- Alí Rodríguez Araque is currently the Venezuelan Minister of Economics and Finance. He has held several different positions in the Chávez government, including Minister of Mines and Energy, president of PDVSA, Foreign Minister and Venezuelan Ambassador in Cuba. He has also served as the Secretary General of the Organization of Petroleum Exporting Countries (OPEC).
- Luis Giusti is a senior adviser with the Center for Strategic and International Studies (CSIS), principally in energy and Latin American affairs. A petroleum engineer and private consultant, he was a member of the task force that issued Strategic Energy Policy Challenges for the 21st Century (Council on Foreign Relations and Institute of Energy of Rice University, 2001), Giusti began his career at Shell Corporation in Venezuela before joining Maraven, S.A., a PDVSA operating affiliate.
- Alberto Quirós-Corradi is a career oil executive and former chief executive of Shell Oil de Venezuela. He was also former president and chief executive of Lagoven and Maraven, PDVSA subsidiaries, as well as director and president of Allied Consulting de Venezuela. He was a director of El Nacional (1985-1987) and El Diario de Caracas (1988).He received his Master’s from Cornell University in Industrial and Labor Relations.
- Víctor Poleo is the leader of the group Soberanía (Sovereignity) and a professor in the graduate program in petroleum economics at the Universidad Central de Venezuela. He was General Director of the Ministry of Energy and Mines from 1999 to 2001. He was also a member of the board of Edelca.
- Elie Habalián Dumat is the former Governor of Venezuela to the Organization of Oil-Exporting Countries (OPEC). He is professor emeritus of the Universidad de Carabobo, Venezuela, where he graduated as a mechanical engineer. He has also been an advisor to the Ministry of Energy and petroleum and to the president of PDVSA.
- Ricardo Hausmann is Professor of the Practice of Economic Development at the Harvard Kennedy School of Government and Director of the Center for International Development at Harvard University. Previously, he served as the first Chief Economist of the Inter-American Development Bank (1994-2000), where he created the Research Department. He served as Minister of Planning of Venezuela (1992-1993) and member of the Board of the Central Bank of Venezuela.
- Bernardo Álvarez is the Venezuelan Ambassador to the United States. He served as Vice-Minister of Hydrocarbons (2000-2003) and Director General of the Hydrocarbon Section (1999-2000), both posts in Venezuela’s Ministry of Energy and Mines. He is author of La política y el proceso de formación de las leyes en Venezuela (Caracas, 1997),Venezuela: deuda externa y crisis del modelo de desarrollo (Lima, 1989) and Empresas estatales y desarrollo capitalista(Sussex, 1982).
From the outset, Chávez was critical of PDVSA’s oil policy. Instead of maximizing production, he sought to increase prices and to strengthen OPEC. What’s your evaluation of this aspect of his energy policy?
Alí Rodríguez Araque: The oil policy prevalent in Venezuela during the 1990s, better known as the “aperture” (i.e. aperture-opening), called for maximizing the country’s production capacity in-country by attracting foreign oil companies to participate in the development of Venezuela’s oil infrastructure and, ultimately, to maximize production. Unfortunately, the involvement of foreign oil companies came at a steep cost since the “incentives” offered led to a collapse in the country’s fiscal income which, in turn, caused considerable damage to our economy and, of course, increased Venezuela’s poverty level. This “free for all” production also affected other oil exporting countries that were devastated by the abrupt collapse in oil prices. To counter this trend, President Chávez reversed the “aperture” and, most importantly, strengthened the role of OPEP in the world oil market. The implementation of this new strategy resulted in a gradual improvement of oil prices, reestablished a more reasonable equilibrium between the income due the state and the participation of the oil companies and, most importantly, ensured a progressive distribution of the country’s income in order to increase the GNP and reduce poverty levels.
Luis Giusti: The oil price collapse in January 1998 was a direct result of the economic crisis in Southeast Asia, which had taken the world by surprise and had global spillover effects. Many blamed OPEC´s meeting in Yakarta in November 1997 for the ensuing oil market crisis although in fact in that meeting OPEC simply acknowledged publicly its true production level. During the course of 1998 it became evident that the real reason had been the collapse of oil demand. During four years, oil demand had increased steadily at 1.6 million B/D per year, including more than 2 million BD in 1997, but in 1998 demand was unexpectedly flat. Saudi Arabia, Venezuela and Mexico engaged in a huge effort to stabilize the market, but production cutting was trial and error. By early 1999, the efforts had paid off and prices began a comeback. Chávez took office in February 1999, and the populist speech blaming Caldera´s administration for low prices was very effective. It is true that Arab OPEC members welcomed the new administration, because of a few years of difficult discussions about quotas with the previous administration.
Alberto Quirós-Corradi: When Hugo Chávez was elected president (1998) oil prices had reached rock bottom. All oil producing countries agreed on the need to reduce production in order to strengthen prices. In March 1998, Venezuela, Mexico and Saudi Arabia met in Ryad to discuss production cuts, avoiding references to oil quotas. This was the beginning of a policy of reducing real production levels, favored by most OPEC’ countries, and inherited by Chávez who campaigned enthusiastically abroad guarantying that Venezuela would honor oil production commitments to OPEC. There is no question that Venezuela’s firm stand at that moment contributed greatly to restore some order in OPEC as a whole. However, whilst in a very severe over supply situation, cutting back production to improve prices is the right practice, maximizing production should be the preferred policy of every oil producing country. This generates employment, increases demand for goods and services and has a multiplier effect on the Gross National Product. Moreover, very high prices in recent years have not been a result of production cuts. Chávez has made a serious mistake in reducing investment in the oil industry, minimizing maintenances expenditures in a rapidly decaying infrastructure and allowing large production losses at a time when the market (especially the United States) could have absorbed a considerable increase in Venezuela’s production levels, without seriously affecting world oil prices.
Víctor Poleo and Elie Habalián: In 1976 EXXON/Shell’s assets in Venezuela provided the foundation of Petróleos de Venezuela (PDVSA); its professionals became PDVSA core management.
A decade and a half later, PDVSA progressively began to build a meta-state (a state beyond the state) to dictate international oil policies and shape the economy according to its corporate interests. PVDSA’s financial scope overpowered that of the state itself.
PDVSA achieved its goal of becoming an International Oil Company (IOC), rather than conforming to its status as a National Oil Company (NOC), through the partisan vision of a political class lacking a political class lacking a robust understanding of worldwide oil markets and optimal allocation of the oil rent. The PDVSA meta-state model is one we have already typified as sowing the oil into the oil (industry) rather than in the country.
In the 1980s and 90s, PDVSA corporate thinking rejected OPEC as a decision- maker. Producing more than the stipulated quotas in the mid-90s, PDVSA played the dangerous game of challenging the Gulf Alliance ability to dictate the worldwide level of oil pricing. Both PDVSA and purportedly the Gulf Alliance, mostly Saudi Arabia, over- supplied the markets. At century’s end, oil prices plunged to 10$/b. Icons of such corporate thought were former SHELL director Alberto Quiros-Corradi and former (1994-1999) PVDSA president Luis Giusti. For oil prices to recover, the newly elected government in December 1999 only had to declare its adhesion to OPEC, ready to comply with its quota. Saudis and other Gulf OPEC members were satisfied with such a declaration: business as usual for the time being.
The so-called Bolivarian Revolution conveys the message that Venezuela dictates the level of worldwide oil prices. Venezuela has not the ability nor capability for disrupting the supply-demand equation at short notice and for a long time, nor has it the lower production costs and significant oil reserves of conventional crudes. Venezuela is a price-taker.
Ricardo Hausmann: It is a fact that Venezuelan oil production is way below where it was supposed to be according to the strategic plans Chávez inherited. Today we should have been producing close to 6 million barrels a day, instead of the current 2.4 million. But under Chávez, the published strategic plans remained very similar. What has happened is a huge increase in the gap between plan and reality. In fact, PDVSA has been grossly overstating the actual level of production. So, it is hard to argue that the current oil production outcomes is the result of deliberate policies rather than inability to achieve desired goals.
