The Dynamic Performance of a NOC during a Windfall – part 1

Published on

July 2, 2018


Article by

Omar Chique

Certain NOC’s underperformed after the last oil windfall. Among them PDVSA. Some observers claim that there were abrupt changes in the environment – mainly low oil prices – that led to their demise. However, performance analysis based on public reports indicates that the root causes of the problems existed before the oil price drop of 2014. They just took some time to unfold operationally and financially.

The net incorporation of PDVSA reserves changed the strategic resource from 80 to 280 billion barrels in 2010, due to additions in the Orinoco Belt. The number of years of production at the prevailing production rate passed from 70 to 255 years. The magnitude of the proved reserves, although important, was not sufficient to generate an increase in production capacity and production. Figure 1 shows simulated values consistent with observed behavior.

The net incorporation of capacity made the strategic resource decrease 10% in the period of study. The price of WTI oil went from 26.18 $/barrel in 2002 to 99.67 $/barrel in 2008; the average price in the period 2008-2014 was 88.74 $/barrel. Production capacity decreased in the presence of sustained high oil prices. The company published in its web site a plan to increase production capacity to 5.8 MMBD (million barrels per day) by 2012; it achieved 3.1 MMBD. The financial availability strategic resource constrained growth in production capacity.

The financial availability strategic resource decreased in the presence of high oil prices. The solidarity policy – triggered by high oil prices in 2007 – that delays collection of a fraction of accounts receivables, helps deplete the resource. In the presence of diminished financial resources, the company delayed payments to contractors, further increasing the stock of commitments and future outflows that constrained financial availability even more. Concurrently, the increase in commitments weakened the debt to assets ratio. New loans became scarce and more expensive to obtain, again, impacting financial availability negatively.

Chique, O. (2016) Dynamic Performance Management of Upstream Oil Companies, PhD dissertation, University of Palermo, Italy

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