By: Massita Ayu Cindy

Venezuela Economic Crisis

 The sudden drop in oil prices in 2014 from $115 per barrel [1] to about $70 per barrel pushed many oil producers to their lowest level. Many companies started to cut costs of production and exploration for more than 25%. According to Houston-based consulting firm Graves & Co, in Feb 2017 the total layoff was 441,371 people around the world, and this number is predicted will keep growing. This great oil crash is not only affecting the oil companies, but also oil producer countries. One country that received the most significant impact is Venezuela. In the first half-century, after the discoveries of oil in 1922, Venezuela was among the biggest economics country in the world. Despite the vast oil reserve and known as the biggest proven oil reserves in the world with about 302 billion barrels [2], Venezuela is now encountering a major economic crisis and hyperinflation. The problem is getting more prominent when the severe food shortage appeared due to the tight control from its government, and this leads to the increases of criminality and poverty in the country. Despite all the political issues, one noticeable problem is that according to OPEC, 98 percent of Venezuela export earnings comes from petroleum exports. In other words, the economic growth of Venezuela is driven by its oil sector. Like many countries with high oil content, Venezuela had also suffered “The Dutch Disease” which caused dramatic changing of county’s economy when the oil’s share of export increased from 1.9% to 91.2% in 1920 [3]. Finally, the result of this mismanagement is the abandoned of the agricultural production to almost zero and the delay of the industrialization.

Figure 1. Venezuela Oil Production (Source: Trading Economics)

Although there is no official data of their recent condition, the data in Figure 1 shows a significant decrease in oil production in the last seven years. According to Bloomberg, Venezuela’s oil production output is expected to fall to 1.84 million barrels a day, and it was the lowest since 1989. The same condition appeared in the rig count data, which hit the lowest number in the last 14 years due to the unpaid bills.

Although there is no official data of their recent condition, the data in Figure 1 shows a significant decrease in oil production in the last seven years. According to Bloomberg, Venezuela’s oil production output is expected to fall to 1.84 million barrels a day, and it was the lowest since 1989. The same condition appeared in the rig count data, which hit the lowest number in the last 14 years due to the unpaid bills.

PDVSA History

 Petróleos de Venezuela, S.A (PDVSA) is Venezuela National Oil Company (NOC). After Venezuela’s nationalization of the oil industry in 1976, PDVSA becomes the giant state-owned company which has full control of the oil and natural gas activities in the country. After the Venezuelan Congress approved the Oil Industry Nationalization Law, all of a sudden, PDVSA became one of the biggest oil producer company in the world with an initial capital of $595 million [5]. As the biggest state-owned company and the primary source of income for the county, the government tried to gain control over PDVSA. The most obvious conflict between PDVSA and government started in the Chávez’s government about who should control the PDVSA, company inefficiency, costly outsourcing, and OPEC membership. President Chávez argued that PDVSA has become too independent and turned into “state within a state.” However, one of the biggest reasons why Chávez’s government wants to reform PDVSA is related to the increases of PDVSA share from 29% in 1976 to 64% in 2000. The government revenue declined to only about a quarter or about $8.34 per barrel of oil, while the NOC of Mexico, PEMEX, could provide their government about $24.66 per barrel of oil [6]. Then, in 1999, the new constitution stated that “Forreasons of economic and political sovereignty and national strategy, the State shall retain all shares of PDVSA or the organ created to manage the petroleum industry.”  [7] With the full ownership by the government, Organic Law of Hydrocarbons also stated that most of the oil income should be used for social programs such as health care and education. In 2007, when the oil price rose, the government then demanded more revenue and changed the agreement of international oil companies so that the PDVSA could have the highest majority control over the projects.

Politics have also intruded the firm through some decisions such as (1) the cut of oil export to the United States which replaced by additional oil export to Latin America as well as (2) the sudden layoff of about 19,000 employees of PDSVA and replaced them with the employee that loyal to the government. The expulsion of international expertise, the firing of PDSVA professional employees and others the political issues might be the reasons for the steep decline of oil production.