With regards to the international price of oil, Venezuela’s oil output collapse has certainly been a small contributing factor, but commodity prices have been rising across the board, including mining and agriculture. Should Chávez be credited with those price increases as well? In any counterfactual scenario, oil prices would have been much higher now than in 1999.
Bernardo Álvarez: In The Bolivarian Republic of Venezuela, when we talk about energy, we are not only talking about ourselves, but about a broader issue that we believe affects the entire world. President Chávez’ position “is to rescue and keep the fundamental principle of defending fair and reasonable prices for our natural resources, reaffirming that OPEC is a public and legal institution acting in favor of its members and seeking to strengthen sovereignty over the oil resources.”
Early in his presidency, Chávez took the initiative to restore OPEC’s discipline and coherence. His objective was to co-ordinate and unify petroleum policies among Member Countries, in order to secure a steady income to the producing countries; an efficient, economic and regular supply of petroleum to consumer nations; and a fair return on capital to those investing in the petroleum industry.
Nowadays, more than ever, the oil-producing countries of OPEC are often blamed for the current high prices of oil, but many other factors are at work, including market speculation and the high financial and technological costs of energy projects. Less attention has been given to factors such as politically and economically motivated armed international conflicts, the high taxes imposed on consumers in countries that are net consumers of energy, the current financial crisis, and the depreciating value of the U.S. dollar.
The policy of full petroleum sovereignty has been an essential part of President Chávez’ approach and its success can be seen globally since many other countries have been closely analyzing and considering the implementation of similar policies.
“Sowing the oil” has been the goal of the Venezuelan state since the 1940s. Oil has been treated as a source of foreign exchange to be invested in other areas of the economy. The energy sector itself has also been seen as a field of industrial diversification. Has Chávez managed to “sembrar el petróleo?”
Alí Rodríguez Araque: Hugo Chávez has oriented his policy of “Siembra del Petróleo” (i.e. “sowing the oil income“) not only to improve essential sectors of the national economy but also to end social injustice. Hugo Chávez changed the orientation of the oil industry to embrace a more lofty objective than just maximizing production: Petróleos de Venezuela now spearheads the war against poverty and has become “la PDVSA de todos”—PDVSA is now of and for all Venezuelans. PDVSA had formerly become an enclave catering to specific individuals and concentrated on its own agenda. This is over with and, of course, such changes displeased special interest groups and individuals that had enjoyed great privileges over the years.
Luis Giusti: “Sowing the oil” had a very positive, well-intended purpose. However, for many years it was a simple statement, meaning that governments should be rational, effective and honest in directing oil revenues to programs and projects that would upgrade the quality of life for Venezuelan society and reduce poverty, improving education, health, housing and infrastructure. Because Venezuela lacked necessary institutional structures, inefficiency and corruption set in; expectations became progressively frustrated. A few positive pre-Chávez expressions of sowing the oil include petrochemical developments, continued support for health and housing programs, agricultural cooperation, infrastructure developments coupled with industrial plants such as José and El Tablazo, and the creation of “Sofip” to open the oil industry to public participation, now extinct. Chávez has most certainly not “sowed the oil.” His government has created dozens of social programs called “misiones,” which receive millions of dollars that despite reaching the poor in several ways, have become sources of squandering and corruption and are not sustainable in time.
Alberto Quirós-Corradi: “Sowing the oil” was a goal developed when it was thought that oil reserves had a limited life. Therefore, in an agricultural society you have to “sow” the income from oil in order to reap other riches from the land of a more permanent nature. Years later when it was realized that Venezuelan oil reserves would last for the foreseeable future, “sowing the oil” became a metaphor for economic and industrial diversification. Chávez has failed to meet both strategies. Agricultural development has suffered under a criminal policy of land expropriation by the state, most of the time breaking down efficient production units into small backward agricultural lots lacking technology and financial support, without giving the new tenants the benefit of ownership of the land. Imports of processed food and agricultural products have increased five times under Chávez and production of traditional crops has severely diminished. On the industrial front more than 5000 companies have shut down, buried under government policies designed to do away with the private sector of the economy. Mayor industries (electricity, telephones, cement and steelworks) have been nationalized thus investing in transferring profitable companies from the private to the government sector, instead of utilizing these financial resources in developing new industries to reduce imports. In short, the Chávez regime has mismanaged over $700 billion during its 10 years tenure, without developing a social security system, a pension fund, a housing policy, unemployment insurance, transportation systems, job creation or reducing poverty. An almost unbelievable negative record.
Víctor Poleo and Elie Habalián: During the threshold years post-2002 leading from the PDVSA meta-state to the current PDVSA status quo, the Venezuelan Revolutionary Government blindly adopted a script already well known in the ex-Soviets states. PDVSA emerged as the corner stone of a para-state (a parallel state), replacing the society and economy institutions. It was viable just because the oil price three folded from 2003-2007. Higher the oil price, higher the disarrays in conducting Venezuela to a better off equilibrium point.
As in the past, but even worse than ever, the sowing of oil became a dictum with no real content. Worse than ever, Venezuela is witnessing inflation, devaluation, production capacity eroded, unemployment, a two-tier exchange rate, poverty, dilapidation and corruption.
The essence of the problem Venezuela has, and has had since the 40s, is the optimal allocation of oil revenues. The PDVSA meta-state is not the optimal model for allocating the oil rent nor is the PDVSA para-state.
Far from being a scientific approach to the optimal allocation of oil revenues, the long time hidden debate on oil revenues flourished. It was first the issue of maximizing oil revenues either by increasing production (vs. decreasing prices) or by increasing prices (vs. decreasing production).
But it was as well the false debate on increasing the royalties and taxes. In 2001 the oil royalty was set up in 30% (16.6% since the 40s). Why not 31%? Why not 29%?
A ridiculous trial and error exorcism. However, the higher the oil revenues, the more the boasting about nationalism and anti-imperialism. Much ado about nothing.
Ricardo Hausmann: Definitely not. While pre-Chávez policies lead to the creation of steel, aluminum and petrochemical industries, export concentration in oil is at a historic peak. Chávez has even made the export of products other than oil almost a crime. He used the fact that steel and cement companies exported part of their output to justify their recent nationalization. The exchange rate regime coupled with a highly protective trade policy is also anti-other exports. There are no plans to create or promote other export industries. Non-oil production is geared to the domestic market and thus is completely dependent on oil as a source of foreign exchange. If the price of oil were to falter, Venezuela would have no alternative industries that could expand to take its role in generating foreign exchange.
Bernardo Álvarez: Venezuela has a legacy of misery, poverty and environmental damage mainly in the areas surrounding the oil fields that have been exploited for years. Numerous questions arise as to where the social value of owner of the natural resources is left, where the Venezuelan industrial parks are, or how many goods and services Venezuela produces for the supply chain of its petroleum and gas industry.
Under President Chávez’s guidance, Venezuela currently has placed a high priority to solve and catch-up on its social passive and is using its purchasing power to prioritize national services and products, developing other related industries i.e. petrochemical, oil services, etc., creating strong diversified international cooperation alliances using its vast oil resources, which are beneficial for the country as a whole in the long run.
The facts show how successful this approach has been. Since recovering from the oil industry sabotage of 2002-2003, PDVSA has played an extremely important role in helping fund necessary social programs in Venezuela. In 2007, the company invested over $13 billion into such programs, which have helped lower poverty and address longstanding social needs. From 2003 to 2007, the poverty rate in Venezuela decreased from 55.1 percent to 27.5 percent, according to the National Institute of Statistics. Furthermore, these programs also helped nearly a million children from the poorest villages to obtain free access to education. Secondary education has been made available to 250,000 children whose economic situation previously excluded them from enjoying this right. Adult literacy programs have taught 1.2 million adults how to read and write. These are just a few examples of the many successes we have experienced in Venezuela.
