Commentary

Venezuela’s PDVSA in Ecuador — The Blind Leading the Blind

Yesterday, Ecuador Minister of Nonrenewable Natural Resources Wilson Pastor announced that Ecuador would restructure its contract with Venezuelan state oil company Petroleos de Venezuela S.A. (PDVSA) for their Rio Napo Sacha oil production joint venture. Former PDVSA Director Gustavo Coronel explains why instead of doubling output at Sacha from 46,000 barrels per day as PDVSA promised in 2007, output has actually declined.

Rafael Correa handed over the Sacha oilfield to Venezuelan state-owned oil company PDVSA in 2007, hoping that the field could be better operated by an expert company. Sacha is one of the last known light crude oil deposits of the country.

PDVSA promised to increase production in this field by some 20,000 barrels per day. Today the production has actually declined and this has forced the Ecuadorians to ask for a revision of the contract.

Original contractual conditions were such that Ecuador experienced a loss of about $50 million and risks losing up to $500 million during the life of the contract.

Some of the loss is connected to the performance of two drilling rigs brought in by PDVSA, CPV 16 and CPV 23, in 2007 and 2008. Although their rates, as promised by PDVSA, would be lower than rigs owned by international contractors such as Helmerich & Payne, they also proved to be much less efficient, requiring twice as much time to drill a well and to move the rig from one location to the other. To make things worse, in January of this year one of the two rigs collapsed, hurting one of the members of the crew.

Low Costs Were a Mirage
During 2010, PDVSA received $12 million for the use of the rigs. This amounts to a daily rate of about $30,000, although they had been promised to work for $8,300 per day. This was no longer a bargain since it was similar to the ones prevailing in the industry. When combined with their lack of efficiency, the result has been highly damaging to Ecuador.

However, in the refining sector Venezuela comes out as the loser.

According to PetroEcuador, the exchange of Ecuadorian crude oil for Venezuelan refined products has been highly advantageous to Ecuador, amounting to a handout from Venezuela of about $250 million during the three years of the exchange.

This exchange has been a political decision made by Hugo Chavez to keep Rafael Correa under his belt. There is little or no transparency in this transaction.

There are doubts even that the shipments of crude oil from Ecuador have effectively reached Venezuela. They might have been partially diverted to other countries, being sold in the open market through trading companies such as Trafigura. This company was once related to notorious buccaneer Marc Rich and has been linked to marketing scandals in the past. A favorite PDVSA contractor, Wilmer Ruperti, was once the representative of this company in Venezuela.

The activities of PDVSA in Ecuador have been mediocre, to say the least, and provide a good example of the blind leading the blind. It illustrates why a country should call real professionals to help them, instead of establishing technical and commercial relations based on political ideology.

Gustavo Coronel was author of the Cato Institute study Corruption, Mismanagement and Abuse of Power in Hugo Chavez’s Venezuela and was the Venezuelan representative to Transparency International from 1996 to 2000.