Furthermore, most people do not realize the vast capital investment needed to manage the oil field. The Venezuela oil field requires a lot of maintenance due to the acidic and viscous oil, so the water and gas injections are needed to produce even the small amount of oil. Although the profit could be as high as billions of dollars, the oil price drop or the exploration and production fail will also turn into billion-dollar losses. Moreover, since PDSVA is under the full control of the government, its revenue becomes the primary income for the government. Thus, the PDVSA unstable economics profoundly affects Venezuela economics. The case of Venezuela and PDSVA indicates that oil price volatility, the high government intervention, incompetence of staff and the mismanagement of oil revenue may have been the roots of the country crisis.

Critical Issues of NOC

 Nationalization often failed to meet the expectation of the government. Iran, which has more oil and gas resources than Saudi Arabia, is produced less than they did in 1979. Russia oil cost has risen, and its production growth has slowly decreased since the takeover. NOC is usually prone to over-staffing, under-investment, political interference and corruptions [8]. Based on the joint study of James A Baker III Institute for Public Policy and Japan Petroleum Energy Center in 2007, the efficiency of oil and gas firm could be indicated by its revenue per employee and revenue per reserves as seen in Figure 2. Major International Oil Companies (BP, Chevron, ConocoPhillips, ExxonMobil, and Shell) revenue sharing is located in the top-right of the scatter diagram which means that both revenues per reserves and revenue per employee are high. On the other hand, although the NOC revenue per reserves evenly distributed, the revenue of employee mostly falls on the bottom. It indicates that although there is a high degree of diversity among NOC revenue, the tendentious of NOC’s over-staffing occurs in most of the NOC.

Figure 2. Comparison of Revenue Sharing between NOC, Major IOC and Other IOC (2004) (Source: Processed from Hartley, 2007)

A weak institution might also be the leading cause of the NOC’s poor performance. Many countries use the NOC to support the national economy, while the countries’ government itself is not strong enough to regulate them, this leads to the expression such as “state within a state.” On the other hand, if the government makes too much intervention, it usually ends with the company revenue cuts and budget efficiencies which then causing underinvestment both in production and exploration activities. Figure 3 shows the modeling of oil company revenue about government intervention. There is a significant impact on the oil company revenue when the government fully owns it compared to the publicly traded firm.

Figure 3. The Impact of Government Ownership and Price Subsidies on Oil Companies Revenue (Source: Hartley, 2007)

Transformation of the NOC

 Despite the unfavorable stigma of NOC, there are some examples where the government and NOC are hand in hand and generate not only a healthy business for NOC but also promising revenue to the government. Saudi Arabia might be one the most successful example of oil nationalization. It was because of the Saudi Arabian government decision made to do the nationalization gradually rather than ambitiously. The Saudi Arabian government keeps the consistent strategy by maintaining the price high enough to give profit for the country – but not so high that will make consumers turn back from oil to the alternative energy. Saudi Aramco is also allowed setting its prices and revenue level for maintenance and business expansion. To survive the recent oil drop, although doubt has been whirling around globally, Saudi Aramco plans to offer an (IPO) and is expected to attract USD 2 trillion valuations. Aside from Saudi Aramco, another NOC with private money injection is Petrobras (Brazil) in 2010 which raised about USD70 [9] billion of shares and Ecopetrol (Columbia) in 2011 by sold USD 1.4 billion [10] of stock to fund investment and double production.

The fair competition within oil companies also helps the NOC to develop their skills and professionalism. Some NOC such as Petrobras from Brazil and Petronas from Malaysia have to bid together with other private oil companies for exploration and production rights. The presence of an international oil company (IOC) as a competitor will trigger the ideas and technology diffusion among oil companies. Furthermore, the NOC overseas expansion where no special privilege applied could also raise the experience as well as the performance of the NOC.

Another strategy to survive in the energy transition era is to diversify the business core of NOC. With fast technology development, there are various energy alternatives in the market. NOC should catch the business opportunity, play beyond the oil and gas business and maximize the company value in the overall energy sector. Some NOC that already started to diversify their business core are Pemex (Mexico) with its cogeneration power plant to help the government to reduce greenhouse gas emissions by 50 percent in 2050; and Saudi Aramco with its USD 60 billion [11] investment on petrochemical projects in the U.S., India, and Saudi Arabia.