On the other hand, Venezuela is a country with almost 100 years of oil production experience; paradoxically, we do not have a national industrial park to provide the goods and services demanded by the current production levels and even less for Venezuela’s oil and gas business plan “Sowing the oil”.
That is why we are creating new affiliates to take care of the supply chain for the oil and gas business and boost the employment and development on domestic service companies. By “Sowing the oil” we are reducing intermediaries and promoting the power transfer to the People.
New affiliates have been created, such as PDVSA Services to be responsible for oil and gas services i.e. seismic well maintenance, construction of drilling rigs, etc. In this sense, PDVSA, in partnership with Belarus, has assembled, for the first time, a team that conducts seismic studies in an area of over 3,000 square kilometers.
In addition, PDVSA Engineering, Procurement and Construction is accountable for all the project phase developments and their appropriated execution capacity; PDVSA Navy (to build tankers); PDVSA Urban development for urbanization and services in the new areas where PDVSA is undertaking operations; Gas Communal for gas distribution to the communities; PDVSA Industrial whose purpose is to cover the needs of the people in household appliances and other goods of mass consumption. In the specific case of PDVSA Industrial, negotiations are currently under way with the Republic of Vietnam to build an energy saving light bulb factory in the state of Carabobo, with an average annual production of 24 million light bulbs.
Furthermore, PDVSA Agriculture will complement government activities to provide assistance to farmers and consequently food to the people. PDVSA Agriculture has already started sowing soy on land owned by the company and will soon start sowing sugar cane. This is done with the help of Argentinean machinery.
PDVSA’s new core business is the People of Venezuela and its new business model reflects this priority. With this new model, we have successfully challenged the existing paradigm of inefficient state owned companies, by demonstrating that while maintaining the status as one of the largest integrated oil companies in the world, PDVSA is also effectively contributing to the development of the Nation.
When he became president, Chávez claimed that PDVSA had become “a state within the state”—an enterprise disconnected from the nation pursuing its own interests. Now critics claim that PDVSA has become a “meta-state”—a powerful instrument of the state unaccountable to society. What do you think?
Alí Rodríguez Araque: The 2002 “coup d’état” was followed by the oil strike which occurred in spite of President Chávez’s attempts at a national reconciliation right after his return to power on April 13, 2002. The failure of both destabilizing attempts allowed for the final and definite harmonization-synchronization of Venezuelan oil policy with national interests. This does not negate or ignore, in any way, the participation of the private sector —both national and international—which, nowadays, has diversified and increased its involvement.
Luis Giusti: PDVSA before Chávez was an absolutely transparent company. It was closely supervised day-to-day by the Ministry of Energy and Mines, it held two ordinary shareholder meetings with the government, one for budget approval and one for rendering results, its dollar revenues and expenses were directly supervised by the Central Bank, within PDVSA there was an office of the Comptroller General, it submitted public audited reports every year and it was supervised by the SEC in the United States in connection with its debt obligations, among many other routine controls. It fulfilled its obligations according to the laws and it complied with its obligations as a good neighbor in its areas of operations and activities. Under Chávez, PDVSA has become an appendix of the “revolution” with the sole purpose, explicitly stated by the authorities, of serving the president and his political agenda, nationally and internationally. It is a true “black box” not properly audited which publishes manipulated unreliable numbers in line with political objectives. The collapse of PDVSA is best expressed by the relentless fall in oil production. After reaching 3,500,000 B/D in 1999, Venezuela´s production has fallen to 2,300,000 B/D. But when considering that there is 1,000,000 B/D of new oil from joint-ventures, it becomes evident that PDVSA proper has lost more than 2,000,000 B/D.
Alberto Quirós-Corradi: The old PDVSA was undoubtedly a very professionally-run corporation. Its management probably had more decision making power than it would normally have had it been a private company. The Minister of Oil who acted as shareholder’s representative had very little control over decisions such as investment abroad, annual budgets, selling and acquiring assets. The reason was that PDVSA had a very professional human resource base, whereas the Ministry did not. The “normal” conflict of interests between a shareholder who demands dividends and management who wishes to reinvest profits was a “no contest” in favor of PDVSA who had ways of hiding cash in its system, through creative accounting. The rationale was that if the government was given all the excess cash it could dilapidate it, whereas PDVSA would invest it wisely.
The claim that PDVSA was a “state within the state” preceded the current regime. Chávez, however, placed the state within PDVSA, transforming the company into a “Cash cow” to finance government plans not included in the annual national budget, such as import and distribution of foods, manufacture of consumer goods, government “Misiones” (social plans). PDVSA also provides cash for acquiring private companies (Electricidad de Caracas, etc). The few audits done on these new activities, more of a conglomerate nature than of a company shows inefficiency, mismanagement and financial malpractices.
Víctor Poleo and Elie Habalián: Meta-state is the PDVSA’s corporate model of the 90s, a state beyond the state, unaccountable for society but coexisting with the institutional bodies of the Nation. Para-state is the PDVSA’s corporate model from 2003, a parallel state, unaccountable for society and destructive of the institutional bodies of the nation. As a parallel state, PDVSA became Chavez’s political a geopolitical instrument.
The PDVSA para-state model lacks knowledge and ethics, as it is a La Habana like inspiration for oppression of the people, a new tropical experiment attempting to trigger ad infinitum the short lived real socialism. We have already characterized the PDVSA “meta-state” model as one that involves ‘sowing the oil into oil,’ that is, rather investing oil money in other areas in order to diversify the economy, investing it into the oil industry itself.
Ricardo Hausmann: Most democracies create organization that are assigned goals and are empowered with managerial autonomy to achieve those goals and systems of accountability to keep them honest and focused. This is the case of central banks and state-owned enterprises. PDVSA had a governance structure that tried to achieve these goals. The state was the sole shareholder and it appointed the president, the board and the strategic plan. Beyond that, there was significant managerial autonomy in achieving the agreed goals.
The totalitarian view of the world sees in any organization – public or private – that has some autonomy vis a vis the government as inconvenient. Chávez has destroyed any sense of managerial autonomy, while employees are required to be loyal to the party. So, PDVSA is not autonomous in any sense of the word. However, it has been made responsible of many tasks other than producing oil: distributing food, funding social programs, etc. This means that public spending is now done directly through PDVSA instead of through the budget. This is done to avoid legislative control and the constitutional requirement of sharing budgetary resources with state and local governments. So, PDVSA is used to avoid democratic accountability and decentralization of public spending.
Bernardo Álvarez: In Venezuela we are leading the way in implementing a new dynamic. In the 1990s, and until the election of President Chávez, our national oil company, Petróleos de Venezuela, S.A. (PDVSA), was ready to hand over our energy resources to transnational capital and become an instrument for International Oil Companies (IOC) to control these resources. PDVSA, just like a private corporation, was committed to what its executives called the “maximization of shareholder value”. That is, the value of the company after payment of taxes, royalties and the like. In the case of today’s PDVSA, the shareholder is the State, which also receives general taxes and generated royalties. In other words, as PDVSA strove to minimize its tax and royalty obligations, it ignored the essence of why the Venezuelan oil industry was purposefully nationalized in 1976 –the maximization of the value of natural resources, i.e. crude oil, to the Venezuelan people. The consequences were startling– the government of Venezuela received double the value of its crude oil through rents and royalties in 1975, the year prior to nationalization, than it did in the year 2000.
The prices used for calculating royalties were solely in PDVSA’s hands. Royalty rates were artificially low. Substantial discounts costing our country billions of dollars in the price of crude oil were provided to PDVSA’s wholly-owned subsidiaries abroad, including CITGO here in the U.S. In the mid-1990s, the Venezuelan oil industry, although having long been nationalized by law, was, in fact, being given away to the IOCs. All the while, more than 60 percent of our population remained mired in poverty.
