History of the Venezuelan oil industry
Encyclopedia
Venezuela is the fifth largest oil exporting country in the world with the largest reserves of heavy crude oil at an estimated 99.4 Goilbbl 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 2394020 oilbbl/d and was also the eighth-largest net oil exporter in the world.
, like many ancient societies already utilized crude oil
s 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.
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.
. 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.
that had not been seen before were apparent. Novelist Jose Rafael Pocaterra described the oilmen as “the new Spaniards.” He wrote in 1918:
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:
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.
, 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 Moilbbl/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.
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.
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.
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.
". 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.
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.
, 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.
, 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.
, 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.
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 100000 barrels (15,898.7 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 Moilbbl/d for 2015 and 6.5 Moilbbl/d for 2020 PDVSA’s goal to produce 6.5 Moilbbl/d by 2020 will likely be harder under Chavez’s policies, which hinder the potential increase of private investment.
2. Information regarding Venezuela's environmental policies and non-oil energy resources:
Pre-discovery years - 1907
The Indigenous peoples in VenezuelaIndigenous peoples in Venezuela
Indigenous peoples in Venezuela form about 1.5% of the total population, although many Venezuelans share some indigenous ancestry. Indigenous peoples are concentrated in the southern Amazon rainforest state of Amazonas, where they make up nearly 50% of the population, and in the Andes of the...
, like many ancient societies already utilized crude oil
Oil
An oil is any substance that is liquid at ambient temperatures and does not mix with water but may mix with other oils and organic solvents. This general definition includes vegetable oils, volatile essential oils, petrochemical oils, and synthetic oils....
s 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
Juan Vicente Gómez Chacón was a military general and de facto ruler of Venezuela from 1908 until his death in 1935. He was president on three occasions during this time, and ruled as an unelected military strongman for the rest of the era.-Early years:Gómez was a barely literate cattle herder and...
replaced his ailing predecessor, Cipriano Castro
Cipriano Castro
José Cipriano Castro Ruiz was a high ranking member of the Venezuelan military, politician and the President of Venezuela from 1899 to 1908...
, 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
Royal Dutch Shell
Royal Dutch Shell plc , commonly known as Shell, is a global oil and gas company headquartered in The Hague, Netherlands and with its registered office in London, United Kingdom. It is the fifth-largest company in the world according to a composite measure by Forbes magazine and one of the six...
) 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
World War I
World War I , which was predominantly called the World War or the Great War from its occurrence until 1939, and the First World War or World War I thereafter, was a major war centred in Europe that began on 28 July 1914 and lasted until 11 November 1918...
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
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
. 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 DiseaseDutch disease
In economics, the Dutch disease is a concept that purportedly explains the apparent relationship between the increase in exploitation of natural resources and a decline in the manufacturing sector...
. 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 xenophobiaXenophobia
Xenophobia is defined as "an unreasonable fear of foreigners or strangers or of that which is foreign or strange". It comes from the Greek words ξένος , meaning "stranger," "foreigner" and φόβος , meaning "fear."...
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 AngaritaIsaías Medina Angarita
Isaías Medina Angarita was a Venezuelan military and political leader, president of Venezuela from 1941 until 1945....
, a former army general from the Venezuelan Andes
Andes
The Andes is the world's longest continental mountain range. It is a continual range of highlands along the western coast of South America. This range is about long, about to wide , and of an average height of about .Along its length, the Andes is split into several ranges, which are separated...
, 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
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
, and by 1945, Venezuela was producing close to 1 Moilbbl/d. Being an avid supplier of petroleum to the Allies of World War II
Allies of World War II
The Allies of World War II were the countries that opposed the Axis powers during the Second World War . Former Axis states contributing to the Allied victory are not considered Allied states...
, 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
Iran
Iran , officially the Islamic Republic of Iran , is a country in Southern and Western Asia. The name "Iran" has been in use natively since the Sassanian era and came into use internationally in 1935, before which the country was known to the Western world as Persia...
, Saudi Arabia
Saudi Arabia
The Kingdom of Saudi Arabia , commonly known in British English as Saudi Arabia and in Arabic as as-Sa‘ūdiyyah , is the largest state in Western Asia by land area, constituting the bulk of the Arabian Peninsula, and the second-largest in the Arab World...
, Iraq
Iraq
Iraq ; officially the Republic of Iraq is a country in Western Asia spanning most of the northwestern end of the Zagros mountain range, the eastern part of the Syrian Desert and the northern part of the Arabian Desert....
