Fuel Shortages in Venezuela: Causes and Proposals

Venezuela has imported crude oil, fuel, additives and refining components have been imported for as long as [state oil corporation] PDVSA has existed.

Due to mismanagement, terrible strategies, frequent [workplace] accidents, increased corruption and the operational dismantling of the firm, imports have steadily increased, reaching levels never seen before. This has especially been the case under PDVSA Presidents Rafael Ramirez [2004-14], Eulogio del Pino [2014-17] and Manuel Quevedo [2017-20] (1).

This increase in fuel imports has subsequently led to a continuous growth of costs, hindering investment and the necessary maintenance of infrastructure and core processes.

Importing versus shortages

From 2007, the Siembra Petrolera plan (Sowing Oil Plan) (2) led to a switch away from crude oil production in traditional regions, which are necessary for certain local processes. This forced the industry to incur higher costs in order to access crude oil that it previously produced elsewhere. PDVSA was later forced to import crude oil, resulting in immense damage to the nation.

The productive loss from the switch away from the [lighter] crude wells, which were more profitable and desirable in markets between 2007 and 2015, was more than 1,360,000 barrels per day (bpd). While this production disappeared, crude oil imports rose steadily from 10,000 to 15,000 bpd between 2002 and 2005, and to more than 100,000 and 200,000 bpd between 2015 and 2019, respectively.

Between 2002 and 2005, crude imports averaged 11,000 bpd. Once the Siembra Petrolera plan was implemented and as heavy/extra heavy oil production increased, these imports also increased, reaching 25,000 bpd between 2006 and 2011.

Between 2011 and 2017, the industry increased imports to an average of 78,000 bpd as a result of the [2012] Amuay accident, divestment and the deterioration of infrastructure. During Quevedo’s leadership, this level surpassed 200,000 bpd. Apart from constituting an unprecedented source of corruption, this irrational rise in crude oil imports has also had an untold cost on the country.

On the refining side, even before the 2002 oil lockout, PDVSA normally imported between 10,000 and 15,000 bpd of crude oil and similar volumes of refined fuel. This was reduced to almost zero during the revolutionary period between 2003 and 2011, and once the Amuay accident occurred in 2012, fuel imports were catapulted to unprecedented levels of up to 94,000 bpd towards the end of the year. They then stabilised around an average of 25,000 to 30,000 bpd until as late as the first two months of 2019.

Amuay’s still unexplained accident severely damaged the Venezuelan oil industry. However, as long as there was money in the account and oil prices were high, the consequences were covered up by spending. No culprits have been identified for this accident.

Following Amuay, everything was laid bare when oil prices collapsed, a situation which was aggravated by the nefarious sanctions which began in 2015.

Since 2012, refinery usage also began a sharp decline from 80+ percent to less than 45 percent of capacity in 2017. It is from 2012 onwards, with Ramirez as PDVSA president, that we started hearing of fuel shortages. From then on, with the arrival of Quevedo, this level of refining usage collapsed to below 15 percent of capacity in certain processes and refineries. Fuel import levels remained constant thereafter until the arrival of further criminal sanctions in 2019.

Although it is correct to point out the existence of destructive elements around local processes within PDVSA itself, it is no less true that there have also been elements of manipulation from the ranks of the Venezuelan opposition.

It is undeniable that from 2015 onwards, when Venezuela was declared an “unusual and extraordinary threat to US national security and foreign policy” by [then US President Barack] Obama, sanctions have adversely affected both the cost of, and access to financing. Since 2019, the blockade on [purchasing] components used in the production of refined products has also had a deadly impact.

This latter element shows up the true co-responsibility of the lie merchants grouped around the clan of [opposition leader Juan] Guaido, whose ultimate goal is intensifying fuel shortages, seeking commotion and causing a social uprising of the country.

Certainly, PDVSA’s own fuel production has declined and processing has deteriorated, but Venezuela’s oil industry and government have found out-of-the-box ways to get fuel to the population until up to 2019. After sanctions were amplified, however, this changed.

As of July 2019, fuel imports had increased unprecedentedly in Venezuela to 195,000 bpd. This is particularly due to the criminal sanctions supported by Guaido’s clan, which have prevented the import of additives and components vital to the domestic production of fuel.

From then on, a virtually resource-less Venezuela has been forced to import refined fuel from different sources including Greece, Russia, Turkey, Nigeria and the UAE. As a result of these sanctions, Caracas uses mostly barter schemes under extremely disadvantageous conditions, resulting in immense pecuniary damage.

Proposals

The nominal installed capacity in Venezuela’s fractional distillation/cracking plants, which contribute to the production of fuel in the country, is around 270,000 bpd. This is distributed as follows:

This total volume of installed capacity was idle until recently, before PDVSA announced that the El Palito refinery has once again been activated to produce fuel, however it is not known if this process has indeed been successfully started.