As his first order of business, President Chávez brought the oil industry under the control of the Venezuelan people for the benefit of the people. While appreciating the role of private investment in the oil sector, President Chávez restored the rightful balance between private and state ownership and the privileges and obligations attendant to the exploration and production of our non-renewable natural resources.
The New PDVSA is aligned with the country’s objectives in the frame of our sovereign National Oil Policy and its priority is to continue to be competitive in the oil industry while contributing to the social and economic development of Venezuela.
According to some analysts, April 11–14, 2002, marked a shift in Chávez’s oil policy. After being overthrown, it is claimed that Chávez “negotiated” the oil industry: decided to take a more conservative course so as not to alienate foreign powers. What’s your evaluation?
Alí Rodríguez Araque: The 2002 “coup d’état” was followed by the oil strike which occurred in spite of President Chávez’s attempts at a national reconciliation right after his return to power on April 13, 2002. The failure of both destabilizing attempts allowed for the final and definite harmonization- synchronization of Venezuelan oil policy with national interests. This does not negate or ignore, in any way, the participation of the private sector—both national and international—which, nowadays, has diversified and increased its involvement.
Luis Giusti: April 11–14, 2002, certainly marked a shift in Chávez’s attitude towards the existing establishment of the oil industry. But it was a merely a shift of gears to accelerate his aim of subordinating the oil industry, and more specifically PDVSA, to fit his political objectives. He had already begun following that path at a low pace, but April 11–14 gave him the pretext to assault PDVSA and begin firing people, eventually more than 20,000 employees. He also became more open against U.S. companies and in favor of China, Iran, Iraq, Vietnam, with negligible progress. Can this be called a policy? A more adequate term would be a random walk.
Alberto Quirós-Corradi: Chávez did not “negotiate the oil industry.” What happened during April 11 to 14, 2002, was that the regime let it be known to the United States that if Chávez were to be removed permanently from office, there would be chaos in Venezuela, affecting the capacity of the oil industry to produce and export normally. This would result in higher oil prices and a serious reduction in important volumes of much needed oil imports into the United States. Nevertheless, Chávez claims that the U.S. government assisted the military coup that removed him from office for a few days. Others think that the U.S. government was indeed concerned with “the day after Chávez” and was quite happy to see him back in the presidential chair.
Víctor Poleo and Elie Habalián: Judging from the revolutionary set of decisions post- 2002, the Venezuelan oil industry is now more alienated than ever from global energy capital. The genuine capital of a nation is knowledge, and one hundred years of accumulated national knowledge about the oil industry was deleted following the upsurge of PDVSA in December 2002. Since that knowledge is irreplaceable, the future of the Venezuelan oil industry is in the hands of global energy capital.
Ricardo Hausmann: In my view, April 11–14 did not represent a major break in the relations between PDVSA and the government. Chávez temporarily backed down from his public firing of oil managers, which put more fuel to the fire of the political crisis of the moment. The major break in relations came after the oil strike of December 2002–January 2003, in which Chávez opted in favor of destroying the managerial capacity of the industry rather than negotiate. This has been the principal cause of the collapse of oil output and the inability to expand production.
Bernardo Álvarez: Formerly, in the Fourth Republic, it was accepted that the company and the state could have different interests. We have rejected this view; the national oil company must accompany the Venezuelan state in its geo-strategic positioning; it therefore has to guarantee the placing of our incremental production volume in the South-American, European and Asian economies, which are currently in full expansion. This is why we enter agreements that involve the expansions of existing refineries, adapting them to our types of crude, as well as integrated projects, from product to refining, and placing crude and products in strategic markets that are new to us.
Our commitment to establish complementary relations based on solidarity and a mutual benefit does not discriminate against any country. Based on the same principle, we now look to the South, and we do it with the same eagerness we felt formerly, when we only looked to the North.
Currently, the openness of our oil market to private companies from the United States or any other foreign country remains extensive. A 2006 U.S. Department of Energy report explained that whereas in Venezuela a U.S. company can purchase a local oil company and obtain equity interest in oil production, that same U.S. company has no such opportunity in Kuwait, Mexico or Saudi Arabia, three ostensible “partners” of the United States in its energy world view.
Furthermore, in 2006, the U.S. General Accountability Office (GAO) concluded in a report on Venezuela’s oil industry requested by Senator Lugar (R-IN), that by ignoring Venezuela’s attempts to resume a technical energy cooperation agreement between the countries, the United States effectively refused to give it continuity. Currently, 18 countries are working with the Venezuelan Petroleum and Energy Ministry and PDVSA to develop the Orinoco Belt. It is well known that Venezuela has 130 billion barrels of proven reserves in this region and, after finishing the certification process trough the Orinoco Magna Reserve Project, our country will have the largest reserves worldwide.
Chávez has presented as a nationalist triumph his policy of repudiating old service contracts and forcing oil companies to become joint ventures. Some of his critics (from the left as well as from the corporate oil sector) claim that this policy, far from being nationalist, has entailed the privatization and de-nationalization of the oil industry. What’s your evaluation of this controversial issue?
Alí Rodríguez Araque: The “operating agreements” and, in general, all the contracts signed as part of the apertura petrolera resulted in concessions with terms and conditions that were much worse than those established in the old Hydrocarbon Law of 1943. The new legal framework requires a majority participation of the State in any oil venture and ensures a more balanced fiscal regime that has translated into significant benefits for the Venezuelan population and reasonable profits for private companies while promoting a transparent relationship between the private sector and the State. Results speak louder than words.
Luis Giusti: I will start by saying that the term “nationalization” can be deceiving. It frequently goes hand in hand with words like “patriotism” and “sovereignty” within populist political speech. For example, many Mexicans use those words to prevent private capital participation in their oil industry, while Mexico’s oil production is falling fast, infrastructure is deteriorating, refineries cannot deliver the needed products and the new potential areas cannot be explored for lack of technology and money. The Orinoco integrated projects required large investments and technologies that Venezuela didn’t have and thus were addressed through strategic associations; the profit sharing agreements for exploration entailed high risks that PDVSA could not assume and thus were addressed by leaving the risk to the partners and agreeing on a favorable sharing of eventual benefits. Finally, old oilfields had no investment provisions within PDVSA’s plans and thus were addressed through operational agreements that ensured a benefit to the partners with PDVSA retaining the property of the oil. Some of the actions of this government concerning those projects have gone in the right direction, such as speeding up the return to normal royalties or seeking changes in the share of the benefits as a result of the very high prices. However, none of them have been addressed properly and all of them have damaged the Venezuelan oil industry, although this has been masked by the high revenues stemming from those high prices.
Alberto Quirós-Corradi: Service contracts were agreements between PDVSA and oil companies whereby the latter would invest, develop and produce some oil fields only marginally attractive to PDVSA. The oil companies recovered their investments and made a profit for their troubles through a pricing formula. The oil produced was the property of PDVSA, which was solely responsible for its export sales. Joint ventures, on the other hand, made the oil companies partners in the exploitation of those fields with property rights over their share of the oil produced. Thus, PDVSA transformed a contractor into a full fledged partner and opened a door for future, more mature partnerships between the state and the private oil companies. Although somewhat battered by being forced unceremoniously out of previous agreements, the oil companies should be delighted with the outcome, which gives them reasonable expectations of a more permanent presence in the Venezuelan oil industry.
Víctor Poleo and Elie Habalián: The state has two models to consider in its interactions with global energy capital: either a relation of service or a relation of sharing property. In March 2006, the revolutionary government forced established service contracts (32) to migrate to sharing property, so-called “empresas mixtas,” with a government- capital ratio of 60:40 in exploration and production, a de facto de-nationalization of oil reserves and profits. In January 2008, the Venezuelan High Court admitted a claim to delegitimate “empresas mixtas.”