Indonesia NOC

 Figure 4. KKKS Oil Production Share (Source:

One of the reasons why the author decided to make this opinion is because of the government decision to transfer some of Indonesia’s biggest oil field from the IOC to Pertamina as Indonesia’s NOC in the last three years. Figure 4 shows the increases of Pertamina shares following the Mahakam Block acquisition from Total in 2017.

Figure 5. Ten Biggest Indonesia’s PSC Revenue Distribution (2007-2016) (Source: Muin, 2018) [12]

 Today, Pertamina holds the most significant share of oil production or about 35% of total Indonesia’s oil production. The considerable increase of oil production share is the result of the Mahakam Block acquisition from Total Indonesie. After the Mahakam Block nationalization, the government made another big step by planning to take Rokan Block as the most productive oil field in Indonesia. The Chevron contract toward Rokan Block will end in 2021, and the government has already shown their seriousness in entrusting Pertamina as the next Rokan Block operator. In addition to the event, Indonesia’s government also decided to transfer the 57% stake (Series B shares) of Perusahaan Gas Negara (PGN) to Pertamina as the holding firm through Government Regulation No. 6/2018 about the Formation of a State-Owned Oil & Gas Holding Firm. Pertamina is one of the biggest state-own company in term of revenue and income. Based on the Indonesia Investments data, the total assets of Pertamina in 2014 is about $50 billion, while its sister company PGN total asset is only about $5 billion. After the Mahakam Block acquisition, it is predicted that the Pertamina asset would be increased to be more than $54 billion. This big additional asset of Pertamina from Mahakan Block will help the company to increase their capital expenditure (Capex) as well as the operational expenditure (Opex).

If the Pertamina could well manage their oil and gas field and maximize their revenue to develop the business, it is not impossible for Pertamina to be a world-class oil firm. However, the path of its ambitious goal is not all rosy. Regarding oil and gas field management, Pertamina is well known of its inefficiency in the production and operation as observed by the cost recovery value. Cost recovery is the operating cost incurred by the contractor to produce oil and gas, which will be reimbursed by the government in the PSC Net Split scheme. Pertamina cost recovery is way higher than most of the oil companies which operated in Indonesia. It is also confirmed recently in 2018 by the Minister of Energy and Mineral Resources, Ignasius Jonan, who was complaining the Pertamina’s cost recovery value which is 20% higher than the average oil companies cost recovery. In June 2018, the cost recovery for Pertamina reached $5.2 billion or about 51% of the state budget [13].  Figure 5 shows the revenue distribution of the ten biggest PSC in Indonesia. Compared to the other contractors, Pertamina EP holds the highest percentage of oil recovery with 43 percent of their total revenue and PHE ONWJ around 39 percent of their total revenue. Although the production cost could be different between oil and gas field, there is also an indication of NOC inefficiency inside the company.

A Brief Note For Indonesia’s NOC

 The energy industry today has transformed due to particular combination of factors such as the decreasing of demand due to the continuous progress of energy efficiency, global pressure to reduce the greenhouse gas (GHG) emission and the more competitive price of alternative energy sources. With the right decision, PT Pertamina has the potential to succeed with the higher capital return as well as its contribution to Indonesia’s economies. However, both government and PT Pertamina should be aware with the urgency of reevaluation and improvement to increase the company performance and remain competitive in the global oil market. The stagnation is not an option to deal with the transformation of the energy industry. Thus, some changes that should be considered, such as:

  1. Focus the Investment to Numerous, Small and Short Cycle Assets rather than the Few, Large and Long Cycle Assets

With the demand for oil is likely to fall in the next years, there will be more supply than demand which leads to the drop in oil price. Unlike the IOC, which today can produce with 40 percent less cost [14], the limitation of NOC innovation makes NOC is vulnerable to business failure. It is advisable for NOC to understand their economic potential and relate it with the compatible resources. With the numerous, relatively short cycle assets and less risk and uncertainty, NOC could generate faster returns and avoid any financial turmoil.

