Oil Industry Is Fading Away in Land of the World’s Richest Reserves

Venezuela sees its production dwindle after decades of graft and mismanagement under Chávez and Maduro regimes, and now the burden of U.S. sanctions. The last drilling rig in the country has shut down

By Kejal Vyas and Ginette González of The WSJ. Excerpts:

"While U.S. sanctions have undoubtedly made matters worse for the Venezuelan industry, economists say most of the fault lies with the two decades of incompetence and graft under the Chávez and Maduro governments, which included making foreign business partners unwelcome.

Venezuela’s oil story began in 1922 with the country’s first successful well. Before long, Venezuela was the second-largest oil producer in the world, after the U.S., with output exceeding even that of Saudi Arabia and Iran. In 1960, Venezuelan Oil Minister Pablo Pérez Alfonzo spearheaded the founding of OPEC.

Venezuela was developing rapidly and attracting European immigrants by the 1970s, a decade when its government nationalized the oil industry. Oil made Venezuela the wealthiest country per capita in Latin America by the late 1970s.

But the country also had large pockets of poverty and a corrupt ruling class. Its dependence on oil left it vulnerable to disruptions such as price shocks. Mr. Pérez Alfonzo prophesied that the reliance on what he called “the devil’s excrement” would one day bring ruin.

When Mr. Chávez, a revolution-minded former army captain, rose to power in 1999, vowing to close the wealth gap in Venezuelan society with socialist policies, he put an end to the operational independence enjoyed by PdVSA, the state oil company.

PdVSA had earned a reputation for efficiency. Mr. Chávez fired its top management after an industry strike aimed at toppling his leadership. He began using the company to build housing, distribute chicken to slum dwellers and organize Socialist Party rallies. Venezuela left gasoline virtually free for its citizens. It also sold cut-rate oil to leftist allies in the region such as Cuba.

In 2006, Mr. Chávez ripped up contracts with the international companies that were doing much of the oil-field work, forcing them to cede majority operational and financial control of projects to PdVSA. One by one, oil majors such as Exxon Mobil Corp. quit the country. Investment declined, and so did output.

At first, few in Venezuela noticed or cared. Oil’s price, driven by a rising Chinese economy, was surging. The price spike bought the government a bounty, which Mr. Chávez spent on programs such as food and other subsidies rather than maintaining the oil industry. By the time he succumbed to cancer in 2013, Venezuela’s crude oil production was about half the level of when he took over. 

In addition, billions of dollars of oil revenue were diverted into discretionary funds controlled by the president with little accounting. Unchecked spending allowed regime insiders to plunder the state coffers and enrich themselves. The graft spawned a leftist bourgeoisie in Venezuela that splurged on luxuries from opulent Miami lofts to castles in Spain. 

Diego Salazar, an oil executive and cousin of a longtime oil czar, became a gatekeeper at PdVSA. Mr. Salazar is accused by Venezuelan prosecutors of charging foreign companies multimillion-dollar bribes to operate in the country. Friends said he sometimes handed out Rolexes at parties, earning the moniker Mr. Wristwatch. After a falling-out with Mr. Maduro, Mr. Salazar was jailed in 2017 on corruption charges. His family has likened the arrest to a kidnapping. Mr. Salazar couldn’t be reached for comment. He hasn’t had court hearings.

Lower-level executives also took advantage, according to company records and court documents. At one joint venture, managers stole hundreds of millions of dollars by routinely inflating the cost of oil-field supplies such as office equipment by more than 100-fold, according to charging documents and purchasing invoices reviewed by The Wall Street Journal. The operator of a company that supplied office equipment pleaded guilty and was sentenced to house arrest.

Transparency International, which calls itself a global movement with the mission of promoting accountability and integrity, ranks Venezuela as one of the world’s most graft-ridden countries in its “corruption perceptions index.” The years of theft, combined with endless subsidy spending and neglect of infrastructure, have left Venezuela’s economy with little to show for the more than $1 trillion in oil revenue it collected in 22 years of socialist rule. Nearly a third was lost to malfeasance, former allies of the government have told the Journal.

The party ended when global oil prices abruptly started dropping in the autumn of 2014. Venezuela’s economy, deprived of revenue, went into freefall. The Maduro government tightened political control to stay in power, sidelining the country’s legislature and having protesters beaten, arrested or shot."