Ricardo Hausmann: The destruction of the managerial capacity of the oil industry and the renegotiation of the contracts with foreign companies (with the departure of those that did not agree with the changes) has diminished the capacity of PDVSA to achieve any desired goal. Contrast this outcome with Petrobras, a company that is now expanding its production internationally, and deploying its proprietary technology abroad. In the meantime, Venezuelan experts are in exile, working for other countries and companies. You would need a very peculiar definition of nationalism to count this as an example of it.
Bernardo Álvarez: The old PDVSA’s internationalization policy was designed to guarantee the United States a massive supply of cheap oil. Also, the strategy aimed at removing some of PDVSA’s assets from fiscal control, because many purchases weere in response to the need to guarantee the placement of our crude. These purchases were simply not processed.
During the 1990s, the policy of apertura petrolera represented a veritable assault on Venezuelan natural resources by some international institutions together with international oil companies. Such agreement involved the complicity of the oil elite, the ruling oligarchy and its political representatives. From the very onset of oil nationalization, the strategy aimed to control PDVSA through transnational interests, minimizing the value of Venezuelan hydrocarbon resources.
With the so-called apertura, foreign capital attempted to expropriate the Venezuelan people from sovereign management and use of their main resource: oil.
In relation to income tax, for instance, the apertura was structured in a way so contractors would pay no royalties, enjoying a very low tax rate that would have been fine if the private companies involved were bakeries or drugstores and not oil companies.
Here, one can discern a massive and deliberate evasion of oil taxes. At the same time, PDVSA management made sure that the State had no direct access to the accounts of petroleum activities. This made it impossible for the State to exercise its sovereignty over its natural resources and thus comply with our National Oil Policy.
Access to private investment was awarded to avoid prior errors because we realize the importance of private/public cooperation for a sustainable long term efficient oil industry.
Some critics argue that the project of orimulsion was the perfect opportunity for Chávez to use Venezuela’s resources to promote an ecological and socially responsible energy plan—one favoring electricity for people rather than gas for cars. What’s your evaluation of Chávez’s policy towards orimulsion? Do you think orimulsion was a viable alternative project?
Alí Rodríguez Araque: The Orimulsion projects were part of a technological quest to make the best use of the extra heavy crudes. Associating the price of these products with that of carbon resulted in enormous losses for Venezuela. Mixing lighter crudes to obtain, for example, Merey 16—as ExxonMobil did—allowed for great competitive advantages compared to mixing heavy crudes with water. The introduction of new technologies to improve and transform the extra heavy crudes resulted in a commercial breakthrough that has made these products quite competitive. In conclusion, Orimulsion has turned out to be no more than a good technology to transport heavy crudes as was originally conceived.
Luis Giusti: The Orinoco belt, more than 700 kilometers long from east to west and between 50 and 80 kilometers wide from north to south, contains 1.2 trillion barrels of oil with an estimated 270 billion barrels of recoverable oil. But there are significant variations along that huge accumulation. Large portions of the belt have oil between 7 and 9 degrees API, which clearly fall in the category of bitumen. Light, medium, heavy and extra-heavy oil, as well as bitumen, are clearly defined by the World Petroleum Congress and not subject to interpretation. It is important to keep this in mind, because it too has been used as part of the political discourse to slander previous administrations. In researching better ways of transporting extra-heavy oil, serendipity resulted in developing Orimulsion, a stable emulsion with some 25% water and special additives that allowed it to be burnt in boilers for power generation, more efficiently than coal. Ecological considerations were no different than those for coal, although Orimulsion is less contaminating. On the grounds of allegedly squandering the value of bitumen, the Chávez administration cancelled the whole expansion project and the contracts, except for the Chinese project.
Alberto Quirós-Corradi: Orimulsion is a mixture of extra heavy oil with water and a chemical compound to create a stable emulsion that can be burned directly in power plants to generate electricity. It was designed to compete with coal. The Minister of Petroleum said the reasons for cancelling the Orimulsion projects were basically economic. The argument was that the extra heavy oil could be mixed with lighter oil resulting in a more profitable product. It was also argued that transforming extra heavy oil, in high conversion units, into lighter synthetic oil was also more profitable than the Orimulsion alternative. However, given the magnitude of the extra heavy oil reserves, the limited availability of lighter oils and the long lead time required to recover investment in sophisticated refineries, some argue that Venezuela could use its extra heavy crudes to develop all alternatives for its use, including Orimulsion. I agree. At today’s coal prices, Orimulsion would be a very profitable product.
Víctor Poleo and Elie Habalián: Orimulsion is a thermoelectric fuel competing with coal and natural gas. At first in 1983, it was an inverted emulsion of water in bitumen of the Orinoco Oil Belt in the ratio 70:30 devised to abate viscosity. In the 90s, it was commercialized in Canada, Denmark and some Southeast Asian power utilities. Because Orimulsion allegedly did not yield high oil rent, the revolutionary government unilaterally cancelled the ongoing supply agreements (100,000 BD) and future contracts in August 2003.
The size of proven Orinoco Oil Belt reserves is around 270,000 million barrels of extra-heavy oil and bitumens (30%). If hypothetically these entire reserves were transformed into Orimulsion, it would provide 50% of the worldwide supply markets of thermo-fuels during the horizon 2005–2025. Otherwise, as it is the case now, the synthetic oils (28API to 34API) made out of extra-heavy oil (8API to 12API) in the Orinoco Oil Belt amount to enough motor gasolines to supply 12 years of world consumption or, equivalently, 25 years of U.S. consumption.
A self-promoted socialist government opted then for feeding the worldwide motor gasoline markets, the essence of global energy capital, rather than providing electricity for Latin American countries in need of cheap thermoelectric fuels for their development.
Ricardo Hausmann: Orimulsion is a substitute for coal in electricity production. It was developed as a way to use the extra-heavy crudes of the Orinoco, when the technological alternatives were few. It is not particularly environmentally friendly, but is slightly better than coal. Newer technologies transform heavy crudes into the equivalent of lighter ones. I do not know which technology is more profitable and I doubt there are significant environmental differences between them. But I wonder what was the real reason behind Chávez’s opposition to orimulsion.
Bernardo Álvarez: In order to sell Orimulsion, the extra-heavy crude oil of the Orinoco Oil Belt was simply labeled as Tar, in this way creating a lie, which was the only way to commercialize Orimulsion. The truth was that the resource used to make Orimulsion was extra-heavy crude oil. Orimulsion was presented as an unequaled business opportunity, using a specified formula, based on coal, and using metric tons as a measuring unit, to distance it as much as possible from what it really was, oil.
Venezuela is an exporter of heavy crude oil; therefore, Orimulsion was affecting not only oil prices in general, but also Venezuela’s oil exports. Venezuela has sovereign rights over its natural resources and is constantly striving to achieve fair prices. Orimulsion systematically reduced this possibility. Venezuela’s decision to deactivate the production of Orimulsion was therefore justified. We did, however, as we have always done, respect previously signed contracts and complied with them until they expired. A question of conscience that should be posed is if burning coal, or in this case Orimulsion, is an environmentally friendly approach to the greenhouse issue.
What do you think of Chávez’s use of oil as an instrument of foreign policy?
Alí Rodríguez Araque: Every country resorts to the options it has available to carry on its international politics. The great military and economic powers use their financial, technological and nuclear might as a means to their ends. Why should Venezuela not have recourse to its “energy might” in order to develop and promote its international policies?
Luis Giusti: Oil as an instrument of foreign policy is not a bad thing in itself. But when it is used to threaten and boycott selected nations things become unacceptable, and eventually will damage the owner of the oil. However, it is important to note that Chávez’ threats are noisy but hollow. He threatens to suspend exports to the United States and send them to China instead. But he has been threatening that for more than nine years now, and exports to the United States continue uninterrupted. The United States is simply the most profitable market and China is not ready to receive Venezuelan oil.
