Venezuela's Balancing Act

...By definition, the state retains its right to tax oil profits under this arrangement...

...The highest level, the national executive, embodied in the Ministry of Energy and Chjvez with Fid Mines (MEM), was given the task of agreement that defining general policies for the sector...

...Nevertheless, it is difficult to precisely quantify how much this strengthening emanates from the new policy...

...These markets, driven by speculation on future crude oil sales contracts, have grown appreciably over the last 20 years, and have been known to negotiate the contracts for more than 150 million barrels a day, about double the real world demand of approximately 76 million...

...At least in the short run, oil income is crucial to maintaining a public consensus about the sociopolitical project underway...

...so have the needed levels of investment...

...Although there is an evident connection between the price of final petroleum products and 1 ir ( that of crude, the connection is not so direct, since crude accounts for less that half the price of derived products...

...Venezuela, Saudi Arabia, Iran, Iraq and Kuwait were the founding members, and in its first resolution, the group affirmed its commitment to stabilize international oil prices by taking concerted actions on levels of production...

...promoting cooperation between national oil companies and the international oil industry...

...Jesis Mora Contreras, "La Apertura petrolera venezolana: un proceso inconcluso de cambios de estructuras," lnvestigaci6n Economica (Mexico: July-September, 1995), No...

...In the years following the 1976 nationalization of the oil industry, "mixed enterprises" had been deemed state-controlled only if the state managed more than half the firm's capital...

...But other problems remain for Venezuela as it attempts to exercise sovereignty over its principal natural resource...

...In addition, the 1967 Hydrocarbons Law had established procedures for approving public-private, joint-production contracts that made those agreements difficult to negotiate...

...At the outset of ChAvez's rule, oil police) the most important task facing the decidedly r new team was the need for prices to rise to their former levels...

...After an intensive week of bidding, two of the 10 areas were left without takers, and the remaining eight were acquired with PEGs of between 29% and the maximum 50%, plus bonuses...

...The technological challenges of extracting the heavy crudes have been great...

...Growing pressure on the industry to act "more like a business" led-until the advent of the Chdvez government-to the gradual displacement of policy design from the MEM to PDVSA...

...The resulting growth of fiscal revenues has allowed the government to mitigate the severe economic crisis that the country has been suffering since the early 1980s, and it has even generated some indicators of recovery...

...30 NMIA REPORT ON THE AMERICAS NACIA REPORT ON THE AMERICAS 30 Venezuela's Balancing Act 1. Efrain E. Barberii, De los pioneros a la empresa nacional 1921-1975 (Caracas: Departamento de Asuntos Publicos de Lagoven S, A., 1997), pp...

...Ten other affiliates were created, all with names ending with "ven...

...The Declaration reaffirmed positions shared of deve since the early days of OPEC and also incorporated new positions responding to important changes in the world economy, and more particularly, to changes in the international oil market...

...To accompany OPEC's defense of international oil prices, the CVP was created as a structure that would manage the state's growing intervention in the oil industry at home...

...It was founded in Baghdad under the leadership of energy ministers Juan Pablo P6rez Alfonzo of Venezuela and Abdullah Tariki of Saudi Arabia...

...With these increments, the Venezuelan quota went from about 2.8 million barrels a day in April to 3.1 million in early November...

...At this meeting, Richardson expressed his satisfaction with the increase in production of crude oil by the OPEC countries that had been announced for the end of that month in accordance with the pricerange policy...

...The possibility that part of the bill could be paid with goods and services was left for further discussion...

...Economic recovery in southeast Asia and, most recently, the sharpening of the Arab-Israeli conflict have also been major variables in the complex equation of oil prices...

...Late this past October, outgoing U.S...

...One of demonstrati the first measures taken to achieve this objective was the strengthening determinati of ties with the OPEC countries and Venezuel2 independent producers like Mexico and Norway...

...There is no doubt that prices have been vigorously strengthened...

...40-60...

...The orientation of the new oil policy has clearly been nationalistic, demonstrating the state's recovered ability to defend Venezuelan interests...