Some proposals [to tackle shortages] have emerged from various sectors which are reflected in Venezuela’s La Tabla news portal. Without criticising any of them in particular, I conclude that none of them are workable for various reasons, with some being politically unviable and incompatible, while others are unsustainable.

The idea behind the exploitation of a natural resource is its finished, manufactured product which benefits the nation. Any proposal that increases imports is, therefore, transitional, non-sustainable and politically, financially, and strategically unworkable. These are not solutions but simple palliatives that do not add any medium and long term value [to the nation].

I have argued that the fuel problem in Venezuela is structural and must therefore be treated holistically. The problem of gasoline is the result of numerous variables involving institutions, society and culture. Our society has no awareness of production costs, instructions are complicit and the industry is marred by corruption, inefficiency and mismanagement.

The supposed determination of the state and its components to seek a solution [to these shortages] forms part of both the problem and the solution. It is up to the state to make [subsidised] fuel prices more realistic (3), enforce the law without discrimination and to assign some of these processing levels to private capital. Awareness, as well as political and institutional determination, is needed.

Alongside the above, the definitive solution to extraction smuggling and/or the handing over of national resources to third party countries does not lie simply in an irrational increase in the price of fuel. Fuel prices must be realistic, but not necessarily set at international levels across the country.

Before any price hike is implemented, the proposal made in the later 1990’s for vehicular gasification (4), which was brought back by the revolution in 2007, must be reconsidered, in particular in the two border regions. This policy was later abandoned by the internal gas debacle under Ramirez and Del Pino.

This conversion project requires relatively little investment and could be implemented in the immediate future with the support of certain elements which are currently available. The cost of Venezuela’s abundant gas is low, and this would end extraction smuggling once and for all. It is a viable, sustainable project with a high impact and relatively low costs.

Alongside the execution of this proposal, the price of fuel should be raised to international levels in border states, leaving the consumer to decide between vehicular gas at a controlled price or gasoline at international prices.

Given large-scale deterioration [of PDVSA’s infrastructure] due to frequent accidents, divestment and inefficient operational personnel, the local section of the industry must also be reinvented. As far as privatization is concerned, the idea would be to start a pilot project which could be expanded later on. As noted in previous articles, [private sector] investment must ensure vital symmetry in financial exposure, and must be from influential strategic and military regional partners in order to be stable. The suggested location of the pilot project would be [the eastern oil hub] Puerto La Cruz due to its size, location and relative complexity.

Based on the simultaneous massification of the use of vehicle gas and the premise of the newly active El Palito refinery, as well as a stable supply of about 20,000 or 30,000 bpd of fuel, a pilot project could be proposed that could be implemented and expanded depending on the gap between the local and international production costs in neighbouring countries, particularly Colombia and Brazil.

In this pilot project, the entire productive chain, both in production and distribution, must be managed by the same private group, which in turn will ensure payment of royalties and local taxes to the state, even at consumption points.

Strategically, PDVSA and the state must retain control of the data, specifically with regard to storage and transport (pipelines), in a way that can not only be monitored but that the corresponding profits or “fees” for the use of such facilities and processes can be managed. Payments in monies and in kind would add financial strength to the industry, allowing it to break from a heavy cost base which it cannot currently maintain, while allowing capital expenditure to be prioritised, a stable product distribution network established and substantial income achieved.

Final remarks

If the Trump administration was not willing to permit a humanitarian flight [for Venezuelan nationals stranded in the US during the COVID-19 lockdown], which was ultimately to his own benefit, in no way would it support sending fuel to Venezuela. This is true even if the fuel comes from Venezuela’s own [CITGO] assets which have been stolen by political traffickers and rusty, inefficient representatives of the mythical [Guaido] leadership, who have used these assets to return short term operational and financial losses when compared to previous years.

In order to open dialogue spaces to negotiate the sanctions against Venezuela, the state and PDVSA must also analyse the legal and strategic provenance-convenience of applying pressure on existing contracts with [international oil] firms like Chevron, Eni, Shell and Repsol. These companies have their roots in countries that support sanctions but remain settled in Venezuela, and any pressure on them may be considered a reciprocal measure in the search for a consensual negotiation.

Notes

(1) Since the writing of this article, Quevedo has been ousted as PDVSA president and was replaced by former oil minister Astrubal Chavez.

(2) The “Siembra Petrolera” plan switched national oil investment away from wells with lighter crude and towards heavier blends found in great quantities in the Eastern Venezuela Orinoco Belt. It looked to increase both crude and gas output, as well as construct regional distribution networks.

(3) Venezuelan vehicle fuel is highly subsidised by the state, to the point where it can be considered practically free.

(4) A project which uses natural gas to produce vehicle fuel, based on pilot projects in Europe in the 20th century.

Einstein Millán Arcia is a Venezuelan oil and gas specialist with a PhD from Oklahoma University. He has written over 250 opinion articles on the matter.

The views expressed in this article are the author’s own and do not necessarily reflect those of the Venezuelanalysis editorial staff.

Translation by Paul Dobson for Venezuelanalysis.