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Raul Gallegos : Beware the rising
cost of Venezuela's oil barrel



Petroleos de Venezuela's days as the cheapest oil producer in the Americas are quickly coming to an end. The state-led company's 2012 results released Saturday show production costs doubled in the last two years to $11 per barrel, fast approaching Colombia's less crude rich Ecopetrol. The trend can scrimp Venezuela's finances, mean higher taxes for partners and hurt bondholders to boot.

PDVSA's populist ethos is taking a toll on the company. The oil giant hired 10,189 more people last year, bringing its bloated payroll to 111,342 employees, its highest level ever. This made its operations less efficient. For each employee the company brought in $1.1 million in sales last year, down from $1.2 million the year before. Just next door, a smaller Ecopetrol yields $4 million in sales per worker.

Such ineffective manpower helps explain how PDVSA managed to increase costs so much. The $11 per barrel the company spent in 2012 was a 60 percent jump in one year alone, even though crude prices and PDVSA's 2.4 million barrels of daily oil output stood largely unchanged last year.

PDVSA looks bad against peers, too. Ecopetrol spends $12.8 to pump each barrel, but the Colombian company invests heavily to replace depleting oil reserves at home and abroad. Brazil's Petrobras also spends more per barrel than PDVSA because it pumps expensive oil from deep under the ocean. But PDVSA's 298 billion barrels of on-shore oil reserves are the largest in the world, and they are also some of the cheapest to locate and produce. Spending more money to generate the same output from a cheap source is a bad sign.

Venezuela's government is slowly coming to terms with reality. PDVSA had to cut social spending by nearly half to $17 billion last year so it could prime investment to $25 billion. But that is still below the $30 billion or more it must invest annually to reach its 4.2 million barrel-a-day output goal by 2018.

PDVSA's partners and creditors may soon feel the pain as well. Under Hugo Chávez the government increased taxes on private oil companies to pay for political spending, a practice that may continue under President Nicolás Maduro. Suppliers already have a hard time getting PDVSA to pay its bills. And a weak company outlook doesn't bode well for future bondholder returns either. If things get really bad, even PDVSA's workers may come to understand that socialist generosity has a cost.

Raul Gallegos is a commentary writer on economics and business with a specialty in emerging markets and the energy industry. He has worked as a Latin America columnist for Bloomberg View, the editorial division of Bloomberg, and as a financial columnist for Reuters Breakingviews, the analysis and commentary unit for Reuters. Petroleumworld not necessarily share these views.

Editor's Note: This commentary was originally published by the State of The Americas.com, on July, 2014. Petroleumworld reprint this article in the interest of our readers.

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Petroleumworld News 08/08/2014

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This site is a public free site and it contains copyrighted material the use of which has not always been specifically authorized by the copyright owner.We are making such material available in our efforts to advance understanding of business, environmental, political, human rights, economic, democracy, scientific, and social justice issues, etc. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit to those who have chosen to view the included information for research, information, and educational purposes. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml. If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from Petroleumworld or the copyright owner of the material.