...The new government adjusted production to comply with the 525,000-barrel reduction that the outgoing government had agreed to in response to the drop in prices beginning in late 1997...

...This irrational organizational structure was defended with the argument that nationalization should produce as little alteration as possible in the old operating activity...

...As president of the Commission on Energy and Mines of the Chamber of Deputies during the first years of the Rafael Caldera government, Rodriguez, a member of 0 the leftist party Homeland for All (PPT), opposed Z Caldera's liberalized oil policy...

...Cuba, whose rapidly growing tourist industry has made it the largest energy market in the Caribbean, signed a contract committing barrels a day...

...PDVSA formulated the "Strategic Associations" program during the 1990s as part of the government's Apertura, or "Opening" to global investment in the oil industry...

...Since the beginning of Chdvez's presidency, however, responsibility for the design and implementation of policy has been moving back to the Ministry of Energy and Mines, reinforcing the idea that industry strategies have goals that go beyond simple profitability...

...7, Luis Vallenilla, La apertura petrolera, un peligroso retorno af pasado (Caracas...

...By that point, it had become apparent that the goals of the Opening would sooner or later lead to a confrontation with OPEC, to whose goals Venezuela said it was still committed...

...Since the September 1999 meeting, Rodriguez has proposed to the organization the idea of permitting OPEC to increase or decrease its global production if prices go above or below an agreed-upon range...

...This past March, OPEC finally adopted the price range, and fixed it at $22 to $28 for the equivalent of a barrel of crude-the OPEC "basket" of oil production...

...The process actually began in the 1980s, most dramatically when Lagoven, one of PDVSA's affiliates, discovered four major offshore natural gas fields just off the northeast coast, under the Caribbean floor...

...Richardson also sent his best wishes to the Seventh Annual Energy Forum, a meeting held in Saudi Arabia in late November between groups representing both consumer and producers...

...Thus, Standard Oil became Lagoven...

...Vol XXXIV, No 4 JANUARY/FEBRUARY 2001 27REPORT ON OIL Ali Rodriguez, principal architect of Chavez's oil policy, now Secretary General of OPEC...

...3. Resolution #1 of OPEC, September 14, 1960, cited in Vallenilla 1990, p. 589...

...The resolution begins by ratifying the group's original commitments: first and foremost, defending the interests -individual and collective--of the member countries...

...Among the changes has been a shifting of the center of oil-policy design...

...n has given ie time and s to set in popular model lopment...

...In March 1999, first in a meeting in The Hague with the energy ministers of Saudi Arabia and Mexico, and later at an OPEC meeting in Vienna attended by new MEM Minister Rodriguez, Venezuela committed itself to a further reduction of 125,000 barrels...

...The Christopher Columbus Project, two-thirds privately owned, was granted the right to produce, liquefy and export the free gas from the off-shore deposits discovered by Lagoven...

...ChAvez welcomed eight of the 11 political leaders of the organization's member countries, as well as high-level delegations from the remaining three countries...

...In April 1991, the Court found for Lagoven, opening the the door not only for the Christopher Colombus Project but for the decade-long Oil Opening...

...Private companies were asked to bid on the level of an additional tax-called State Participation in Profits (PEG)--they would be willing to pay for the right to do business in Venezuela...

...The expansion of oil production that the Opening promoted was rationalized by optimistic short- and medium-term projections about the behavior of the international petroleum market--specifically that year after year, demand would increase 1 or 2% annually...

...When the average annual price exceeds $15 per barrel, the signatories agreed, part of the oil bill can be paid in installments over a 15-year period, with an initial grace period, and at a very low rate of interest...

...They also promised to carry out efforts to diversify their own economies .9 Just a few weeks after the Summit, top-level representatives from Venezuela and ten Central American and Caribbean countries met in Caracas for the signing of a document agreeing to lower the oil bill of the signatory countries when the international price of crude becomes high...

...With Christopher Columbus, however, state control meant control over only a third of the enterprise...

