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Lagniappe
Venezuelan
Oil – The Unfulfilled Promise
By Luis A. Pacheco
Background
Winston
Churchill once said that: "Russia is a riddle
wrapped in a mystery inside an enigma". One is reminded
of these words when approaching the subject of Venezuela's
oil strategy in the last few years.
Venezuelan politics, and by implication its economy, have
always been a product and a hostage to oil and the capriciousness
of the oil price. A founder member of OPEC, and throughout
history a very vocal, and at times vociferous advocate for
the rights of the sovereign state against the international
oil companies, Venezuela is today the archetype of an oil producing
and exporting country that does not seem to be able to leverage
its resource base into sustainable development for its population.
Ever since the nationalization of its oil industry in 1975,
in the wake of the then oil price bonanza, Venezuela's oil
strategy has struggled to find a consistent direction between
two seemingly contradictory objectives. On the one hand to
maximize the rent per barrel either through increasing fiscal
pressures or embracing OPEC's strategy of production quotas
to raise prices, and on the other, to increase production in
the hope of fostering growth in the non-oil economy.
At the risk of oversimplification, one may argue that this
as yet unresolved dichotomy lies at the heart of the strategic
seesaw with which one can characterize Venezuelan oil strategy
in the last fifteen years.
In 1970 Venezuela reached a production peak of almost 3.8
million B/D, out of proven reserves of the order of 14.000
million barrels. By 1988, production levels had fallen to almost
1.5 million B/D and reserves had risen almost 59.000 million
barrels. During the same period Saudi Arabia, had increased
its production from 3.8 million B/D to 5.1 million B/D (going
trough a peak of almost 10 million B/D in 1988), and increasing
its booked reserves from 141.000 million barrels to 255.000
million barrels. [1]
Today Venezuela claims booked reserves of the order of 80.000
million barrels, and has announced that it expects to book
an additional 50.000 million barrels in the next 18 months.
However, its level of production still hovers between 2.5 and
3.1 million B/D, depending on whose numbers one chooses to
believe, but still quite far from the potential its resource
base should allow.
Does Venezuela have long term oil strategy?
When the
present administration came to power in 1999, the Venezuelan
oil industry differed significantly from the modest
beginnings after nationalization in 1975. The production levels
were still around 3.1 million B/D and reserves in books had
risen to a staggering 77.000 million barrels. PDVSA, the state
owned company, had evolved from a Venezuelan based E&P
focused outfit, into a world class corporation with significance
presence in the downstream of its primary markets in the USA
and Northern Europe, and with plans to penetrate the Latin-American
and Asian markets.
Furthermore, as a consequence of a change in its investment
strategy, Venezuela had managed to attract back foreign investment
through the structuring of a various upstream business opportunities,
the so called 'Apertura Petrolera' (opening of the oil industry).
This strategy was inscribed into the wider vision of leveraging
the ample resource base and the market opportunities identified
in Asia and South America, into an aggressive growth plan of
the production and refining capacities, in and out of Venezuela
The inertia and robustness of those plans, in particular the
huge investment that the IOC's were still making in the late
90's, guided the oil strategy of the incoming government during
the initial years, despite the fact that the collapse of the
oil price in 1997, and the promises of the then presidential
candidate, called for a sudden change of direction.
Since then, and despite a nominal adhesion to an aggressive
expansion plan ('Siembra Petrolera', circa 2006), very similar
to what previous administrations had pursued, one can safely
surmised that the real strategic intent of the administration
is the maximization of the oil rent and therefore the fiscal
revenues for the central government. As we will discuss below,
this has been somewhat at the expense of economic efficiency
and long term sustainability.
This strategy of rent seeking can be characterized under three
headings:
a. Production quotas to maintain high oil prices
b. Increase political control over the oil industry
c. To use oil and oil revenue as political weapon (nationally
and internationally)
OPEC Quotas
OPEC quotas have always been difficult and economically painful
to implement for the Venezuelan oil industry. This is a consequence
of the low productivity and relative high cost of production
of its reservoirs, and in particular, the result of the complex
mesh of relations between the oil industry and the rest of
the economy (gas for manufacturing and electricity generation,
social impact in communities, marketing strategies, downstream
integration, operational downturns, etc.)
From 1999 onwards, and at great cost to the efficiency of
the industry, the Venezuelan government has embraced wholeheartedly
OPEC's strategy, at least nominally, and has been rewarded
with an increase in oil prices, that the administration attributes
to itself and its action.
Without
getting involved in the discussion of whether or not OPEC's
discipline is the main reason behind the historical
level of prices or not, the end result of the strategy is that
Venezuela, because of the constraints briefly mentioned above,
always ends with the short end of the stick. In 1998 OPEC's
production was 27.37 million B/D, of which Venezuela contributed
3.12 million B/D. By 2005, OPEC's production had increased
to 30.67 million B/D, of which Venezuela still remained at
3.12 million B/D (At the time of publication, and apparent
slip by the OPEC bureaucracy let the world know that Venezuela's
production quota is now 2.4 million barrels per day, which
has put under an uncomfortable light five years of official
Venezuelan production figures). One is reminded of Orwell's
Animal Farm: "All animals are equal, but some animals
are more equals than others".
Political Control
Ever since
nationalization, the political actors in Venezuela characterized
PDVSA (the state owned oil company), as too independent
and difficult to control. The expression "a state within
a state" was freely used by all sides of the political
spectrum. After the crisis of 2002/3 which resulted in the
firing of more that 20,000 employees (including almost all
the management) and the resulting reorganization of the industry,
PDVSA has now lost all its independence to pursue its own industrial
strategy.
