If all that isn’t bad enough, equipment breakdowns and increased accident rates have contributed further to long downtimes and output declines. As of October 1, 2020, PDVSA had reported 42 accidents and incidents since 2003, costing the SOE approximately 580 days of production. Because many of PDVSA’s blunders go unreported, and many of the mismanagement incidents (such as the sinking of the natural gas exploration rig “Aban Pearl”) cannot be quantified in terms of days lost, the true number of days in which PDVSA’s production has been hampered due to mismanagement is undoubtedly much higher than reported figures.
PDVSA’s decreased output is not due to dwindling oil reserves, but instead due to a reduction in its depletion rate. The depletion rate — the rate at which oil companies are depleting their proven reserves — provides the key to understanding the economics of an oil company and the value of its reserves.
Venezuela’s depletion rate has been falling rapidly since 2007 (see the first chart). In 2019, it sat at 0.121 percent per year, indicating that it would take 569.41 years for PDVSA to tap half of its reserves.
This has noteworthy economic implications. Because of positive time preference and discounting, the value of a barrel of oil produced today is higher than the value of a barrel of oil produced in the future, provided the price of oil remains the same. Given Venezuela’s incredibly low depletion rate, its reserves are essentially worthless because they are left in the ground for too long.
To put Venezuela’s depletion rate into perspective, consider Exxon, one of the world’s largest oil companies. At the end of 2019, Exxon’s depletion rate was 6.53 percent per year —comparable to that realized by most major oil companies. That rate implies that it would take 10.25 years for Exxon’s oil reserves to be halfway depleted. That is 559.16 years earlier than when PDVSA would deplete half of its reserves. If we discount at 10 percent, the median value of Exxon’s reserves is worth 37.65 percent of their wellhead value (the value that the producer would receive if the oil was sold at the wellhead and not distributed further downstream) — not zero, as is the case for PDVSA.
Thanks to Venezuela’s embrace of socialism and Chavismo, PDVSA has probably destroyed more economic value than any institution in world history. This brings back memories of President George W. Bush’s infamous remark that “this sucker could go down.” It’s no surprise that the clergy are preparing to administer PDVSA’s last rites.