...In July 1995 Congress approved a framework within which these associations might be approved, and some six months later, 10 areas were opened for bidding, representing nearly 2% of the national territory...

...Orimulsion has been marketed as a substitute for coal in thermoelectric plants, and has also begun to be used as a substitute for standard fuel oil...

...Lessons were welllearned following the international reprisals against Mexico and Iran, when first the government of LUzaro Cgrdenas (1938) and then Mohammed Mossedegh (1951) decreed the nationalization of oil in their respective countries.2 Indeed, memories of the U.S.imposed isolation of Cfrdenas and the CIA's overthrow of Mossedegh loomed large when Venezuela helped form the Organization of Petroleum Exporting Countries (OPEC) in 1960 and carefully nationalized its oil industry in 1976...

...6 Under the direction of PDVSA, the Oil Opening of the 1990s was a form-and perhaps the most important one-by which Venezuela uncritically responded to the demands of globalization over the past decade...

...And even though OPEC has had difficulty trying to reduce prices in recent months while showing considerable efficiency when its members felt they needed raising, no longer does the organization seem to be trying to get the highest possible price for raw materials regardless of consequent damages to the producing countries...

...The two signed an would lower Cuba's oil bill...

...2. Daniel Yergin, La historia del petr6leo (Barcelona: Plaza & Janes, 1972), pp...

...At the lowest level, the operating affiliates were charged with directly executing the industry's plans and programs...

...Strategic Associations production-development plans in the Orinoco Belt have been less criticized than other forms of the Opening because they have been successfully promoted as "special cases" Vol XXXIV, No 4 JANUARY/FEBRUARY 2001 25 "C z z 0 Vol XXXIV, No 4 JANUARY/FEBRUARY 2001 25REPORT ON OIL that serve the public interest...

...Translated from the Spanish by NACLA...

...Control over the project has been ambiguous, and to guarantee profitability to the transnationals, the state's fiscal sovereignty-its ability to tax the transnationals-has largely been sacrificed...

...preserving and improving the role of oil in satisfying the energy demands of the world...

...213, pp...

...The following year the first of the very large fields-the giant Mene Grande-was discovered, and in 1918 oil appeared in official statistics as an export product.' The desperation dramatic confirmation of n capital Venezuela's enormous oil potential came in December 1922 with conflict with the violent eruption of the exploratory well, Barrosos-2: For :o exercise nine consecutive days, it gushed ty over its 100,000 barrels every 24 hours...

...The maximum PEG was set at 50% of net profits...

...In 1977, the first reorganization took place, reducing the affiliates from 14 to seven, as the largest absorbed the smallest...

...Sure enough, at the tail end of the Opening, as Hugo Chivez took office in February 1999, the price of the Venezuelan "basket" of crude oil and related products had plummeted from its 1997 average of $15 a barrel to an average of $8.43 a barrel...

...developing policies that contribute to stabilizing the oil market with compensatory prices that are competitive with other energy sources...

...Since those early days, the esources...

...In short, the country's desperation for foreign capital had trumped its desire to maintain control of its oil...

...country has engaged in a search for a coherent oil policy that would achieve two central objectives: the greatest possible benefits for the nation as a whole, and the growth of the state's role in the administration of the industry...

...Luis Vallenilla, Auge, declinacidn y porvenir del petrdleo venezolano (Caracas: Monte Avila, 1990), pp...

...3 In the same year, the government of R6mulo Betancourt founded the Venezuelan Oil Corporation (CVP), the country's first state enterprise charged with directly participating in all phases of the oil industry...

...Besides the usual commercial uncertainties, several legal obstacles had to be overcome for Christopher Columbus to get off the ground...

...What's more, during the past year, the group became a recognized participant in a dialogue between producers and consumers...

...Other factors, external to OPEC, have also contributed to the steady rise in prices since February 1999...

...In the United States, for example, refining capacity has fallen from 19 million barrels a day in 1981 to about 16 million today...

