Before we head Down The Rabbit Hole a couple of quick items. Today marks the 200th anniversary of the Battle of Carabobo.It marked the end of the war for independence of Venezuela from Spanish colonial rule.It’s worth remembering that Simon Bolivar’s forces were bolstered by a healthy contingent of British and Irish volunteers. It’s also important to note that Simon Bolivar was a big fan of Thomas Jefferson and fashioned Venezuela’s constitution after that in the USA….and look where they are now. Hmmm… more on that tomorrow.

 Venezuela’s foreign minister says that an EU mission for electoral observance for the elections in November would be welcome.It’s more of the same from these guys. It sounds good when they say it but when the time comes there are always a raft of conditions that come along with it that nobody,except their allies,would agree to. Maybe that’s why there haven’t been any independent observers of an election in Venezuela since 2006.However, the president of the CNE,you know,that new,kinder to the opposition CNE,was sure to officially invite the Russians to observe. We’ll see who shows up in November.

 The ICJ (International Commission of Jurists) reports that the TSJ, Venezuela’s supreme court, is purely at the service of the executive branch. 85 % of Venezuela’s judges are provisional so they are nowhere close to independent.Oh,and did I mention that the top guy at the TSJ is a criminal? Maybe not convicted of everything  but none the less… More on that when we get to it in Venezuela : Down The Rabbit Hole.

 Before we move on I have to share something I came across in Caracas Chronicles regarding the Maduro regime’s priorities. They decry the imperialist sanctions from the US as preventing them from paying for vaccines. No money for vaccines but there is money to sponsor the Bicentennial Congress, a gathering of leftists from around the world.(pssst…and don’t forget those arms sales)

 Time to head Down The Rabbit Hole….

 ……I first became alerted to the question of who actually pays PDVSA for their oil when Chavez went on his borrowing binge and then when Maduro continued to rely on credit to run the country instead of revenue. They would periodically announce a great new trade deal with China or Russia and it was always guaranteed by future oil shipments.I kept seeing loans of $5 billion here and $5 billion there and soon commitments of thousands of bpd became hundreds of thousands of bpd. Eventually between Chavez and Maduro the total reached about 700,000 bpd combined, guaranteed, for which PDVSA received no cash. Add in,let’s say another 700,000 bpd for domestic needs, another 100,000 for Petrocaribe, and another 100,000 for Cuba and we have 1,600,000 bpd PDVSA must supply for free!

 Since everything Venezuela related seems to be good news/bad news let’s look at the upside. With all the oil PDVSA had to give away basically for free due to the government’s totally irresponsible use of resources and finances There were still some paying customers out there. Year over year they were exporting 300,000 bpd to India and another 800,000 bpd to North America, most of that to the US. Despite all the anti-capitalist rhetoric and anti-imperialist bluster the US was their number one trading partner. The downside regarding revenues from the US was that it wasn’t all cash. Remember that Venezuela needed dilutents to process their extra-heavy crude and their No.1 supplier of these was the US. That said,the US still bought,and paid for, more Venezuelan oil than any other country.

 So now we add another 1,100,000 bpd to the ledger to maintain the status quo for a total of 2,700,000 bpd. among the major players. Other than the peak production years of 3,500,000 bpd PDVSA produced 2,500,000 bpd most of the time so, as you can see, they had to do some juggling. They were 200,000 bpd short. One month they would short the free shipments and another month they would short the paying customers and take the financial hit. But that only worked for just so long and periodically they had to raid their gold reserves. You can see where we’re headed.

 Again, I apologize for the tedious nature of this but there are a lot of moving parts to this train wreck. I’ll try not to get too deep in the weeds but please bear with me, it’s worth it.

 As this scenario is unfolding let’s flip back to the personnel side of the story. Remember, even with the purge there were still some qualified people at PDVSA among the bloated payroll. That would begin to change when oil prices dropped and the Chavista credit dried up. First it was just people that were frustrated that Chavistas were promoted and the real oil professionals were expected to carry the load for the “dead weight.” The desertions accelerated when employees saw the handwriting on the wall. Things weren’t going to get better anytime soon so if they could get out they did.

 Now, with Maduro in control, things got really crazy. In one demonstration of paranoia or simply putting on a big anti-corruption show he fired the entire accounting department…all of ’em! For weeks there was absolutely nobody there qualified to pay bills or bill customers. Then he turned PDVSA over to the military since he couldn’t buy their loyalty through any other means.In light of the recent and prior purges distrust ruled the day and more employees left. Now that the head of the company was a military general with no oil business experience it seemed that nobody had any idea what was going on.

 As the economy cratered those who remained saw their wages lose all their purchasing power. They had gone from good jobs to mediocre jobs to bad jobs. The minimum wage got as low as 60 cents, yes that’s right, 60 CENTS a month, and while PDVSA workers earned more than the minimum wage they were struggling just to feed their families. The last straw came when Maduro completely reconfigured the monetary and economic system and raised the minimum wage 3,000 %. The problem for experienced workers was they got nothing. No increase for them, not even a token amount. A new hire would earn the same as an experienced professional (what few still remained). The exodus proceeded in rapid fashion.

 One last note on the personnel side of things. For the remaining administrators a paralysis set in. Nobody wanted to be the one who approved or denied anything so they delayed and side-tracked. When a decision finally had to be made they were in a damned if you do and damned if you don’t situation. If the word came down from above  they wanted you to do something corrupt or just plain stupid and it came to you, you had a choice. Sign off on it and set yourself up as a scapegoat if all didn’t go well, or refuse to sign off and be thrown in jail ( remember,in Venezuela rights are a thing of the past). Many of these people found it better to simply leave. At one point  PDVSA stopped accepting resignations.

 So now you have a collapse in oil prices (they have rebounded but nowhere near the prices Chavez enjoyed) and production is falling. If they had to do some juggling at production levels of 2,500,000 bpd  a drop to 2,000,000 bpd would be a real balancing act. The minimal investment in new equipment and infrastructure at 2,500,000 bpd was nonexistent at 2,000,000. The deserted workforce at 2,500,000 became a wasteland….and THEN IT GOT BAD!

 Under Maduro’s leadership production continued to decline reaching the previously unthinkable level of 1,000,000 bpd. The days of raking in $300 million a day were a distant memory. Revenues were down to $50 million per day and falling. Could it get any worse? You know the answer.

 In March 2019 Venezuela experienced a series of catastrophic blackouts. They were caused by the same issue afflicting PDVSA, years of little or no investment in critical infrastructure. And wouldn’t you know, the hardest hit areas were the oil producing regions. March oil production came in at 720,000 bpd and most analysts were predicting a fall to 500,000. With operable drilling rigs at the time down to 20 from 95 (some days zero in operation), production from existing wells declining, a complete collapse of the workforce, no experienced leadership, and no credit availability PDVSA is in a death spiral.

 Summary : It seems a pattern is developing here. PDVSA did not collapse due to civil war,a natural disaster, or outside influences. Other oil dependent countries and companies survived the collapse in oil prices and today are doing quite nicely. It is estimated that 10 billion dollars per year will be needed for at least 10 years to recover lost production. As there is no technical expertise nor responsible management left at PDVSA they will have to partner with the large multi-national oil companies and oil service firms or contract out the recovery and development altogether. You know, those same people still involved in litigation from the expropriations of Chavismo. As has become our mantra, This is an entirely avoidable disaster, a man-made disaster, a Chavista-made disaster.