History of the Venezuelan oil industry

The Real and Nominal price of oil from 1968 to 2006.

Venezuela is the fifth largest oil exporting country in the world with the largest reserves of heavy crude oil at an estimated 99.4 billion barrels (1.580×10¹⁰ m³) as of 2010. Venezuela has the largest reserves of light and heavy crude oil in the entire western hemisphere. In 2008, crude oil production in Venezuela was the tenth-highest in the world at 2,394,020 barrels per day (380,619 m³/d) and was also the eighth-largest net oil exporter in the world.

Pre-discovery years - 1907

The Indigenous peoples in Venezuela, like many ancient societies already utilized crude oils and asphalts from petroleum seeps, which ooze through the ground to the surface, in the years before the Spanish conquistadors. The thick black liquid, known to the locals as mene, was primarily used for medicinal purposes, as an illumination source, and for the caulking of canoes.

Upon arrival in the early 16th century, the Spanish conquerors learned from the indigenous people to use the naturally occurring bitumen for caulking their ships as well, and for treating their weapons. The first documented shipment of petroleum from Venezuela was in 1539 when a single barrel of oil was sent to Spain to alleviate the gout of Emperor Charles V.

1908-1940 – The Birth of the Venezuelan Oil Industry

Juan Vicente Gómez

Despite the knowledge of oil in Venezuela for centuries, the first actual oil wells of significance were not drilled until the early 1910s. In 1908, Juan Vicente Gómez replaced his ailing predecessor, Cipriano Castro, as the president of Venezuela. Over the next few years, Gómez granted several concessions to explore, produce, and refine oil. Most of these oil concessions were granted to his closest friends, and they in turn passed them on to foreign oil companies that could actually develop them. One such concession was granted to Rafael Max Vallardares who hired Caribbean Petroleum (later to be owned by Royal Dutch Shell) to carry out his oil exploration project. On 15 April 1914, the first Venezuelan oilfield of importance, Mene Grande, was discovered by Caribbean Petroleum upon the completion of the Zumaque-I (now called MG-I) oil well. This major discovery is what encouraged a massive wave of foreign oil companies to "invade" Venezuela in attempt to get a piece of the action.

From 1914 to 1917, several more oil fields were discovered across the country; however World War I retarded significant development of the industry. Due to the war effort, purchasing and transporting the necessary tools and machinery some oil companies were forced to forego drilling until after the war. By the end of 1917, the first refining operations were carried out at the San Lorenzo refinery, and the first significant exports of Venezuelan oil by Caribbean Petroleum left from the San Lorenzo terminal. By the end of 1918, petroleum appeared for the first time on the Venezuelan export statistics at 21,194 metric tons. After about twenty years from the installment of the first oil drill, Venezuela had become the largest oil exporter in the world and the second largest oil producer, after the United States. Exportation of oil boomed from 1.9% to 91.2% between 1920 and 1935.

When oil was discovered at the Maracaibo strike in 1922, Venezuela's dictator Juan Vicente Gómez allowed Americans to write Venezuela's petroleum law.

The Dutch Disease

By 1929, Venezuela was the second largest oil producing country (behind only the United States) and the largest oil exporter in the world. With such a dramatic development of the industry, the oil sector had begun to dominate all other economic sectors in the country, however, agricultural production began to decrease dramatically. This sudden increase of attention to oil and neglect of the agrarian sector caused the Venezuelan economy to suffer from a phenomenon known to economists as the Dutch Disease. This “disease” occurs when a commodity brings a substantial increase of income in one sector of the economy, and is not supplemented by increased income in other sectors. Agriculture accounted for about one-third of economic production in the 1920s, but by the 1950s this fraction dramatically reduced to one-tenth. This sudden increase of oil production restricted Venezuela’s overall ability to create and maintain other industries. The government had ignored serious social problems, including education, health, infrastructure, agriculture, and domestic industries, causing Venezuela to fall well behind other industrialized countries.

Xenophobia

With a large influx of foreign “invaders” it did not take long before the effects of a xenophobia that had not been seen before were apparent. Novelist Jose Rafael Pocaterra described the oilmen as “the new Spaniards.” He wrote in 1918:

"One day some Spaniards mounted a dark apparatus on three legs, a grotesque stork with crystal eyes. They drew something (on a piece of paper) and opened their way through the forest. Other new Spaniards would open roads…would drill the earth from the top of fantastic towers, producing the fetid fluid…the liquid gold converted into petroleum."