...Overall management of the industry's activities was the responsibility of a new state enterprise, PDVSA, created as a central company with 14 affiliates, including the previously created CVP...

...This permitted him, at the beginning of his rule, to install a team of MEM leaders with a distinctly different approach from the one that prevailed through the previous decade...

...In 1913, the first oil field was established...

...Furthermore, as taxes comprise a large percentage of the final price in the industrialized countries, high oilof the new consumption taxes have also created higher market prices for has been petroleum products...

...First of all, the joint venture turned out to contradict certain aspects of the 1971 Law Reserving the Natural Gas Industry to the State (LREIGN)-a law that, as its name indicates, reserves to the state the right to extract all natural gas from hydrocarbon fields...

...6. Former PDVSA president Andris Sosa Pietri, for example, recounts his tense relationship with MEM, and his constant struggle with the Ministry over the administration of the corporation See Andris Sosa Pietri, Petrd6leo y poder (Caracas: Planeta, 1993) Also see Bernard Mommer, "Venezuela, Politica y petrbleos," Cuadernos del CENDES (Caracas, September-December, 1999...

...In short, the Opening proved unviable in the face of the collapsing oil prices of the late 1990s...

...Chnvez is clearly determined to take oil policy in a more nationalist direction, but as he does so, the legacy of the Opening, and the global pressures to keep it in place, are powerful obstacles to his ability to act...

...And though there have been moments of tension between the state and the industry, the two sides have been careful never to bring those tensions to the point of rupture...

...strengthening cooperation between the organization and non-member producing countries...

...But its control over the "High Risk and Shared Profits" projects virtually disappears...

...When bidding ties occurred, an additional round was held at which another bonus was offered...

...Energy Secretary Bill Richardson spent two days in Caracas to meet with his Venezuelan counterpart, Rodriguez-who then also held the rotating presidency of OPEC...

...The postponement probably signalled the death of the Christopher Columbus Project, but even so, the project's legacy was enormous: Not since nationalization had such important innovations been seen in the "uses and customs" of petroleum practices...

...Above all, post-nationalization conflicts between the Executive and PDVSA have typically been presented to the public as contradictions between the "political objectives" of the government and the "entrepreneurial goals" of the industry...

...Ediciones Porvenir, 1995), pp.13-15 8. Statement of All Rodriguez at the forum,"Venezuela y la II Cumbre de la Opep," September 21, 2000, Central University of Venezuela, Caracas...

...In 1991 and 1992, after a number of techno- logical and financial failures, the state oil company, Petr6leos de Venezuela (PDVSA), signed 11 letters of intent with transnational oil companies interested in pumping the extra-heavy crudes of the long strip of land, known as the Orinoco Oil Belt...

...In short, the state has attempted to maximize its oil rents and increase its own capacity for intervention, all by way of careful negotiations with the transnational oil industry...

...Since its implementation and after a production increase agreed to in April 2000, this policy has led to adoption of four subsequent increases of 500,000 barrels each (except in September, when it was 800,000 barrels), shared proportionally among the various countries...

...ince Hugo ChAvez took office, Venezuela has been much more committed to OPEC and its policies than in recent years, and this past SepVol XXXIV, No 4 JANUARY/FEBRUARY 200129 Vol XXXIV, No 4 JANUARY/FEBRUARY 2001 29REPORT ON OIL tember in Caracas, for only the second time in its 40year history, the group convened the political leaders of its member countries for a Summit of OPEC Heads of State and Government...

...gapor (SMEX) have played a key role in determining oil prices...

...5 This operating scheme, with its seemingly clear division of labor at each level, has sometimes been fraught with tension...

...Since the second half of the nineteenth century, a modem oil industry has developed, devoted to the exploration, extraction, refining and transportation of petroleum...

...OPEC was formed for the purpose of defending oil prices in international markets...

...Silva Calder6n has _ NACLA REPORT ON THE AMERICAS 28REPORT ON OIL long been an important player in drawing up the country's oil laws, including those of the 1970s nationalization period...

