Venezuela, a nation home to some of the world’s largest proven oil reserves, has proven itself to be unprepared for the looming energy transition.
Production peaked in 1998 for Petróleos de Venezuela
(PDVSA) when Hugo Chávez
was elected president. In the following years, the left-wing tribune and his authoritarian successor, Nicolás Maduro
, “purged PDVSA’s professional staff, strong-armed its international partners and raided its coffers” (The Economist
Since January, when America announced tough sanctions on PDVSA, production has plunged to the lowest levels since the 1920s. Today, millions of Venezuelans lack food and basic medicine
A survey of Latin American state-controlled energy giants (which accounts for around 10% of global oil output and 20% of proven reserves) demonstrates that this dysfunction is not detained to Venezuela, however.
“Five years after the oil price crashed, output remains depressed in much of the region, even as the industry as a whole faces unprecedented disruption” (The Economist
States control about 90% of the world’s oil and gas reserves; but do so in different ways, as illustrated in the case of Latin America.
Although they may operate in different corporate forms, the region’s oil giants share three common problems:
1. Mismanagement of cash in good times
This mismanagement includes the common practice of pouring too much capital into government strongboxes and too little into investment for future growth.
When the oil price topped $100 a barrel in 2013, Pemex
moved about half of its revenue to Mexico’s government. Despite rising crude prices, Petrobras
saw its share price decline, loading up on debt and investing in too many marginal projects.
According to data from the Natural Resource Governance Institute
, as oil prices plummeted, Latin American oil companies obtained long-term liabilities accounting for over $400bn, or 8.5% of their countries’ combined GDP. Petrobras accounted for almost half the total.
2. Politicians and executives used the oil companies as personal piggy banks
Petrobras, Petroecuador and Pemex, and PDVSA have all been hit with corruption scandals of substantial size.
Petrobras took a plummet when the public found out that construction firms had paid Brazilian politicians billions of dollars in bribes, receiving padded contracts to build refineries and infrastructure in return.
This revelation, in conjunction with Petrobras’ massive debt, led credit-rating agencies to downgrade the oil giant in 2015. Between August 2014 and February 2016, Petrobras’ market capitalization shrunk by $115bn, or 80%. As shown in the chart below, only some of that was down to the collapsing oil price. ExxonMobil’s stock dipped by 18% in the period.