Popular resentment of the foreign oil companies was also evident and expressed in several ways. Rufino Blanco Fombona, a Venezuelan writer and politician, accounts for the conflict between Venezuelan workers and their foreign bosses in his 1927 novel, La Bella y la Fiera:

"The workers asked for a miserable salary increase and those blond, blue-eyed men who own millions of dollars, pounds and gulden in European and U.S. banks, refused."

These strong sentiments towards foreign oil companies in many ways never went away, and it was these thoughts that Venezuela’s natural resources were being exploited by foreign countries that convinced the government that it needed to gain more control over its oil industry. This of course eventually led to the eventual nationalization of the oil industry in 1976.

1940-1976 – The Road to Nationalization

In 1941, Isaías Medina Angarita, a former army general from the Venezuelan Andes, was indirectly elected president. One of his most important reforms during his tenure was the enactment of the new Hydrocarbons Act of 1943. This new law was the first major political step taken toward gaining more control over its oil industry. Under the new law, the concept of a 50/50 split in profits between government and the oil industry was introduced. Once passed, this piece of legislation basically remained unchanged until 1976, the year of nationalization, with only two partial revisions being made in 1955 and 1967.

In 1944, the Venezuelan government granted several new concessions encouraging the discovery of even more oil fields. This was mostly attributed to an increase in oil demand caused by an ongoing World War II, and by 1945, Venezuela was producing close to 1 million barrels per day (160,000 m³/d). Being an avid supplier of petroleum to the Allies of World War II, Venezuela had increased its production by 42 percent from 1943 to 1944 alone. Even after the war, oil demand continued to rise due to the fact that there was an increase from twenty-6 million to forty million cars in service in the United States from 1945 to 1950. By the mid 1950s, however, Middle Eastern countries had started contributing significant amounts of oil to the international petroleum market, and the United States had implemented oil import quotas. The world experienced an over-supply of oil, and prices plummeted.

Creation of OPEC

Main article: OPEC

OPEC countries

In response to the chronically low oil prices of the mid and late 1950s, oil producing countries Venezuela, Iran, Saudi Arabia, Iraq, and Kuwait met in Baghdad in September 1960 to form the Organization of the Petroleum Exporting Countries (OPEC). The main goals of the OPEC member countries was to work together in order to secure and stabilize international oil prices to ensure their interests as oil producing nations. This was managed largely via maintaining export quotas that helped prevent the overproduction of oil on an international scale.

Oil Embargo of 1973

Main article: 1973 oil crisis

In the early 1970s, oil producing countries of the Persian Gulf began negotiations with oil companies in attempt to increase their ownership participation. In 1972 they rapidly obtained a 25 percent participation, and less than a year later they revised those agreements to obtain up to 60 percent participation in the ownership of the companies. By 1973, OPEC Persian Gulf states members decided to raise their prices by 70 percent and to place an embargo on countries friendly to Israel (the United States and Holland). This event became known as the 1973 oil crisis. Following a culmination of conflicts in the Middle East and the oil producing countries of the Persian Gulf no longer exporting to the United States and oil prices rising steeply, Venezuela experienced a significant increase in oil production profits. Between 1972 and 1974, the Venezuelan government revenues had quadrupled. With a new sense of confidence, Venezuelan president Carlos Andrés Pérez pledged that Venezuela would develop significantly within a few years. By substituting imports, subsidies, and protective tariffs, he planned to use oil profits to increase employment, fight poverty, increase income, and diversify the economy. Unfortunately, OPEC members had been violating production quotas, and oil prices fell drastically again in the 1980s, pushing Venezuela deeper into debt.

Nationalization

Petroleum map of Venezuela, 1972

Well before 1976, Venezuela had taken several steps in the direction of nationalization of its oil industry. In August 1971, under the presidency of Rafael Caldera, a law was passed that nationalized the country's natural gas industry. Also in 1971 the law of reversion was passed which stated that all the assets, plant, and equipment belonging to concessionaries within or outside the concession areas would revert to the nation without compensation upon the expiration of the concession. The movement towards nationalism was experienced once again under decree 832. Decree 832 stipulated that all exploration, production, refining, and sales programs of the oil companies had to be approved in advance by the Ministry of Mines and Hydrocarbons. So for all practical purposes, Venezuela was already well on its way to nationalization by 1972.

It did not become official however until the presidency of Carlos Andrés Pérez, whose economic plan, "La Gran Venezuela", called for the nationalization of the oil industry and diversification of the economy via import substitution. The country officially nationalized its oil industry on 1 January 1976, and along with it came the birth of Petróleos de Venezuela S.A. (PDVSA) which is the Venezuelan state-owned petroleum company. All foreign oil companies that once did business in Venezuela were replaced by Venezuelan companies. PDVSA controls activity involving oil and natural gas in Venezuela. In 1980, PDVSA bought the US company Citgo and is the third-largest oil company in the world.

