Three Days in Venezuela's Oil Belt Show the Price of Pillage

(Bloomberg) -- The men step out of the van and act fast. As one stands guard, the others approach an oil pump and remove filler plugs. They drain the viscous liquid into buckets that they stack in their van and take off.

In Venezuela’s remote Orinoco Belt, theft used to happen in the dead of night to avoid the gaze of security cameras like the one that captured the scene near the town of El Tigre. Now, the cameras themselves have been stolen and oil is taken in broad daylight, much of it destined for auto repair shops in cities. Thieves take electric motors, transformers, heat-controlling devices, valves and especially valuable copper wiring – kilometers of the stuff.

The crumbling of Venezuela’s oil industry after epic mismanagement by presidents Nicolas Maduro and Hugo Chavez – exacerbated by tough U.S. sanctions -- caused the nation’s broader crisis. Increasingly, the industry itself has become a victim. Five decades ago, Venezuela  churned out 3.7 million barrels daily. Today, it produces only about 712,000, about half what North Dakota pumps.

Bloomberg reporters in September drove more than 640 kilometers (400 miles) on a three-day tour of the Orinoco field, spoke with employees of state oil giant PDVSA and examined internal reports to understand how the nation with the world’s largest proven reserves could have fallen so far. The journey, whose legs were timed to avoid heavily armed military patrols and checkpoints, showed that the nation’s industrial and economic engine has been stripped of equipment and neglected to the point of collapse.

Facilities in the Orinoco Belt, which produces more than 90% of Venezuela’s dwindling flow, look like graveyards for million-dollar equipment: abandoned rigs, empty tanks, disemboweled generators, gutted power panels, stripped cables among pools of spilled crude oil and encroaching vegetation.

The ravage of the industry extends throughout a society that came to depend on it. Near the Dacion oil fields, bony dogs played with scrawny, barefoot children. A man on the roadside said he hadn’t eaten since the previous night, 17 hours earlier.  

“What you see in Venezuela today, the collapse of their oil fields and the oil industry in general, is worse than what you see in some war zones,'' said Fernando Ferreira, director for geopolitical risk service at Rapidan Energy Group, a consultancy in the Washington area.  “Venezuelan oil production was wrecked by 20 years of asset seizures, widespread corruption and sanctions.''

The nation could increase production to about 2 million barrels a day in five years at a cost of as much as $30 billion. “The recovery depends in large part on who is going to replace Maduro,'' Ferreira said.

Full recovery from the pillage could take decades.

Luis Pacheco, president of a PDVSA board named by opposition leader Juan Guaido, said the extent of damage to the system is a matter of conjecture: The board controls only PDVSA assets outside Venezuela. It predicts a cost of $120 billion to restore the domestic industry, he said.

 “That level of investment must come mostly from private investors," Pacheco said. That would challenge decades of zealous state control of Venezuela’s mainstay asset.

The nation had only 23 oil rigs functioning in August, down from 48 two years ago and from 119 in 1997, according to Houston oil-service company Baker Hughes. By comparison, the Permian field that straddles Texas and New Mexico had 436 rigs working in August.

The trip through the Orinoco Belt showed that even those rigs that remain are endangered. Theft is increasing as facilities sit idle due to power outages, an exodus of workers and lack of working gear. Most fields, accessible only by gravel trails alongside bumpy, muddy roads, are unmanned. A supervisor might stop by twice a day for 15 minutes. PDVSA security and rig operators refuse to travel deep into oil fields for repairs or patrols out of fear of being kidnapped or robbed. That makes easy targets of copper-filled, diesel-powered, iron-rich equipment surrounded by nothing except scattered cattle operations and small farms.

“The dismantling at oil rigs, tug boats, industrial units, vehicles and now areas at the upgraders is massive,” said union leader Jose Bodas. Knowing exactly how much equipment is missing is almost impossible because PDVSA stopped publishing reports that covered security in 2014.

Little investment and the U.S. sanctions, which limit imports, mean pieces and parts are often taken from one machine to patch up another.

At the Petromonagas upgrader, a joint venture with Russia’s state oil company Rosneft in Anzoategui state, burners and valves from sulfur extractors are constantly switched from one unit to another as technicians resort to mechanical cannibalism, according to an internal PDVSA report. Piston rods and other parts are reported lost and replacements are ordered. Later, the old components reappear and the new ones are apparently sold on the black market.

At one site at the Oritupano oil field, two out of seven wells were operating. About 40 kilometers away, at the Leona field, one of three. At another nearby, all five were down. An oil storage facility at the Karina field burned down three months ago. Spilled oil was contained in an open-air pool and its smell was nauseating. Because of the fire, PDVSA had to shut a nearby oilfield whose production was stored at the site.

In Puerto La Cruz, which until recently was responsible for 15% of the country's oil exports, viewing the ruin requires a motorboat. Of seven berths there, only one was occupied with by a ship unloading gasoline on a calm sea under a bright sun.

Near the coast floated two unused monobuoys, transfer points for crude that are about the size of a city bus. They were commissioned when Venezuela had plans to increase exports to 3 million barrels a day. The yellow monobuoys, whose price on the international market can top $30 million, are dead in the water literally and metaphorically: Because of the sanctions, they are almost impossible to sell.

About 30 kilometers west, about 10 ships were moored at the Jose terminal, which accounts for more than 80% of exports. Sanctions mean that Venezuela can’t easily move oil to market, and there is little available tank space on dry land, so many of the vessels function as expensive, floating storage units. The ships Rio Caroni, Rio Apure, Rio Orinoco and the Ayacucho hold 5 million barrels going nowhere soon.

The motorboat passed the Inciarte, a PDVSA tanker standing in Venezuelan waters more than two years. There’s no way to board, but a recent photo obtained by Bloomberg shows an interior in shambles. Ceiling tiles have been torn off and are hanging. Chairs and broken furniture are scattered among torn books. Rubble is everywhere and a Venezuelan flag lies amid it.

At the coastal Jose Anzoategui complex are four upgraders that operate intermittently. When they function, the plants spit fire and black smoke into the air. In a village 5 kilometers away, a thin layer of soot covers houses and businesses.

Inland, at a power plant that should have provided electricity to the entire Melones field, even the light bulbs were gone. Weeds were growing between control panels. In a trailer where oilfield workers used to live was a red safety helmet with a faded PDVSA logo and a white ceramic saucer without a cup.

An oil field near San Tome looks good at first glance. From a distance, you can see pretreatment and storage tanks. There are pipes, towers -- everything an oil field should have. Get closer and the illusion fades. There is no movement and the only noise comes from birds. The tanks are rusty and pipes connect nothing. The equipment is cold. Knock on a tank and it rings hollow, empty.

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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