Venezuelan Refinery Explosion Tests Chavez Oil Development Plans
The fire set off by a gas explosion last week in Venezuela’s largest oil refinery is still burning, figuratively at least.
The flames were put out and the Amuay refinery could resume operations within days. At least 42 died, eight are missing, and more than 130 were injured, according to the Venezuelan Attorney General who is leading an investigation. Hundreds more living in the vicinity lost their homes. The cause is still under investigation, but the temperature is rising among political pundits trading blame with presidential elections only five weeks away.
Firebrand President Hugo Ch’avez is staking a lot more than his reelection in this incident. The survival of his Bolivarian revolution and his legacy will increasingly slip away if he can’t convince investors to pump all the oil that he is counting on.
Ch’avez plans to more than double Venezuela’s current production of some 2.8 million bpd (giving the government the benefit of the doubt because OPEC says it’s more like 2.4 million bpd) to 6 million bpd by 2020.
There is little doubt that he really wants to double production, despite years of failed promises. The government budget breakeven price is the highest in OPEC, according to the International Energy Agency, and stands around $100 a barrel, which is pretty much in the range of what Venezuela’s crude has traded this year.
Ch’avez social expenditure, especially in the run-up to elections, has soared for more than two years, after a two year recession, as has public debt. And Ch’avez knows that falling production from mature fields can only be offset by rising production in new fields, especially in the Orinoco Belt, which holds the world’s biggest oil-in-place.
But his plan inevitably requires huge investment from PDVSA, the country’s national oil company and owner of a 60 percent stake in energy projects. It also needs foreign investment and expertise.
And to deliver on either one, the government needs transparency and improved management of its oil business. But the Amuay explosion and questions over PDVSA’s handling are undermining Ch’avez’s grand oil plan.
To put it bluntly, PDVSA -and by extension Ch’avez’s Bolivarian revolution- is shooting itself in the foot.
Underinvestment
As soon as the magnitude of Amuay’s explosion rocked energy markets, suspicions of underinvestment and mismanagement surfaced. An investigation is under way and like other industrial accidents the verdict should wait until the findings are released.
But several reports in the aftermath of the explosions, and more importantly PDVSA’s track record, suggest at the very least that PDVSA has to drastically improve if it’s to convince foreign investors that it’s not to blame, or simply to raise production in order to raise government revenue.
Understandably, many are demanding accountability, starting with Energy Minister Rafael Ram’irez. Union leaders representing the oil industry, who traditionally have close ties to the government, have angrily denounced underinvestment and mismanagement.
As far back as 2010 Jos’e Bodas, the secretary of the biggest oil workers’ union, and Orlando Chirino, now a former union leader running for president representing a party with close ties to Ch’avez, said that the government was “putting at risk the lives and health of the workers.”
Bodas has asked for Ram’irez’s resignation and for an independent inquiry. In an interview with a local daily, he said “the management board of PDVSA and Minister Ramirez should be sent to prison. “Workplaces cannot be turned into places of death. We demand that PDVSA invest in maintenance.”
Union representatives in the Amuay refinery also said they had denounced the dangerous conditions as a result of underinvestment for some time.
A report on the Paraguana refinery complex, which includes the Amuay refinery, that was prepared in March by London-based RJG Engineering for insurance firm QBE and was filtered after the explosion to Venezuelan and international press, also foretold a disaster.
The report accuses Ch’avez’s government of using the refineries as cash cows for his social programs. “Overall, we see some positive progress, although we continue to rate this large refinery complex as ”in need of improvement” as in 2010,” the report quoted in CNN said. “A stronger ”proactive” approach is necessary.”
It went on: “Major maintenance (turnarounds) has been seen to be suffering from delays, typically of one or two years. Routine maintenance suffered a significant ”low” in 2009, the effects of which are still being felt, evidenced by a marked increase in the ratio of corrective to preventive maintenance. The effects are also evident in the maintenance backlog particularly for pumps and motors, and in a higher than target proportion of ”Emergency” and ”Urgent” work orders.”
There is of course also the 2010 sinking of an offshore drilling rig when a floating devise failed and 95 people had to be rescued. Unions have also denounced dozens of other accidents, fires, and deaths as a result of industrial accidents.
PDVSA has suggested that the lack of spare parts is partly to blame for its safety rap sheet. And while the verdict is still out on Amuay, and the government has denied it’s to blame, there is little doubt about a broader trend exposing PDVSA’s underinvestment.
Mixed messages
Ch’avez had set a target to reach a 3.5 million bpd in 2012. That is not happening. And to blame can only be PDVSA because the country certainly has more than enough oil and the technology is certainly there.
When Ch’avez rose to the presidency in 1999, Venezuela’s production was nearly 3.5 million bpd, but public spending was much smaller. His populist programs have raised budgetary commitments, while oil production dwindles. The model is unsustainable.
Moreover, China, which has become Ch’avez’s economic lifeline, is investing billion in Venezuela’s oil industry. It won’t walk away soon. Nor will ENI, Repsol, Chevron, and the dozen other companies that still operate in Venezuela.
Ch’avez showed early signs of flexibility starting in 2010, and increasingly in 2011 and 2012. It was able to secure financing and private investment from ENI, Repsol, and Chinese firms. Last year it also signed a separate gas-development contract with Repsol and ENI, paying better than market prices.
“After 13 years of poor results from its oil policies, and clearly motivated by the need of increased revenues, the Venezuelan government is pursuing ways of increasing production by inviting large foreign companies to participate in new developments in Venezuelan territory,” told me earlier Luis E. Giusti, the former chairman and chief executive officer of PDVSA until Ch’avez took over and a senior advisor of the Center for Strategic and International Studies.
“The success of this initiative will not be easy, because of the unilateral changes of contracts and conditions that have characterized the Chavez years. However, ENI and large Chinese companies will be engaged in important new projects that will bring new oil to the markets.”
But the lure of the huge resources Venezuela holds will not be enough. PDVSA must prove it will be a reliable partner, not only to companies already operating there and to China, its underwriter, but critically, to Venezuelans.
If Ch’avez wants his revolution to survive, he needs to shake up PDVSA and the Oil Ministry because they are certainly not doing a good job. Or he can just blame everyone else for his woes.