Alberto Quirós-Corradi: It is perfectly reasonable that countries use their resources (human, natural, industrial) as instruments of foreign policy, basically to improve their international economic leverage. Although oil has been utilized as an instrument of political power and its ready availability can make the difference in the outcome of a conventional war, a country like Venezuela has no business trying to become what it cannot be: a major player among countries that complement their economic strength with “firing” power. Chávez has used oil to foster Venezuela’s political influence in Central and South America buying fragile ideological alliances with the poorest countries of the hemisphere. In a more ambitious move, Chávez has structured expensive alliances with countries such Iran, Syria and North Vietnam whose major attributes are their hate of everything from the United States.
Leveraging oil wealth, Chávez could have acquired technical assistance and training from developed countries and trading agreements to improve Venezuela’s unbalanced economy. Instead he has purchased arms, military equipment and even submarines. Rather than delighting in developing highly productive agricultural units or very sophisticated industries, Chávez dreams about a military force that would carry the Venezuelan flag across the continent, like his hero Simón Bolívar, liberating countries from real or imaginary “imperial” forces. Sadly, it has become a very expensive dream.
Víctor Poleo and Elie Habalián: The use of oil as a mechanism of foreign policy has to be evaluated in five years time with reference to Central America and Caribbean countries. Predictably enough, however, most of current mechanisms are quite volatile and lack sturdy design.
Ricardo Hausmann: I do not share Chávez’s foreign policy goals, so as a Venezuelan I think the costs clearly exceed the benefits. Latin American governments have shown a willingness to accept Chávez’s gifts in exchange for lip service. His real agenda is to help like-minded governments get to power and orbit around Venezuela, such as Bolivia, Ecuador and Nicaragua. To a lesser extent you can count Argentina in that group, with President Cristina Fernández aligning its foreign policy to the likings of Chávez, at least with regards to the United States and Colombia-FARC policy in exchange for financial support to the government and to her electoral campaign. The oil subsidy to the Caribbean islands assures these countries’ votes at the OAS and the UN. Subsidized oil in Boston allows Joseph Kennedy to pay himself $500,000 as his salary for running the foundation that delivers Chávez’s subsidy. In exchange, Chávez gets an amount of press coverage that would have been hard to achieve any other way. Now, the “poor” who get the subsidized oil in Boston and the Bronx have incomes per capita well above the Venezuelan median. It would be hard to imagine that Venezuelans would find that this subsidy makes much sense.
Bernardo Álvarez: Countries can no longer “go it alone,” not even the United States. Rather, energy integration, which is the route to energy security, must be based on the notions of solidarity, inclusion, common and complementary interests, and the recognition of the sovereign rights of each country.
Based on these underlying principles, energy integration will assure the accessibility of resources, guaranteeing the right of each nation to manage its natural resources and to have access to energy with which to promote development and social justice. It will also ensure the affordability of resources, so that each country can cope with the cost of energy through financing terms and other means. Energy integration will give governments the ability to foster sustainable development and reduce asymmetrical consumption.
In the rapidly evolving political terrain of this hemisphere, we find a number of progressive governments leading their countries down a new path. No longer are free trade and private capital the only terms in which social and economic development may be discussed; the discussion now includes serious considerations of poverty, social exclusion, regional integration, sovereignty, South-South cooperation and, more recently, the food crisis. These governments have begun to re-define the role of the state in development and to empower citizens by allowing them to make their own decisions and participate in re-defining the role of their countries in regional and global contexts. Unless this new reality is truly understood and accepted, we are in danger of failing to achieve energy security and to bring about the better world we seek.
These changes in the hemisphere are not an accident. The rise of leaders like Presidents Evo Morales in Bolivia, Rafael Correa in Ecuador, Hugo Chávez in Venezuela and, most recently, Fernando Lugo in Paraguay, among others, show that the People of Latin America are looking for a new direction, away from the typical neoliberal model imposed by the now defunct “Washington Consensus.”
Venezuela is promoting regional multilateral initiatives such as PetroSur, Petro- Caribe, the Bolivarian Alternative for the Americas (ALBA), and the Bank of the South to demonstrate our commitment to strengthening Latin America as a whole and creating productive unity. These initiatives, raising citizen and civic awareness, form part of Venezuela’s ideal of empowering the People, which is in our point of view the only way to solve the problems of poverty. By letting people make the political decisions that will affect them directly, the communities will be directly responsible for achieving the much needed solutions to their plights.
One of the initiatives that Venezuela has been promoting for peace and prosperity is international energy integration, on the basis of fair commerce, solidarity and complementary strengths. As the recent Declaration of Margarita says (in the framework of the first South American Energy Summit on April last year): “We (Venezuela) are fully committed to solving the current energy crisis, especially within our region (…) The chiefs of State of the participating countries agreed on the importance that energy integration has as a first step to achieving social and economic integration (….)”
Other main points discussed included:
1. Energy integration should reduce existing asymmetries in the region.
2. The process of energy integration should involve the States, the communities and the oil companies as principal actors.
3. The energy integration infrastructure should be developed and expanded through joint investments.
4. All countries should cooperate to maximize energy savings (…)
5. Countries should work to harmonize regulations, rules and technical standards in their energy sectors.
Oil is not being used as an instrument of foreign policy; it is being offered as our contribution to achieve these common goals. In the same way the European Union was born initially using coal and steel to then develop to a fully integrated bloc, Venezuela is offering to use oil and gas to achieve a similar integrated regional bloc in South America.
What’s the most remarkable achievement of Chávez’s energy policy?
Alí Rodríguez Araque: There are many successes, as recent history has shown. However, the most important accomplishment has been to establish full sovereign control over our natural resources, in general, and oil, in particular, so as to exercise a fundamental and universally accepted right aptly covered by several UN resolutions.
Luis Giusti: An immense gap exists between “the talk and the walk” in Venezuela. Despite trumpeting dozens of projects and signing literally hundreds of memoranda of understanding and letters of intent, practically nothing significant has been done in 9 ½ years. The list of achievements is very short: two blocks assigned off-shore in Plataforma Deltana, a few assigned in the Gulf of Venezuela, the assignment of a small gas field inland, and a process of certification of reserves in Orinoco of dubious justification. The situation is better illustrated by the list of frustrated big projects, including four refineries in Venezuela, one in Ecuador, one in Nicaragua, nine new petrochemical complexes and the wild chimera of a 10,000 kilometer gas pipeline to take gas as far south as Argentina, which can be defined as “a project never to be built, to take non-existent gas reserves to non-existent markets.” There is no remarkable achievement in the list, except for the efficient marketing of oil at discounted prices and with soft financing to Caribbean and other nations, if that can be called remarkable.
Alberto Quirós-Corradi: One achievement is that although Chávez has gone about it the wrong way, he has tried to develop a comprehensive Latin American energy policy, utilizing Venezuelan oil as the guiding force for this effort. A sub-continental energy common market could be the stepping stone for a continental energy policy that would include the United States and Canada.
The other “achievement” is that his highly criticized direct utilization of PDVSA funds on non-oil programs, mainly of a social nature, could be a blessing in disguise for the future as it does away with the firmly established principle of having all oil revenue placed in the Public Treasury. This breakthrough may allow the development of an aggressive new oil policy under which Venezuelan citizens could have direct access to the riches generated by the oil industry, through a special fund as in Alaska. Or establishing the principle of the citizens’ collective ownership of the oil reserves which would allow that payment of royalties be made direct to the now-owners, and not to the State. Or the establishment of a major fund in which all taxes, royalties and dividends paid by the oil industry are deposited, with only a given percentage allocated to the national budget. The balance would be distributed partially among citizens and partially saved for future generations.
Víctor Poleo and Elie Habalián: Dismantling the irreplaceable machinery of a professional body of more than 10,000 geologists, petrophysicists, production and refinery engineers, researchers and planners. If assessed in the context of a zero-sum game, the loss for Venezuela is a gain for the world, quite a remarkable achievement.
