The industry keeping Venezuela afloat is under pressure from both inside and outside the country

  • Venezuela is increasingly reliant on its faltering oil industry for revenue.
  • But the deteriorating economy is undermining the oil sector.
  • And other countries in the region want to roll back Venezuela’s oil diplomacy to further isolate its embattled government.

Venezuela’s embattled government has relied on oil – which provides about 95% of the country’s export revenue – to help keep it afloat as it fends off international pressure and deals with unrest over a rapidly unwinding economy and rampant shortages.

But turmoil in Venezuela and external efforts to isolate President Nicolas Maduro are increasingly straining the country’s oil industry, managed by state oil company PDVSA.

On the ground, years of mismanagement and underinvestment have left much of PDVSA’s infrastructure unable to function at full capacity – and, in some cases, unable to function at all.

‘This is unheard of, a catastrophe’

PDVSA’s production has halved over the last 16 years. Daily output in January was 1.77 million barrels – down from a peak of 3.34 million barrels a day in 2001. Energy Intelligence reported this month that oil output may in fact be lower – about 1.4 million barrels a day.

PDVSA’s refineries will operate at 43% of their capacity in March because of a lack of spare parts, feedstock, and light crude,according to Reuters, which cited company internal documents. The 701,000 barrels a day it plans to process this month are slightly more than in March 2017 but well below total capacity of 1.62 million barrels a day.

“With production going down and down, there is a spiral of less cash and less investment and less production,” Francisco Monaldi, a Venezuelan oil expert at Rice University, told The New York Times in December. “I don’t think there has ever been such a collapse in cash flow of any national oil company.”

Jobs at PDVSA – with generous pensions and ample meals in company cafeterias -were once highly sought. But spiraling inflation has made the pay increasingly worthless, and shortages have left the cafeterias bare.

Underfed workers are less able to do their jobs. Some have passed out at their work stations. Others, too weak for demanding labour, are sent home. Workers who stay on the job have to do more, sending them deeper into calorie deficit. They are less able to quickly respond to the technical and mechanical problems.

Jose Bodas, the general secretary of United Federation of Venezuelan Oil Workers, estimated 500 employees have resigned at the Puerto La Cruz refinery and nearby processing facilities – which produced almost all of Venezuela’s oil exports – in the past year.

Bodas said PDVSA – which brands some departing employees “traitors to the homeland” – is trying to stop its brain drain.

Skilled workers like those from the oil sector have been sought by foreign headhunting firms, and an influx of Venezuelan oil workers has been credited with boosting Colombia’s oil industry.

Hundreds of workers from Venezuela’s Caribbean refineries left at the end of 2017 for $US10-an-hour construction jobs on the Caribbean island of St. Martin, which is rebuilding after hurricanes late last year.

“They’re giving up because of hunger,” Bodas told Bloomberg. “They’re leaving because they get paid better abroad. This is unheard of, a catastrophe.”

Maduro carried out what many saw as a purge of PDVSA last year, replacing rivals with political allies, mainly military officials. While their inexperience may only undercut the firm, Maduro doesn’t appear to have suffered for it.

“Surprisingly, despite plummeting production and total mismanagement of PDVSA, Maduro has so far avoided any significant cracks within his inner circle,” Geoff Ramsey, assistant director for Venezuela at the Washington Office on Latin America, told Business Insider.

Venezuela’s military is vital to Maduro’s hold on power, Ramsey said, and “while it’s clear that the oil sector has been key to ensuring the support of security forces … Maduro has given them plenty of other perks to ensure their loyalty,” including control of the borders and access to kickbacks from imports and food distribution.

Even if Venezuela’s oil industry were to grind to a halt, whether from mismanagement or because of US sanctions, Maduro seems likely to retain power, Ramsey added.

‘A fairly strong shock’

Other countries, led by the US, want to erode Maduro’s influence abroad by rolling back Caracas’ oil agreements.

Last summer, Mexico began looking at ways it could replace Petrocaribe, the Venezuelan oil program that has provided cheap fuel to Caribbean and Central American countries since 2005.

Mexican officials said replacing Petrocaribe was a way to win allies and break up a bloc that has largely resisted international efforts to censure Maduro.

“If you look at the most recent [Organisation of American States] vote, for instance, you see that most of the countries that continue to stand alongside Venezuela are still those that have historically benefited from PetroCaribe or other Venezuela-led economic initiatives,” Tim Gill, a professor of sociology at the University of North Carolina at Wilmington, told Business Insider.

But cracks have appeared in the alliance, as Venezuela’s faltering oil industry reduces its ability to supply fuel, said Gill, whose research has focused on US-Venezuela relations.

Gill pointed to Jamaica, a Petrocaribe beneficiary that has voted against Venezuela and whose foreign minister said Venezuela’s political situation and Mexican oil supplies may be discussed when Mexico’s foreign minister visits this month.

The privatised American oil industry has limited the US government’s ability to supply oil to Petrocaribe countries, Gill said, but it’s possible Mexico, through its state oil firm, Pemex, “could work with other countries to wean some remaining Central American and Caribbean countries off Venezuelan oil and urge them to favour resolutions against the Venezuelan government in the OAS or elsewhere.”

Mexico denies its recent moves against Venezuela are efforts to court favour with US amid NAFTA talks. (Mexico and others in the region have invoked Venezuela’s internal turmoil for domestic political gain.) And Mexico is part of a growing group of countries trying to reprove Maduro over his anti-democratic actions.

“The United States and Latin America are trying to broaden the coalition working to resolve Venezuela’s humanitarian crisis and advance a democratic transition there, as Caribbean votes are needed to suspend Venezuela from the Organisation of American States,” said Mark Feierstein, senior director for Western Hemisphere Affairs on the National Security Council during the Obama administration.

“Given the Caribbean’s long democratic tradition, those countries should be especially receptive to efforts that will not only support their economies but position them to help advance the struggle for democracy in Venezuela,” Feierstein, currently a senior adviser at Albright Stonebridge Group, told Business Insider.

The US has sanctioned dozens of Venezuelan officials and targeted the government’s financial dealings, and is weighing additional measures against Maduro, particularly in the run-up to a late-May presidential election that many expect to be a sham.

The Trump administration is now reportedly considering sanctions against a Venezuelan military-run oil services company, restricting insurance coverage for Venezuelan oil shipments, and blocking the sale of US light crude to Venezuela, which it needs to mix with its own heavy crude to make refined products like gasoline.

A US official told Reuters an eventual full ban on Venezuela oil shipments to the US – Caracas was the US’s fourth-largest supplier in 2017 – has not been ruled out.

Broader oil sanctions are considered unwise by many, in part because of the impact they would have on ordinary Venezuelans and their potential to disrupt the oil market.

The US official told Reuters that a full oil ban would cause “a fairly strong shock to the oil market in the short term” but stressed that no decisions have been made.

“Oil sanctions are not taken lightly,” the official said.

There is also the risk that Maduro and his allies would be insulated from the effects of an oil ban by the diversity of their assets and the range of industries to which they have access.

“That’s why oil sanctions are such a risky move: They wouldn’t necessarily force Maduro from power, but they would certainly provide him with plenty of ammunition to [blame] his country’s economic crisis on the United States,” Ramsey said. “Ultimately, those who will be most affected by such sanctions would be everyday Venezuelans, already suffering from widespread shortages of food and medicine.”

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