil and gas fields that have been irrationally exploited and much more. Many companies that have remained semi-crouched in the country, without investing, basically surviving and begging for payment of their debts, are now getting concessions and slight improvements in working conditions.
Now the rest is to remain competitive with the new imported products that enter with zero tariffs. The great challenge is the dismantling of PDVSA’s fuel import monopoly. Are we a step away from the liberalization of electricity and fuel prices? PDVSA’s only payment currency is its crude oil. This crude oil today has to go out to the Asian market to unknown companies.
PDVSA has some 100 fields on offer, some with great potential, but where the financing scheme is complex. No bank in the western hemisphere would lend money. But the government’s allies are not there, but in Arab countries, Russia and Asia. Many fields have already passed to new owners and these changes that were very rare are now frequent.
In the end, the truth is that necessity has the face of a heretic. The criticizing aspect of the change of model is that it comes with privatizations and delivery of assets and services without transparency, without bids and without competitiveness.
- Current Managing Partner of Gas Energy Latin America.