1977-1998 - Years of Decline

After the 1973 oil crisis, the brief period of economic prosperity for Venezuela was relatively short lived. This especially was the case during the "1980s oil glut". OPEC member countries were not strictly adhering to their assigned quotas, and once again oil prices plummeted. By the 1990s, symptoms of the Dutch Disease were once again becoming apparent. Between 1990 and 1999, Venezuela's industrial production declined from 50 percent to 24 percent of the country's gross domestic product compared to a decrease of 36 percent to 29 percent for the rest of Latin America. On top of all these issues, the efficiency of PDVSA was coming into question over the years. From 1976 to 1992, the amount of PDVSA’s income that went towards the company’s costs was on average 29 percent leaving a remainder of 71 percent for the government. From 1993 to 2000, however, that distribution almost completely reversed to where 64 percent of PDVSA's income were kept by PDVSA leaving a remainder of only 36 percent for the government.

1999-present

Current Venezuelan President Hugo Chávez.

After Hugo Chávez officially took office in February 1999, several policy changes involving the country's oil industry have been made to explicitly tie it to the state. Chávez has made political changes towards its neighbors as well as worldwide. In addition, he has attempted to strengthen Venezuela’s infrastructure and other national industries to move the country towards a more developed nation.

Chávez's Role in the Reinforcement of OPEC

At the time of Chávez's election, OPEC had lost much of its influence compared to when it was first created. A combination of OPEC members, including Venezuela, regularly ignoring quotas and non-OPEC countries such as Mexico and Russia beginning to expand on their own petroleum industries resulted in record low oil prices to which hurt the Venezuelan economy. One of Hugo Chávez's main goals as president was to combat this problem by re-strengthening OPEC and getting countries to once again abide by their quotas. Chávez personally visited many of the leaders of oil producing nations around the world, and in 2000, he hosted the first summit of the heads-of-state of OPEC in 25 years (the 2nd ever). Goals of this meeting, held in Caracas, included recuperating the credibility of Venezuela in OPEC, defending oil prices, consolidating relations between Venezuela and the Arab/Islamic world, and to strengthen OPEC in general.

The meeting could be considered a success given the record high oil prices of the present, but it should be noted that much of that is also a consequence of the 11 September 2001 attacks against the United States, the 2003 invasion of Iraq, and its subsequent occupation. All of which helped prompt a surge in oil prices to levels far higher than those targeted by OPEC during the preceding period. In addition to these events, the December 2002 oil strike in Venezuela, which resulted in a loss of almost 3mmbpd of crude oil production, brought a sharp increase in world prices of crude of that had still not been relented by 2005.

2001 Hydrocarbons law

On 13 November 2001, under the enabling law authorized by the National Assembly, President Chávez enacted the new Hydrocarbons Law, which came into effect in January 2002. This law replaced the Hydrocarbons Law of 1943 and the Nationalization Law of 1975. Among other things, the new law provided that all oil production and distribution activities were to be the domain of the Venezuelan state, with the exception of joint ventures targeting extra-heavy crude oil production. Under the new Hydrocarbons Law, private investors can own up to 49% of the capital stock in joint ventures involved in upstream activities. The new law also provides that private investors may own up to 100% of the capital stock in ventures concerning downstream activities, in addition to the 100% already allowed for private investors with respect to gas production ventures, as previously promulgated by the National Assembly.

Tension Between Chávez and PDVSA

Chávez began setting goals of reinstating quotas, such as ten percent of PDVSA’s annual investment budget was to be spent on social programs. He also changed tax policies and the oil revenue collection process. Chavez initiated many of these major changes to exert more control over PDVSA and efficiently deal with the problems he and his supporters had over PDVSA’s small revenue contributions to the government. However, strictly adhering to these policies was not immediately welcomed by PDVSA, because for the last few decades they had been focused on producing as much oil as possible. Then in December 2002, PDVSA officially went on strike creating a near-complete halt on oil production in Venezuela. The aim of the Venezuelan general strike of 2002-2003 was to pressure Chávez into resigning and calling early elections. The strike lasted approximately two months, and the government ended up firing 19,000 PDVSA employees and replacing them with workers loyal to the Chávez government. When the strike ended, substantial macroeconomic damage had been done with unemployment up by 5 percent. This increase brought the country to a national unemployment peak of over 20 percent in March 2003.

