The collapse in oil prices has hit OPEC nations hard, but perhaps none more so than Venezuela. Hugo Chavez apparently put more of his profits into his socialization programs than in paying contractors for their work. Now they have stopped working altogether as Chavez has no money to pay their past-due notices, which will curtail production just when Chavez needs it most:
Venezuela’s state oil company is behind on billions in payments to private oil contractors from Oklahoma to Belarus, some of which have now stopped work, even as President Hugo Chavez funnels more oil revenue to social programs.
Petroleos de Venezuela SA, or PDVSA, says unpaid invoices jumped 39 percent in the first nine months of last year — reaching $7.86 billion in September. And that was when world oil was selling for $100 a barrel.
With prices plummeting by more than half, PDVSA is trying to renegotiate some contracts. But analysts say hardball tactics to reduce charges from crucial service providers could backfire by lowering Venezuela’s oil output. And foreign debt markets are reflecting jitters about Venezuela’s finances.
How badly has this already hampered operations? Two rigs run by a Tulsa contractor have shut down, cutting into Chavez’ revenues, and nine more controlled by the contractor will shut down by July unless Venezuela pays the bills — more than $100 million. PDVSA had to take over another off-shore rig when a Dallas company said “Adios” after Chavez reneged on a $35 million debt. Even Belarus, hardly unfriendly to dictatorial strong men, has had enough, ending its work on a gas pipeline and possibly two other contracts in the coming weeks.
Chavez has had PDVSA take over operations where possible, but PDVSA doesn’t have the resources or the skills to replace the contractors. If they did, Venezuela wouldn’t have outsourced the work in the first place. Unless Chavez finds a way to replace the contractors or to pay them what they’re owed, he will start losing as much as $5 million a day in lost output.
Why can’t Chavez simply pay these contractors and secure his revenue stream? He doesn’t have the money. Chavez spent like a drunken sailor on his socialization projects, assuming that the price would remain high even for his sulphuric crude. When the bottom fell out of the oil market in the recession, Chavez was already overextended, and now he’s all but broke. His nationalization of the oil fields had already cut into his output, and the low margin on what he does produce can’t maintain his political projects and the oil fields at the same time.
Chavez faces another key vote this year. If he stops spending money on his pet projects, he’ll lose the support of the poor, practically his only constituency now. If he doesn’t pay the contractors, though, his entire economy could collapse, creating a huge backlash against the man who claimed nationalization would cure all Venezuela’s ills. Chavez may soon reach the end of his rope, and as Benito Mussolini discovered when his dictatorship resulted in disaster, that’s not necessarily a figurative phrase.