“Apertura Petrolera” (The Oil Opening)

In the mid-’90s, PDVSA engaged in a tough political battle to allow international investment in the country’s oil and gas. The objective was an expansion plan to take advantage of the growing opportunities from increasing global oil demand. The opening would complement PDVSA’s capacities; it would carry out the core of the task based on the most attractive parts of its portfolio – i.e., those with higher profitability, fewer capital requirements, and lesser risk. Three sets of “apertura” projects were selected: strategic associations for the Orinoco Belt, operational agreements in old fields, and exploration and production profit-sharing agreements.

The implementation of the apertura produced 4 strategic associations in the Orinoco, 33 operational agreements in old fields, and 8 exploration and production profit-sharing deals.

The Orinoco Belt was a forsaken accumulation, 350 kilometers inland and with scarce infrastructure, unprofitable, and not viable, since there is no refinery in the world that can take large amounts of that extra-heavy crude. The old fields selected for the operational agreements were slowly lingering towards their economic limits, while the profit-sharing deals were signed for high-risk areas.

The Orinoco projects delivered 600,000 barrels per day, while the operational agreements achieved an additional 600,000 bbl/d. The profit-sharing deals have resulted in two important discoveries.

Shortly after he took office in February 1999, Chávez announced that he would reverse the apertura contracts and would sell all the oil properties abroad. Although he never moderated his contentious speech, the realities moderated his actions concerning the oil industry. However, within PDVSA, the sectarian spirit of the new administration was immediately felt. More than 18,000 workers were fired, and the company progressively became a mere political appendix of the “revolution” and quickly fell victim to corruption. The so-called “new PDVSA” is no more than a big company with large oil reserves. It retains 80,000 employees who are largely inefficient.

Despite having sorely criticized PDVSA’s expansion plans during previous administrations, the Chávez regime has done little over the past nine years to increase output. Instead, it repeatedly announces similar expansion plans, which are delayed year after year. Also announced and equally postponed is the construction of four refineries within Venezuela and several abroad, plus the construction of several gas pipelines and the long-delayed offshore LNG project.

There is a very large gap between “the walk and the talk.” In February 1999 when Chávez took office, oil production stood at 3.5 million barrels per day. Today, it is 2.3 MMbbl/d. But that 1.2 MMbbl/d loss doesn’t fully reflect the collapse, because more than 1.2 MMbbl/d of new oil has come from the Orinoco and the old-fields projects (this production has now dropped to 1 MMbbl/d), indicating that PDVSA’s own production may be just 1.3 MMbbl/d, reflecting an astounding decrease of over 2 MMbbl/d.

Despite the past five years’ high oil prices, Venezuela’s fiscal situation is deteriorating, the government’s spending spree continuing, and the government’s debt rising. Meanwhile, Venezuelan money is being used to finance neighboring countries. Inefficiency and corruption are widespread. Food scarcity is becoming a big issue.

Using the pretext of rescuing the “violated sovereignty,” the government launched a coercion campaign against the international oil companies, with the objective of modifying the existing contracts of the apertura. The mandatory migration of the operational agreements into equity deals, the untimely and coercive increase in Orinoco projects’ royalties, and the unilateral seizing of portions of the equity of those projects’ partners (which has triggered several arbitration processes that the government has used to cry conspiracy), all conform a bleak panorama. In addition, PDVSA took over the operation of the projects, which in addition to the production infrastructure include pipelines, terminals, and very complex upgrading plants. PDVSA can barely manage its own operations, so this takeover merely adds to the ongoing decline in production.

Concerning new projects, the list is very short. They include assignment of two areas offshore, the assignment of a small inland gas field, the recent assignment of a few areas in the Venezuelan Gulf, and the assignment of several studies of certification of reserves in the Orinoco – and those certifications are of dubious quality.

While Chávez has repeatedly threatened to suspend oil shipments to the U.S., nine years after taking office the export volumes to the U.S. continue at the traditional rate of 1.2 MMbbl/d, because the U.S. market is Venezuela’s most profitable, and its sour and heavy crudes have ready refining capacity on the Gulf Coast. When Chávez criticizes Colombia, Perú, and others for their free-trade agreements with the U.S., he conveniently glosses over the fact that Venezuela has the largest one outside NAFTA, with combined yearly trade of over $50 billion.

As Chávez continues his verbal attacks on selected countries, his regime has struck deals with many, including China, Russia, Argentina, Brazil, and Iran, but they have not progressed. Perhaps the project that best shows Chávez’s lack of understanding of the energy sector is the much-discussed gas pipeline through South America. That line was supposed to carry non-existent gas reserves to non-existent markets.

The only oil projects that have been efficiently addressed by the government are aimed at subsidizing and financing oil deliveries to countries in the region.

Chávez’s oil posture is characterized by great confusion, little action, and lots of noise. To the eyes of the layman and the unaware, his announcements may seem reasonable, but they do not translate into action.

The institutional framework of the national oil industry has been disarticulated, and the international oil companies operating in Venezuela navigate in uncertain waters, victims of frequent arbitrary rule changes. All of this suggests that production will not increase significantly at any time in the foreseeable future.

In summary, the situation looks gloomy, even though the government trumpets long lists of successes supported by alleged projects that have not progressed. Despite its large reserves, the most likely scenario is that Venezuela will continue to be an important producer, but a prisoner within its current predicament. .

Luis E. Giusti is a former CEO of PDVSA.