...To overcome these obstacles, Lagoven took the case to the Venezuelan Supreme Court in November 1990, arguing that critical portions of the LREIGN interfered with national development and should be nullified...

...Later that same year, they shrank to five and, by 1986, to three: Corpoven, Lagoven and Maraven...

...17-23...

...The heads of state also reaffirmed OPEC's promise to take into consideration the problems of developing oilconsumer countries through individual aid programs and by strengthening the OPEC Fund for International Development and the International Fund for Agricultural Development...

...From 1993 through 1998, Venezuela's Congress approved the creation of four mixed enterprises to extract these Luis E. Lander is a social researcher at the Economics and Social Science Faculty at the Central University of Venezuela (UCV...

...OPEC has argued that the high current prices result mainly from the scarcity of final oil-derived products, and not the scarcity of crude...

...Indeed, as Venezuela's nationalist president, Hugo ChAvez, enters his third year of government, the country's desperation for foreign capital continues to conflict with its traditional desire to exercise sovereignty over its natural resources, particularly the resource that, for over a century, has virtually defined the Venezuelan nation-oil...

...Lagoven and a private partner, Shell International Gas Limited, did a preliminary study to evaluate the comel Castro during Castro's October state visit...

...5. Venezuela: The Political Economy of Oil, pp...

...130-135...

...Projections about prices, demand and productive capacities have constantly been overtaken by events, demonstrating that any projection about market behavior must be made with great caution...

...Beneath the banks of the Orinoco River in east- ern Venezuela lies one of the largest hydrocar- bon reserves in the world, a source of oil with enormous potential but with one major complication: All the crude that has been extracted from it is extra heavy, and contains high levels of sulfur and mineral residue...

...Findings led to the Christopher Columbus Liquid Gas Project, which became emblematic of the intense struggles that peaked in the 1990s-and continue into the 2000s-over the role of transnational capital in the country's oil industry...

...The rebound of prices in 1999, followed by strong increases throughout 2000, was due in part to OPEC's ability, once again, to stabilize prices in the global petroleum market...

...Mobil became Llanoven, and so on...

...But not t n r until the twentieth century did oil begin to establish itself as the principal industry of the country...

...26 NACIA REPORT ON THE AMERICAS NACI REPORT ON THE AMERICAS 26REPORT ON OIL Nationalization took place in 1976, during the first administration of Carlos Andr6s P6rez, leaving all the private firms licensed to operate in the country fully compensated and converted into 15 newly formed state companies...

...Public investments and the employment they bring, for example, in education, health, housing and infrastructure, are necessary not only to sustain expectations of improved living conditions for the poor, but to generate the human and physical capital necessary for future economic development...

...4. Juan Carlos Bou6, Venezuela: The Political Economy of Oil (Oxford: Oxford University Press, 1993), pp...

...This oil policy, and the increased fiscal income it generates, underpin the entire ChAvez project...

...In fact, petroleum is the area in which the new government has so far gained its most important economic achievements...

...Oil policy, for these reasons, has played a key role in Chavez's government, and it will continue to do so...

...In addition, delegations from oil exporting countries who are not OPEC members, such as Mexico, Norway, Russia and Ango- Petroleur la, attended as special invitees...

...Under this scheme, private capital natural is invited to participate in the exploration and extraction of conventional crude oil, the traditional core of the Venezuelan industry...

...23-26...

...Following nationalization, as we have mentioned, this center moved toward PDVSA, so that during the 1990sand specifically during the second half of the decade, with the full development of the Oil Opening--formulation of oil policy was firmly in PDVSA's hands...

...4 This organizational structure, according to the nationalization law and the Presidential decree that created PDVSA, had three clearly defined levels of administration, each with its own responsibilities...

...The law was also bent to allow the partnership a longer life span than previously allowed for such joint ventures...

...8 nationalistic, And in addition to limitations on refining capacity, high taxes ng the state's and high shipping costs, the futures markets of New York on to defend (Nymex), London (IPE) and Sinn interests...

...efore Chavez's triumph in the 1998 elections, he had gathered a group of advisors who opposed the oil policy of the Opening...

