Venezuela
The Chávez EffectFall 2008
Oil and Revolution: Viewpoints
Alí Rodríguez Araque, Luis Giusti, Víctor Poleo, Elie Habalián, Alberto Quirós Corradi, Ricardo Hausmann and Bernardo Álvarez
OIL AND REVOLUTION
VIEWPOINTS
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 Quiros-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 Habalian: 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).
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 Quiros-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 Habalian : 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, aluminium 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" --and 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’etat” 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 Quiros-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 favour 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 Habalian: 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 govenments. 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.