"Re-Nationalization" and Tax Reform

Following the December 2002 to February 2003 oil strike, Chávez has referred to regaining control of the industry as "re-nationalization". He aims at improving the efficiency of PDVSA in the context of distributing a greater amount of its revenues to the government and also by certain changes in taxation. Certain tax reforms had already been implemented earlier in Chávez's first term. As of 2001, royalty payments were nearly doubled to 30 percent of the price at which every barrel is sold compared to before when it was 16.67 percent. Also in 2001, the government lowered the income tax levied on oil extraction from 67.6 percent to 50 percent.

It is important to note the political environment during the place of the strike. In April 2002, the opposition attempted to overthrow Chavez, while calling for an "indefinite national strike" which in fact turned out to be a forced 'bosses lock out' where the employees were prevented from working. The documentary The Revolution Will Not Be Televised critically examines this attempted coup, and particularly focuses on the role of the international mass media in supporting the opposition and allegedly even taking part in propaganda which aimed at discrediting the Chavez government.

In 2006, the government had a forty percent share which was announced to be increased by twenty percent. Some believe this move could potentially burden PDVSA with investment costs, but Chavez created several new subsidiaries of PDVSA to try to prevent unwanted costs from happening. These subsidiaries include agriculture, shipbuilding, construction, and industry. Chavez also put effort into diversifying the economy.

Today and the Future

Today, Venezuela is the fifth largest oil exporting country in the world with the second-largest reserves of heavy crude oil (after Canada). Canada and Venezuela have significant potential for capacity expansion; Venezuela could potentially increase production capacity by 2.4 Mbbl/d (380,000 m³/d) from 2001 level (3.2 MMbpd) to 5.6 MMbpd by 2025 - although this would require significant amounts of capital investment by national oil company PDVSA. By 2010, Venezuelan production had in fact declined to ~2.25 Mbbl/d (358,000 m³/d). PDVSA have not demonstrated any capability to bring new oil fields onstream since nationalizing heavy oil projects in the Orinoco heavy oil belt formerly operated by international oil companies ExxonMobil, ConocoPhillips, Chevron and Total.

In 2005, PDVSA opened its first office in China, and announced plans to nearly triple its fleet of oil tankers in that region. Chávez has long stated that he would like to sell more Venezuelan oil to China so his country can become more independent of the United States. The United States currently accounts for 65 percent of Venezuela's exports.

In 2007, Chavez also struck a deal with Brazilian oil company Petrobras to build an oil refinery in northeastern Brazil where crude oil will be sent from both Brazil and Argentina. A similar deal was struck with Ecuador where Venezuela agreed to refine 100,000 barrels (16,000 m³) of crude oil from Ecuador at discount prices. Cuba has agreed to let thousands of Venezuelans be received for medical treatment and health programs, and in turn, Venezuela agreed to sell several thousands of barrels to Cuba at a 40% discount

As of March 2010, PDVSA’s current strategic plan forecasts 5 million barrels per day (790,000 m³/d) for 2015 and 6.5 million barrels per day (1,030,000 m³/d) for 2020 PDVSA’s goal to produce 6.5 million barrels per day (1,030,000 m³/d) by 2020 will likely be harder under Chavez’s policies, which hinder the potential increase of private investment.

See also

• Corporación Trebol Gas C.A.

References

• Randall, Laura. The Political Economy of Venezuelan Oil. Praeger; 1987.
• Fundacion Empresas Polar. Historia de Venezuela Para Nosotros. http://www.fpolar.org.ve/nosotros/educacional/economia/petroleo.html. Accessed 15 April 2008.
• Venezuelanalysis.com. "Venezuela's economy shows strong signs of recovery after lock-out/strike". http://www.venezuelanalysis.com/news/127. Accessed 9 April 2008.
• Radio Netherlands Worldwide. "'Oil Chinese' in Venezuela are treading carefully". http://www.radionetherlands.nl/specialseries/mrli/080408-li-oil-venezuela. Accessed 9 April 2008.

External links

1. Information regarding Venezuela's current petroleum relations with China and India:

• http://www.freewebs.com/npre480venezuela/index.htm

2. Information regarding Venezuela's environmental policies and non-oil energy resources:

• http://www.youtube.com/swf/l.swf?video_id=l8EFU-nEle8&rel=1&eurl=&iurl=http%3A//i.ytimg.com/vi/l8EFU-nEle8/default.jpg&t=OEgsToPDskJ6zNzIRtw3ppBVD9LXMFsg