Factotum of such an energy policy is Alí Rodriguez Araque, PDVSA president at the time (2003) and later Ambassador to Havana, an irregular trade center for the transshipment of the Venezuelan oil rent.
Ricardo Hausmann: I will have to think much longer to see if I can find one.
Bernardo Álvarez: To deliver oil benefits of the owners of the resource, the People of Venezuela, directly through education, health, basic services, and other social areas, investing in productive assets to achieve sustainable development, while maintaining a vibrant oil industry.
To rethink the country and its national oil industry as a whole to deliver social value.
To reestablish the discipline and coherence of OPEC, and abort the old outrageous PDVSA strategy of challenging the organization to production volumes that could lower oil prices to unimaginable levels.
To give voice and practice to the political will for Latin American integration, offering Venezuela’s energy surplus in solidarity as the backbone of this integration, as well as serving a leadership role against unilateralism and the irrational consumption of energy that is destroying our planet.
What’s the most significant shortcoming of Chávez’s energy policy?
Alí Rodríguez Araque: What could be referred to as a “shortcoming” in President Chávez’s energy policies is, in reality, a byproduct of other developments. Nowadays, for example, our expansion plans require an important increase in drilling rigs which, unfortunately, are in small supply. Also, PDVSA needs to expedite the training of its HHRR. Both problems are being addressed by our state oil industry.
Luis Giusti: The list of shortcomings is long, but perhaps the most significant one is the destruction of the whole institutional framework of the Venezuelan oil industry, most notably of PDVSA. The consequences have been the loss of qualified people, of interlocution capacity, of production capacity and of the execution capacity needed to take advantage of future opportunities.
Alberto Quirós-Corradi: The lack of accountability regarding oil activities. Chávez disregarded the technical knowledge and professional expertise required to efficiently run an oil company. His belief that PDVSA is an inexhaustible cash cow. His lack of definition as to whether he really wishes to have a healthy oil industry that maximizes production or whether he wants to keep production at a low level sufficient to make a “controlled contribution” to the country’s welfare in order to rule forever over an ignorant and impoverished society.
Víctor Poleo and Elie Habalián: Chávez’s energy policy has no shortcoming at all; it is nearly perfect in a totalitarian regime. That explains why a Council for Energy Policy would never be in place under Chávez, but necessarily will be after Chávez.
Ricardo Hausmann: I guess that destroying PDVSA’s managerial capacity is certainly up there, including our own R&D capability at INTEVEP.
Bernardo Álvarez: Reliable and affordable access to energy is essential for the attainment of sustainable economic and social development in all nations. Meanwhile, extreme asymmetries characterize use and access to energy in the Hemisphere. These asymmetries must be addressed so that the world can achieve access to energy that is characterized by rational use and equilibrium, and thereby attain true security.
Collaboration between producer and consumer countries is a key part of the solution, framed by changing the developing model of the so called industrialized countries. It challenges the paradigm of what “development” means for developing countries, offering an alternative way to generate social value.
President Chávez has called on countries and multilateral institutions to save the planet from the consequences of using food to fuel cars, but his exhortations have fallen on deaf ears; in fact, the use of food as fuel results in the exponential rise of food prices and numerous countries falling in famine.
Can the state in a dependent country like Venezuela define an independent energy policy, or is the state already constrained by structures and rules established by dominant actors?
Alí Rodríguez Araque: Under the leadership and guidance of President Chávez, Venezuela has demonstrated that it is possible to establish an independent and sovereign oil policy. In the past, OPEC member countries have nationalized their oil industries as part of their own transformation into independent and sovereign states. What is essential is that these policies count with the support of the general population…as has happened in Venezuela.
Luis Giusti: It is not difficult to define an effective and solid institutional framework for the oil industry in a country with large energy resources, like Venezuela. It is simply a matter of separating three things, and paying respect to that separation. Place policy in the hands of the government, administration/ regulation in the hands of a special entity that should be given continuity and professional status (normally called agency, as in Norway, Brazil, Peru and Colombia), and leave the operations and the business in the hands of the national oil company and any other companies that participate within the country. This model has been highly successful in all the countries mentioned above.
Alberto Quirós-Corradi: Important factors establish some constraints such as the perceived notion of the political unacceptability of not having the state as owner of the oil reserves and a state oil company. However, although this inheritance derives from colonial days, it is not as firmly embedded in the Venezuelan culture as it is, for instance, in Mexico.
The so-called apertura, allowing private oil companies to operate in Venezuela many years after nationalization is still an accepted practice, even under the new rules imposed by the Chávez regime. Therefore, there are no insurmountable constraints that work against the development of a new, more flexible energy policy in Venezuela.
Víctor Poleo and Elie Habalián: Venezuela does not have the ability to define an “independent” energy policy as such. Venezuela can only maximize options for the future, a future already experiencing structural changes leading to the emergence of a new energy order and the fading out of oil as the energy form.
Ricardo Hausmann: I don’t really understand the question as I do not know what you mean by a dependent country or by an independent energy policy. I think that Brazil has a pretty impressive state-owned company and a pretty original biofuels policy. I don’t see why Venezuela could not have done much better, given it started much earlier and had a bigger industry with deeper technical capabilities in 1999.
Bernardo Álvarez: As then-Venezuelan Minister for Energy and Petroleum Rafael Ramírez accurately declared some years ago, “The old PDVSA was a Trojan horse that transformed itself into a hostage of transnational oil companies because there is no way to understand how a dispute with a company can bring a state to the expropriation or confiscation of its assets. These companies needed a hostage, something with which they could act in case there was a dispute with our sovereign decisions.”
On March 17, 2008, a London Court dismissed ExxonMobil’s attempts to freeze part of PDVSA’s global assets and undermine an ongoing arbitration case. This ruling proved that PDVSA and Venezuela have respected international law and have followed all steps to arrive at an amicable solution in its dispute with ExxonMobil.
It is difficult for some in the United States—and certainly the current administration comes to mind—to recognize the legitimate aspirations of developing countries to control their own destiny. It is our sovereign right to develop and manage our non-renewable energy resources in ways we deem most appropriate. For too long, the benefits associated with natural resources in the developing world have flowed in only one direction: to the North. Venezuela is changing that dynamic. The model can no longer be based on feeding the insatiable appetite for energy of the developed world and the coffers of the international oil companies. There is an urgent need to establish equilibrium between producer and consumer countries and to adequately take into account the needs and sovereign rights of each.
Venezuela’s oil policy was dominated by strong actors that led to the internationalization of the oil policy. They were leading the country towards a fully privatized oil industry that would have been controlled solely by these dominant actors. President Chávez managed to break this dominance, but he nearly lost his life in the 2002 coup attempt. Furthermore, the Chávez oil policy has led to a battle with the corporate media which still continue to undermine his administration with constant defamation campaigns.
There is common agreement that oil is the foundation of Venezuela as a modern nation. Do you think that oil policies have been given central place in public discussions in Venezuela, at any time or particularly now, as part of this participative democracy? Do you think that the political system in Venezuela has made it possible for ordinary Venezuelans to understand what happens to their common patrimony?
Luis Giusti: After the blowout of Los Barrosos-2 in 1922, oil companies began flocking to Venezuela, marking the beginning of Venezuela’s contemporary oil industry. Oil production increased rapidly and by 1929 the country had become the world’s second producer. Oil rent allowed Venezuela to make the transition from a primitive society with an economy based on rudimentary agriculture, and a population with poor health and a low level of education into a modern country with a healthy, educated society and a strong middle class as the core of economic development. The model was based on the government’s discretionary spending of the rent, but for many decades the oil industry was an enclave and the link between oil and society was purely fiscal.