  1. Create a Joint Operation for the High Risk and Certainty Assets

Indonesia’s oil and gas industry is now being pushed to do the exploration and exploitation in the high risk and uncertainty fields such as deepwater and unconventionals due to the shortage of oil and gas reserves. Although PT Pertamina can be successful as an oil and gas producer, it takes advanced technologies and skills to operate such fields. The joint operation could be the solution to reduce the capital cost and accelerate the recovery to secure the institution finance. Furthermore, the collaboration also could help PT Pertamina to acquire the knowledge, technologies, and skill so that they could improve their performance.

  1. Diversify The Business Object

Diversification is one of the necessary steps to deal with the energy industry transition. The diversification could be in two forms. First is the diversification of the oil and gas value chain business. NOCs tend to play in the upstream sector, which is highly vulnerable to the risk, uncertainty and the threat of price down. On the other hand, refining and midstream business give a secure margin that will benefit the financial institution. Second is the diversification outside the oil and gas business. By the alternative energy swirling around the world with more and more competitive price, the era of fossil fuel might come to an end in the next decades. The decision of PT Pertamina made to contribute to the geothermal business is a good step, and this should be continued to another type of renewable energy.

  1. Reevaluate and Improve the Business Operating Model

This point might be the most simple idea. However, the implementation is more difficult since it pertains to the very core of the business model. As discussed before, the NOC usually prone to the over-staffing, under-investment, political interference as well as corruptions. The organization culture should be transformed into high performance culture, which support the business performance. It should also include government interference reduction and let the NOC keep a healthy business.


[1] Daiss, T. (2016, September 20). Oil Prices At $70, ‘Not A Chance’. Retrieved November 13, 2018, from Forbes:

[2] OPEC. (2018). Venezuela Facts and Figures. Retrieved November 13, 2018, from OPEC:

[3] Hartley, P. (2007). Empirical Evidence on the Operational Efficiency of National Oil Companies. James A Baker III Institute for Public Policy. Houston, Texas: Rice University.

[4]Alexandra Ulmer, M. P. (2017, October 18). Venezuela’s deteriorating oil quality riles major refiners. Retrieved November 13, 2018, from Reuters:

[5] Oil and Gas Journal. (1993, August 16). Venezuela. Retrieved November 12, 2018, from Oil and Gas Journal:

[6] Wilpert, G. (2003, August 30). The Economics, Culture, and Politics of Oil in Venezuela. Retrieved November 13, 2018, from

[7] The Congress of the Republic of Venezuela. (2009). Constitution of the Bolivarian Republic of Venezuela. Caracas.

[8] The Economist. (2006, August 2006). Oil’s Dark Secret: National Oil Companies. Retrieved October 10, 2018, from Economist:

[9] Millard, P. (2010, September 25). Petrobras Raises $70 Billion as Investors See Growth. Retrieved November 14, 2018, from Bloomberg:

[10] Walsh, H. (2011, July 26). Colombia’s Ecopetrol Seeks to Sell $1.41 Billion in Stock. Retrieved November 14, 2018, from Bloomberg:

[11] Tullo, A. H. (2018, April 13). Aramco plans $60 billion petrochemical push. Retrieved November 14, 2018, from Chemical and Engineering News (C&EN):

[12] Muin, A. (2018, May 30). Krisis Harga Minyak Dunia : “Tantangan Eksplorasi & Produksi Migas Kedepan”. SKK Migas, Jakarta.

[13] Amelia, A. R. (2018, August 8). Menteri ESDM Pertanyakan Tingginya Biaya Produksi Pertamina. (A. Sirait, Editor) Retrieved November 14, 2018, from Katadata:

[14] Muqsit Ashraf, R. C. (2017). National Oil Companies in the Third Petroleum Era: The Unavoidable Change. Accenture.

*This opinion piece is the author(s) own and does not necessarily represent opinions of the Purnomo Yusgiantoro Center (PYC)

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