...MEM's Minister and Vice Minister, Alf Rodriguez and Alvaro Silva Calder6n, respectively, were the key advocates of this new approach...

...mercial feasibility of exploiting the fields and exporting the liquid gas to the U.S...

...optimizing the general economic benefits obtained by exploiting hydrocarbons...

...crudes and then convert them, with water and a stabilizing agent, into a usable fuel called-after the river of its origin-"Orimulsion...

...But in any case, we should recognize that OPEC's current discipline and cohesion gives that organization important regulatory ability in a global oil market whose non-OPEC members generally produce at maximum capacity...

...With the help of generous, Congressionally authorized tax breaks justified by an arrangement called "Strategic Associations," the companies reduced the costs of pumping and improving the heavy crude to the point of economic viability, and began producing both Orimulsion and more conventional crudes...

...What's more, with the Opening, the autonomy of the state oil company, PDVSA, was reinforced...

...The country's for foreic continues to A more controversial arrange- itS aesire ment under the Opening is called sovereign "High Risk and Shared Profits...

...The Summit produced an image Ch vez tl of a coherent, revitalized organiza- resource tion, as well as a unanimously approved document called the motion a p Caracas Declaration...

...International arbitration was permitted to resolve conflicts, thus bypassing Venezuelan courts...

...57-69...

...7 Lagoven and its parent body, PDVSA, nurtured the project, and in 1993, amid a severe political crisis and an unstable transitional government -President Carlos Andr6s PNrez had just been removed from office for misappropriation of funds-Congress approved the partnership of Lagoven with Shell, Exxon and Mitsubishi...

...With the Opening, a process began that included the transfer of important activities of the country's petroleum industry from the public to the private, fundamentally transnational sector...

...Then, unexpectedly, in December 1996, the project was put on hold for five years for commercial reasons...

...While the new fuel has enjoyed only partial marketing success, PDVSA has great hopes for its future profitability...

...Shell became Maraven...

...developing a production policy that assures "equitable" participation for the organization...

...The project's tax burden was reduced from 67% to 34%-the level normally reserved for non-petroleum activity--and foreign investors were protected by a regulation mandating that Lagoven compensate any partner who might be damaged by changes in Venezuela's tax laws...

...In early January, as we go to press, Rodriguez has been named Secretary General of OPEC, and Silva Calder6n has moved up to be Min- Orientatior ister of MEM...

...On October 30, barely two weeks after the accords were signed, Fidel Castro paid a four-day visit to Venezuela, and Cuba became the eleventh country to sign on to the agreement...

...Venezuela to supply up to 53,000 These examples of recent oil diplomacy are not the only changes in oil policy to be implemented by the Chavez government...

...But if there is one certainty about international energy markets, it is their uncertainty...

...An intermediate level, exercised by PDVSA, had broad powers of coordination, supervision and control over the operators...

...359367, 595-621...

...These achievements have given Chavez the time and resources to set in motion what might be called a popular model of development...

...Under the Opening, tensions with OPEC would always be present...

...Expectations generated by the arrival of winter in the principal consuming countries, combined with deepening conflict in the Middle East over the past two years, have produced an artificial growth of future demand with a corresponding increase in price...

...market...

...Aside from the CVP, the affiliates were the former licensees, transfomed into newly formed divisions of the state corporation, and the industry was organized just as it had been before nationalization...

...OPEC, "Why you pay so much for Gasoline and other Oil Products," http://www.opec.org, September, 2000 9. OPEC, "Why You Pay So Much for Gasoline and other Oil Products...

...From the beginning, a cornerstone of Venezuela's oil policy has been its determination to keep the industry accountable to the nation...

...His most recent contribution to NACLA was "Refounding the Republic: The Political Project of Chavismo" with Margarita L6pez-Maya in the May/June 2000 issue...

...35-44...

...AnIbal R. Martinez, Cronologias del petrdleo venezolano (Caracas: Ediciones Foninves, 1976), pp...