As the country grew, it became progressively integrated into the global economic community. Along the way came the awakening of the political class to the significance of oil. As the country diversified its economy, the notion of the need for a deeper integration between oil and society became part of the national discussion. The expression “sowing the oil” reflected this notion, although for a long time there was little progress. Oil policies very seldom took central place in public discussions, the exception being the national discussion that led to the approval of a hydrocarbon law in 1943. During the period 1989–1999 many initiatives finally expressed the sowing of oil. During the period 1994–1999, the opening of the oil industry (apertura petrolera) was the subject of an open national discussion similar to the one in 1943.
But unlike in the case of such topics like education and health, the understanding of the oil industry and the ways to benefit from that oil patrimony have seldom been consensual. There has been a secular debate between oil simply as a source of rent or as an integrated part of economic activity, between opening or autarchy, between direct subsidies or a healthy tax-paying industry with subsidies separated, between exporting oil and products or owning refining and distribution chains abroad.
Alberto Quirós-Corradi: In 1943, Venezuela passed a hydrocarbon law allowing the state to receive an important share of the oil income through royalties and taxes. In 1946, the principle of a 50-50 distribution of oil revenues between the state and the oil companies was established. In 1976, Venezuela nationalized the oil industry and decreed a state monopoly over all of the oil activities. In 1992, this monopoly was relaxed (apertura), allowing private oil companies to participate again in oil exploitation. Chávez modified this participation without changing the basic policy that allowed the companies to be present in Venezuela.
Thus, the discussion about oil matters in Venezuela has only covered the limited scope of the relations between the oil companies and the state (how much each takes of the total oil revenues). The citizens have never been a party to this debate.
Furthermore, how oil revenues can best be managed to improve the welfare of the Venezuelan citizens, either by creating a special fund for distribution among Venezuelans or for a “rainy day” or through payment of royalties to the citizens (the true owners of the oil reserves) has never been discussed.
Víctor Poleo and Elie Habalián: No, the Venezuelan political class has not enforced a public debate on the oil rent allocation, the essence of oil policy.
Ricardo Haussman: I think that oil was given a quite central position in public discussion for a very long time in Venezuela. It was central during the 1940s when concessions were extended for 40 years and new hydrocarbon and taxation laws were past. It became a central aspect of the debate between President Medina Angarita’s government and the Acción Democrática opposition, which eventually took power in 1945-48. President Rómulo Betancourt’s influential book, written during his exile in the 1950s was called Venezuela: Política y Petróleo. Oil policy became central also during the reforms of the 1960s and to the formation of OPEC. The decision to nationalize in the 1970s and to build a state-owned oil company with a governance structure that allowed both government control, operational efficiency and a major increase in investment required a very stable and deep political agreement that was amply debated.
In Venezuela today there is no oil policy. We do not even know how much oil we are pumping and what is happening to the productive capacity of the country. Financial disclosure has been suspended. The government has destroyed the operational capacity of the national oil company, making it dependent on foreign oil companies, but at the same time has reneged repeated times on the contracts it has signed with them making Venezuela a dangerous place to invest. We are on a perilous road to nowhere. The opposition is quite clear as to what is happening, but there are no instances for public engagement. I do not recall any discussion about oil policy in the National Assembly during the past four years. Venezuela is a one man show where debate is actively discouraged.
Bernardo Álvarez: Yes, there are now opportunities for every Venezuelan to participate in the oil industry by becoming suppliers of PDVSA. Furthermore, PDVSA promotes the creation of Social Production Companies, which are intended to bring the most benefit to the most people.
The new PDVSA offers support to almost all social programs with extraordinary funds from the oil revenue. The ultimate goal is to achieve the inclusion of all citizens in social and economic development.
As a state-owned oil company, PDVSA is accountable to the people of Venezuela, its only shareholders. Due to the company’s commitment to poverty reduction and to social development, PDVSA distributed its 2007 operational profits of $25.3 billion as evenly as possible. It returned $14.1 billion in the form of social value directly to its shareholders and $6.3 billion as dividends and retained earnings to the state and other minority shareholders. This also reflects the company’s alignment with the national development plan with the clear objective of achieving economic and social development of the nation.
Ask yourself a question and answer it.
Luis Giusti: I ask myself the question: What will happen with the Venezuelan oil industry if oil prices fall to levels of $70–75/barrel and stay there for a few years? The answer is that the country will fall into a severe economic crisis that will become unmanageable, unless oil production can be increased significantly. This would require accelerated effective investments of at least $10 billion per year. In order for this to become feasible, a large opening to international oil companies would be required. It will not be a small task to convince them to get back into the country, after their predicament under the Chávez government.
Alberto Quirós-Corradi: “Will Chávez ever cut Venezuelan oil supplies to the U.S. market? Contrary to some popular belief, it is not the possibility of U.S. military retaliation that holds Chávez back. The deterrent is his understanding of the short, medium and long term negative impact this action would have on Venezuelan economic welfare. Although Chávez’s flair for the dramatic may push him in that direction, this would be the one decision that could mark the beginning of the end of his regime. Weak as they appear to be, Venezuelan political and civic institutions would not put up with this decision. The feeling of impending doom would be too strong.
Víctor Poleo and Elie Habalián: What next? Post rentism. It is for social scientists to explain and predict the Venezuelan future.
Ricardo Haussman: What will happen to Venezuela if the price of oil falls? The price of oil does not need to fall for Venezuela to get into a serious mess. Oil production is falling, production costs are skyrocketing and the share of the oil going to the highly subsidized domestic market is rising very fast. All this means that if the price of oil stops rising the profit margin of PDVSA with which the government funds itself would collapse very quickly. Accelerating this dynamic is the fact that the exchange rate is fixed while inflation is running in the twenties. Since PDVSA’s costs are affected by inflation but the exchange rate at which it sells its export dollars is fixed (as is the price of gasoline in the domestic market) the erosion of PDVSA’s capacity to finance the government would be quite rapid, even at 120 dollars a barrel. This will be a testament to the irresponsibility with which Chávez has managed Venezuela’s fat cow years.
Bernardo Álvarez: It must be recognized that the actual model imposed by capitalism is exhausted and no longer viable and that poverty, exclusion, and famine are key issues that need to be addressed immediately before they become global crises.
If this is the case, why doesn’t anybody accept that the Bolivarian Model has been successful and it is an option to be tested and adopted, and instead prefer to blame, manipulate and try to undermine the legitimacy of a democratic government, popularly elected and ratified at the polls eleven times over the past decade?
We believe that personal interest and old mindsets are part of the problem. We need strategies based on a new vision of the world able to deal with today’s realities. We cannot expect to meet today’s challenges with old conceptions of how national societies are organized, or how the international system of nations should operate. This has precisely been the problem. Old paradigms, such as the neoliberal paradigm and the concept of elite-based democracy, failed to promote growth and development with equity in Venezuela, as well as political participation and the inclusion of the historically excluded. The “end of history,” called upon after the collapse of the so-called iron-curtain led to a monolithic view of the world, led by attempts to impose a liberal conception of society on the rest of the world. This brought disastrous consequences for Venezuela, and South America. The unilateral actions taken by the United States and other European powers in Iraq should give us pause about the unfeasibility of unilateral actions against other countries and the violation of the principles of self-determination and sovereignty found in the UN Charter. Unless the leaders of this country decide to challenge what is taken for granted, and challenge the traditional paradigm of the free market, they will not understand the Venezuelan process of change. They will not understand President Chávez’s recognition that human beings should be the main agents and objective of growth and development.
This section was conceived and edited by Fernando Coronil Imber and Jeffrey Cedeño.
Jeffrey Cedeño is Professor in the Department of Languages and Literatures in the Universidad Simón Bolívar in Caracas. He has published several articles on literature and Latin American culture in specialized magazines in Latin America, the United States and Europe, including “Venezuela in the Twenty-first Century: ‘New Men, New Ideals, New Procedures?’” Journal of Latin American Cultural Studies (March, 2006).
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