Venezuela’s Grim Realities

(Anthony Venezia, Energy Intelligence, 30.May.2018) — The political and economic crisis afflicting Venezuela typically makes international headlines in connection with the possibility of sanctions being imposed on Caracas by the US, or the impact on world oil markets of the country’s dwindling crude production. But recent reporting by Energy Intelligence Latin America reporter Anthony Venezia has highlighted the grim on-the-ground realities facing the country’s state oil company, Petroleos de Venezuela (PDV), and its desperate workforce.

With much of the rest of the economy at a virtual standstill, PDV is essentially the country’s only source of cash generation, and is now allegedly being preyed upon by racketeers charging it exorbitant prices for goods, Venezuelan industry sources tell Energy Intelligence. Interviews with workers and contractors paint a picture of an anarchistic environment, in which corruption and fraud are commonplace. “There’s no [equipment] supply, but there’s a lot of demand,” one oil industry source says. “So, everybody has to know somebody to get anything.”

Such graft has only exacerbated PDV’s financial problems, which include crushing debt and default on its bonds. Oil output, meanwhile, has slipped to 1.4 million barrels per day from 2.17 million b/d in 2017, according to Energy Intelligence estimates, and the country’s refining complex is in disrepair. And with President Nicolas Maduro winning re-election over the weekend in a vote widely seen as undemocratic, little relief is in sight.

A common racket that sources working in the Venezuelan oil industry describe involves shadowy intermediaries, operating out of residential or even false addresses, that step into transactions between PDV and what few suppliers remain in Venezuela, marking up prices and pocketing the difference. These shadowy intermediaries are referred to as “briefcase companies,” an allusion to how money obtained via graft is commonly perceived to be exchanged. Such illegitimate companies are not unique to the energy sector and appear to hold sway over virtually every part of Venezuela’s weakened economy.

“These organized mafias steal millions of dollars of equipment and then sell it on the black market,” a source at PDV tells Energy Intelligence. “I’m talking thousands of kilometers of cables, pumps, seals, parts.” Multiple sources claim such firms are frequently set up by ex-employees of PDV’s procurement department, who leverage their network to tap into its supply chain.

Plugged In

The firms, likely innumerable across the economy, usually comply with minimum legal requirements such as obtaining a government tax ID. Several sources say company names that convey an air of legitimacy yet remain very generic are common, although the firms often have no fixed addresses, phone numbers or internet presence. Individuals operating such schemes are called “enchufados,” which in Spanish means “plugged in,” as they are connected to industry or political insiders who facilitate purchases.

“You get one of these enchufado guys who finds a supplier and says, ‘you want to sell your pumps, they sell for $60, but I can get PDV to buy 20 of them for $45,'” a source at a major service company says, explaining how a scheme might work in practice. “So, the supplier says, ‘my margin is less, I make them at $40, but OK.’ And the enchufado doesn’t worry because his cousin at PDV is the one approving it,” adds the source, who no longer lives in Venezuela, but still does business there.

The enchufado would then sell the pumps at $60 or more but pay the supplier $45 apiece, splitting the difference with his or her PDV accomplice. Meanwhile, PDV accountants would simply register a finalized purchase at $60 per pump.

With “briefcase companies” monopolizing many transactions, and virtually no one else selling goods on the open market, PDV and other oil companies have little choice but to pay up. “At the end of the day, there’s a well that needs to be worked on … so, they end up paying,” the major service firm source adds.

Markups of 100%-150% on the list price are common, sources say, but might be as high as 1,000% in some cases. One oil industry source in Venezuela recalls a large piece of equipment normally costing around $200,000 being marked up to more than $1 million.

Because the firms have no physical infrastructure to stock items, transactions are generally one-shot affairs carried out in US dollars, as Venezuela’s bolivar has become worthless. Once a sale is complete, the firms are abandoned to cut off paper trails and new ones are set up to continue the racket.

The major service firm employee says the schemes do not even need to be set up inside Venezuela, alleging that a host of ex-PDV logistics staff are operating remotely in and around the Miami, Florida area, with in-country acquaintances doing the dirty work.

Venezuela’s government seems powerless to stop the rackets, despite extensive coverage in the local press. It is likely a PDV audit last December was at least partially undertaken to root out such schemes. Before the late President Hugo Chavez took power in 1999, PDV had essentially zero tolerance for corruption, a source formerly with the firm tells Energy Intelligence. But corruption flourished during Chavez’s decade-plus in power, continued after he died in 2013, and now eats into Venezuela’s shrinking oil revenue stream.

Unable to eliminate the schemes, Venezuela has at times played down the menace they pose. In 2016, for instance, after citizens questioned whether the illicit firms played a role in hyperinflation by artificially driving up prices for everything from food to medicine, officials maintained they were marginal and not a true threat to commerce.

However, in September 2017, Venezuela identified two such “briefcase companies” in the mining and chemical sectors, according to a state news site, supposedly raiding the residences they were registered under.

In that same instance, the government also acknowledged that a similar “multimillion-dollar embezzlement” had occurred in Venezuela’s Orinoco Belt heavy-oil region, perpetrated by what it said were individuals residing in the US.

Rock Bottom

While PDV struggles with the corrosive effects of such widespread graft and corruption, workers in the country’s oil fields are facing even graver challenges, laboring under brutal conditions, from food shortages to a lack of spare parts and even roaming gangs terrorizing employees, stealing what little they have left.

“What you hear from outside is a lot better than what we’re actually living through in the fields,” one source inside Venezuela says. “The morale of the people in the industry has hit rock bottom.”

Multiple sources on the ground in Venezuela, as well as several who have fled the country, paint a bleak picture of working conditions, with PDV apparently unable to provide even the basics. Cafeterias operated by the state oil giant often have no food — mirroring shortages experienced by the wider Venezuelan population — depriving employees of the calorie intake needed to undertake hours of manual labor. Weakened employees frequently request part-time shifts or medical leave, says one source, which PDV begrudgingly grants.

Blackouts are also an everyday occurrence, leaving equipment without power and forcing crews to work intermittently. Even when there is electricity, facilities used to monitor operations often have no air conditioning, leaving personnel at the mercy of Venezuela’s tropical climate — one source describes a control facility where the temperature inside routinely hits 40°C (104°F), making anything resembling normal productivity all but impossible.

In scenes reminiscent of the “Mad Max” film series set in a dystopian future in which armed factions feud over oil, employees also risk violence merely by showing up for work. Several sources spoke of a lack of trucks for transport, forcing workers to bring their own vehicles to the job site and leaving them vulnerable to carjackings.

“The lack of security in the areas around the wells is out of control,” says one source, noting armed gangs roam the fields, stripping anything of value from equipment and personnel. Indeed, wiring and electronics are often stolen off rigs, their copper to be scrapped for cash, while PDV personnel are routinely robbed of their belongings.

Workers say they frequently complain to PDV about security, with strikes over those issues as well as general working conditions commonplace, but the company does nothing “concrete” to address it. PDV has not responded to Energy Intelligence attempts to contact it for comment either on the day-to-day conditions facing its workers, or the allegations of graft and corruption.

While there is usually a Venezuelan National Guard unit stationed at oil installations, their presence seemingly does not improve the situation. Some workers suggest it may even be part of the problem.

When thefts and assaults occur, provided employees have not been robbed of their cell phones, workers say calling the authorities for help from out in the fields’ vast, wide-open spaces is a lost cause.

“Even if you did call the police,” one source says, “when they show up, they might rob you, too.

 Anthony Venezia is a reporter with Energy Intelligence based in New York. This article is based on news stories that have previously appeared in Energy Intelligence’s publication Oil Daily.

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