, and Kuwait
Kuwait
The State of Kuwait is a sovereign Arab state situated in the north-east of the Arabian Peninsula in Western Asia. It is bordered by Saudi Arabia to the south at Khafji, and Iraq to the north at Basra. It lies on the north-western shore of the Persian Gulf. The name Kuwait is derived from the...
met in Baghdad
Baghdad
Baghdad is the capital of Iraq, as well as the coterminous Baghdad Governorate. The population of Baghdad in 2011 is approximately 7,216,040...
in September 1960 to form the Organization of the Petroleum Exporting Countries (OPEC
OPEC
OPEC is an intergovernmental organization of twelve developing countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC has maintained its headquarters in Vienna since 1965, and hosts regular meetings...
). 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
In the early 1970s, oil producing countries of the Persian GulfPersian Gulf
The Persian Gulf, in Southwest Asia, is an extension of the Indian Ocean located between Iran and the Arabian Peninsula.The Persian Gulf was the focus of the 1980–1988 Iran-Iraq War, in which each side attacked the other's oil tankers...
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
Israel
The State of Israel is a parliamentary republic located in the Middle East, along the eastern shore of the Mediterranean Sea...
(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
Persian Gulf
The Persian Gulf, in Southwest Asia, is an extension of the Indian Ocean located between Iran and the Arabian Peninsula.The Persian Gulf was the focus of the 1980–1988 Iran-Iraq War, in which each side attacked the other's oil tankers...
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
Carlos Andrés Pérez
Carlos Andrés Pérez Rodríguez , also known as CAP and often referred to as El Gocho , was a Venezuelan politician, President of Venezuela from 1974 to 1979 and again from 1989 to 1993. His first presidency was known as the Saudi Venezuela due to its economic and social prosperity thanks to...
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
Rafael Caldera
Rafael Antonio Caldera Rodríguez was president of Venezuela from 1969 to 1974 and again from 1994 to 1999.Caldera taught sociology and law at various universities before entering politics. He was a founding member of COPEI, Venezuela's Christian Democratic party...
, 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.
Petróleos de Venezuela S.A.
Petróleos de Venezuela, S.A. is the Venezuelan state-owned petroleum company. It has activities in exploration, production, refining and exporting oil, as well as exploration and production of natural gas...
(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 glut1980s oil glut
The 1980s oil glut was a serious surplus of crude oil caused by falling demand following the 1970s Energy Crisis. The world price of oil, which had peaked in 1980 at over US$35 per barrel , fell in 1986 from $27 to below $10...
". 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
Dutch disease
In economics, the Dutch disease is a concept that purportedly explains the apparent relationship between the increase in exploitation of natural resources and a decline in the manufacturing sector...
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
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
compared to a decrease of 36 percent to 29 percent for the rest of Latin America
Latin America
Latin America is a region of the Americas where Romance languages – particularly Spanish and Portuguese, and variably French – are primarily spoken. Latin America has an area of approximately 21,069,500 km² , almost 3.9% of the Earth's surface or 14.1% of its land surface area...
. 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
Hugo Chávez
Hugo Rafael Chávez Frías is the 56th and current President of Venezuela, having held that position since 1999. He was formerly the leader of the Fifth Republic Movement political party from its foundation in 1997 until 2007, when he became the leader of the United Socialist Party of Venezuela...
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 CaracasCaracas
Caracas , officially Santiago de León de Caracas, is the capital and largest city of Venezuela; natives or residents are known as Caraquenians in English . It is located in the northern part of the country, following the contours of the narrow Caracas Valley on the Venezuelan coastal mountain range...
, 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
2003 invasion of Iraq
The 2003 invasion of Iraq , was the start of the conflict known as the Iraq War, or Operation Iraqi Freedom, in which a combined force of troops from the United States, the United Kingdom, Australia and Poland invaded Iraq and toppled the regime of Saddam Hussein in 21 days of major combat operations...
, 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 AssemblyNational Assembly of Venezuela
The National Assembly is the legislative branch of the Venezuelan government. It is a unicameral body made up of a variable number of members, who are elected by "universal, direct, personal, and secret" vote partly by direct election in state-based voting districts, and partly on a state-based...
, 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 strikeVenezuelan general strike of 2002–2003
The Venezuelan general strike of 2002–2003, also known as the oil strike or oil lockout, was an attempt by the Venezuelan opposition to President Hugo Chávez to force a new presidential election. It took place from December 2002 to February 2003, although within this period the effectiveness of the...
, 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 Moilbbl/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 Moilbbl/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
Petrobras
Petróleo Brasileiro or Petrobras is a semi-public Brazilian multinational energy corporation headquartered in Rio de Janeiro, Brazil. It is the largest company in Latin America by market capitalization and revenue, and the largest company headquartered in the Southern Hemisphere by market...
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 100000 barrels (15,898.7 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 Moilbbl/d for 2015 and 6.5 Moilbbl/d for 2020 PDVSA’s goal to produce 6.5 Moilbbl/d by 2020 will likely be harder under Chavez’s policies, which hinder the potential increase of private investment.
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