The most telling sign of this loss of independence is that
the minister of energy and petroleum is now, at the same time,
the representative of the shareholder and the chief executive
of the corporation. This in itself is not much different than
the structure utilized by other NIOC's in OPEC countries, but
for a constitutional republic such as Venezuela, it represents
a significant loss of the orthodox mechanisms of balance and
control.
The most significant part of the new political control is
the so called 'new nationalization' of the oil industry, carried
out since 2005. This is basically the renegotiation of all
the contracts that PDVSA entered into during the 1990's with
private oil companies, both national and international.
A complete treatment of this subject is beyond our scope.
Suffice to say that the increase of the oil price well above
the expectations of the industry when all this contracts were
signed, highlighted asymmetries in the rent distribution that
were politically difficult to sustain for any government.
The government has taken advantage of this very rational argument
as an opportunity to extract political capital out of the situation,
by colouring the whole exercise with the politically popular
palette of nationalism, The net result of this exercise, which
still has not ended, has been the reluctant acceptance of the
private companies of the terms imposed by the government, as
price to pay for remaining in what is still one of the world's
most promising oil provinces, but at the expense of an uncertain
investment climate and reduced production share.
One has
to admit that the gap between the discourse and the implementation
can be very confusing at times. The migration
of the 32 Operating Contracts into Mixed Capital Companies,
where the private operators now have equity rights over oil,
is called "Recuperation of Sovereignty". The reduction
of the equity share of the private companies in the four Strategic
Alliances that exploit the Orinoco Belt, from 60% to 40%, is
called "Nationalization".
The fact of the matter is that the rent distribution has been
redrawn in light of the new market realities, and that the
private companies, although significantly weakened, still remain
an important factor in the Venezuelan Oil industry. Indeed,
one may argue that without their continuous presence, the Venezuelan
oil sector will be in even greater dire straits.
It may
be, after all, that the rumours about the death of the "Apertura Petrolera" have
been greatly exaggerated. At the time of writing this essay,
some IOC's have decide to
abandon Venezuela altogether, after what they qualify as severe
breaches of their contractual rights by the Venezuelan government.
Oil as a Geopolitical Weapon
The Venezuelan governments are no strangers to using oil to
further its geopolitical objectives in the region. The present
administration, however, has taken this to a new level, both
internally and internationally. Although most its initiatives
are still mostly announcements, and one can not be sure of
their sustainability in time, its undoubted that the promises
of the supply of gas, oil, oil products at reduced prices or
with generous financing terms, not to mention direct assignment
of hard cash, have attracted a lot of sympathy from governments
in and out of the region.
The fact that most of those promises, in particular those
associated to the financing of ambitious infrastructure projects
such as refineries in south and central America, a gas pipeline
to be built through the Amazon rain forest, the gas pipeline
to Colombia, and a myriad of other projects are unlikely to
be fulfilled, does not stop the strategy from being geopolitically
effective, much to the chagrin of the traditional powers in
the region: USA, Mexico and Brazil.
From the recipients' perspective, it would be a political
suicide to refuse the offers from a country that has such a
huge resource base of fossil fuels, in a continent that has
a net deficit of energy, at a time of high prices. However,
this strategy has one major Achilles'' heel: it depends on
Venezuela being able to tap its resource base into long term
sustainable production streams.
What of the future?
The easiest answer to the question of what lies ahead, at
least in the short run, is one of continuity. Why change a
winning game? However, there are some important caveats to
keep in mind when one tries to look beyond the next OPEC meeting
or the next headline by the Venezuelan president:
a. Will Venezuela continue to bite its tail in regards to
its production capacity strategy? Will it continue to sacrifice
its market share for a sustained per barrel rent?
b. With an ever growing demand for barrels for the Venezuelan
internal market, will it continue the subsidies? Is Venezuela
going down the route of Iran and become a gasoline importer?
c. Why is Venezuela intent in booking more reserves, however
fragile, if it has no intention of going beyond the OPEC restraints?
d. When the time comes to develop the technically challenging
Orinoco Belt, or its offshore gas reservoirs, will it call
back the IOC's, or will it keep faith with its new allies the
Iranian, Russians, Chinese and Argentineans? Can these new
actors deliver?
e. At a time of a huge world demand for technical and physical
resources in the energy sector, have the Venezuelans priced
them out of the market?
f. Either way, what is the answer to the old age question
of whether the state should invest in the oil and gas industry
that keeps the country afloat, or invest in what is after all
the state's real health, education and infrastructure?
When 2007 is safely archived into the annals of history, the
present administration will have put to rest all the alleged
warts that they have assigned to previous oil policies. Still,
the administration will have to find the answers to that old
question: how to transform the country's generous resource
base into sustainable benefit for their citizens? And in the
process help quench the thirst for energy of their partners
in trade.
For that they will have to find new ways of looking at the
relationships between resources and wealth, control and participation,
mistrust and alliances. This question has always been a Sisyphean
riddle for this oil blessed/cursed country.
It is a great and difficult challenge for any country, but
in particular to one so entangled in ideological dogmatism
and with the pressures of a very poor and impatient population.
If one is to judge by present evidence, Venezuela is heading
for a Gordian knot, for which they have no Alexander in sight.
Notes:
[1] All figures from
The OPEC Annual Statistical Bulletin, 2005
Luis
A. Pacheco earned a Ph.D. in mechanical engineering from
the Imperial College, University of London. He then worked
at PDVSA for 17 years, leaving in 2003 after serving as the
executive director for corporate planning. Petroleumworld
not necessarily share these views.
Editor's
note: This
commentary was originally published by Oxford
Energy Forum, Oxford Institute for Energy Studies (Issue
70, September 2007). Petroleumworld reprint this article
in the interest of our readers.
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