19 May 2006
''Venezuela Moves to
Nationalize its Oil Industry''
atin
America's shift from the Western sphere of influence and toward an independent
path is a major current of the recent years. Venezuela, the world's fifth
largest oil producer, has spearheaded this change by exploiting soaring global
oil prices in order to pursue a "Bolivarian" economic model detached from the
Washington Consensus. [See: "Venezuela's
Hugo Chavez Makes His Bid for a Bolivarian Revolution"]
Venezuelan
President Hugo Chavez's power and vision for a united South America depends on
oil, which accounts for half of state revenues and about one-third of G.D.P.
Caracas, however, has attempted to balance any potential liability by shrewdly
positioning itself as a pivotal player in the global energy market. Increasing
revenues have translated into political influence that allows Chavez to
undermine decades of Western-mandated neoliberal reforms and begin to
effectively nationalize the Venezuelan oil industry.
The State Assumes
Control
Last month, Chavez ordered a state takeover of several major
oil operations that had been controlled by foreign-owned corporations. France's
Total SA and Italy's Eni SpA refused to cooperate with contractual changes
mandated by Chavez. Sixteen firms, however, including Royal Dutch Shell, Chevron
Corp., and Spain's Repsol YPF, all agreed to the terms of a reworked contract
with Venezuela that grants the state greatly increased revenue shares and
operational control.
Under the new contracts, income tax rates on
windfall profits for oil companies will increase from 34 percent to 50 percent.
Venezuelan Oil Minister Rafael Ramirez, who is also president of state-owned
Petroleos de Venezuela SA (PDVSA), expects an additional US$1.2 billion in
revenue from the tax. Chavez has also indicated that PDVSA, which currently
holds between 30 and 49 percent of heavy oil ventures, would assume "at least 60
percent" of the reworked operations that will be chartered for 20 years.
"Venezuela has control of its natural resources," Chavez stated prior to a
summit in Vienna with leaders from the E.U., Latin America and the
Caribbean.
In keeping with Chavez's use of strong nationalist language,
Venezuelan Deputy Rodrigo Cabezas -- who heads a special National Assembly
commission on oil contracts -- said that the increased tax revenue is "money
that we are demandingÂ…for all Venezuelans."
In the 1990s, Venezuela
opened its oil industry to private investment, which resulted in the creation of
32 operating service agreements with 22 foreign oil companies. Under these
contracts, foreign companies managed the oil fields and PDVSA purchased the
produced oil at a price fixed to the going market rate. PDVSA also had the
option to purchase minority stakes in projects under risk/profit sharing
agreements, and held shares in four "strategic associations" that produce heavy
crude.
Oil production in Venezuela dropped significantly during the 2002
national strike and has yet to return to the 1997 peak of 3.5 million barrels
per day since Chavez came to power in 1999. In 2004, Chavez increased taxes on
the four heavy oil ventures from one to 16 percent.
It is these
"strategic associations" that are the intended targets of the new tax structure;
joint ventures with Total, ExxonMobil, Chevron, ConocoPhillips, BP and Statoil
account for about 23 percent of Venezuela's oil production. According to
Cabezas, "We don't want to expel foreign companies nor exclude them, but it is
absurd that the Venezuelan state doesn't have a majority stake."
The
Orinoco Tar Belt
Venezuela's Orinoco River basin, located southeast
of Caracas, is rich in heavy crude oil. The region currently yields about
600,000 barrels per day, but contains approximately 235 billion barrels of heavy
oil, which if included in official tallies would increase Venezuelan reserves to
300 billion barrels, thereby making it the largest oil country. However, an
important caveat must accompany this figure: heavy oil is extremely difficult to
extract and costly to refine. In order for heavy oil to be made profitable to
process, oil prices must be at least $40 per barrel, by some accounts. An
estimated $200 billion is required to maximize production in the Orinoco belt,
and Chavez has called on the "junior" partners, or foreign-owned firms, to
devote $70 billion to such development.
In a recent report, Venezuela's
congress recommended state majority control of heavy oil operations, stating,
"The National Assembly does not accept that the [Orinoco oil] belt does not
include majority state control over operations in the belt." Heavy oil fields
such as the Orinoco belt and those near Alberta, Canada are expected to provide
an increasing share of future global oil supplies as fields containing the light
sweet crude that accounts for much of the oil currently in use become
increasingly difficult to locate.
Bolivarian
Revolution
PINR Senior Analyst Dr. Michael A. Weinstein defines
Chavez's Bolivarian ideology as "a set of broad principles and goals around
which to mobilize Venezuelan society that reflects adaptation to the country's
economic underdevelopment and its sharp social divisions." In 2005, Chavez
sought to integrate Latin America in line with his "Bolivarian Revolution" by
brokering pipeline deals with Colombia and Argentina, forging a trade pact with
Brazil, and partnering with Cuba on medical and education efforts. [See: "Venezuela's
Hugo Chavez Makes His Bid for a Bolivarian Revolution"]
Venezuela,
O.P.E.C.'s only member from the Western Hemisphere, possesses 77.2 billion
barrels in proven oil reserves. Chavez seeks to translate this material wealth
into political clout in order to shift Latin America away from
Washington-centered neoliberal economics and toward a socialist model that would
place the locus of influence in the global south. To this end, Caracas paid a
major portion of Argentina's I.M.F. debt, effectively eliminating U.S. influence
over the country and placing it firmly in Chavez's camp.
In a move with
as much symbolic importance as economic, construction will soon begin on El
Gran Gasoducto del Sur, or the Great Gas Pipeline of the South, an ambitious
6,600 kilometer (4,100 miles), $23 billion project that would link Venezuela's
natural gas supplies, totaling 151 trillion cubic feet, to Brazil and Argentina.
Vowing to provide energy to his South American neighbors at a discounted price,
Chavez declares, "The project will be sustainable until the end of the century."
Slated for completion in 2017, PDVSA calls the pipeline "one of the fundamental
steps to South America's integration."
In June, Chavez will make his move
to place Venezuela atop the world oil rankings by requesting that O.P.E.C. fix
prices at $50 per barrel and announce that Venezuela's reserves are greater than
Saudi Arabia's. Chavez said, "Venezuela has the largest oil reserves in the
world. In the future, Venezuela won't have any more oil -- but that's in the
22nd century."
Venezuela's Closer Union with
China
Venezuela sells 1.5 million barrels per day to its biggest
customer, the United States. Despite his inflammatory rhetoric and actions
intended to subvert Washington's influence in Latin America, Chavez's Bolivarian
vision ultimately relies on tremendous energy consumption by the United
States.
As part of his efforts to reduce reliance on Washington and forge
a "South-South" alliance that would extend from Venezuela to China via Africa,
the Middle East, and India, Chavez has signed a multitude of agreements with
Beijing encompassing energy, radar equipment, military aircraft, road and rail
construction, and communications infrastructure.
Venezuela views China's
booming economy as the most effective instrument to modernize its oil
infrastructure and maximize production and profits. In 2005, PDVSA agreed to
supply China National Petroleum Corporation (CNPC) with 160,000 barrels per day.
That amount is expected to double by the end of the year and increase to 1.6
million barrels by 2007. Recently, PDVSA agreed to purchase 28 drilling rigs
from China Petro Technology and Development Corp., a subsidiary of CNPC, with
the intention of being able to assemble its own rigs by 2009 in order to
increase total production to 5.8 million barrels per day by 2012.
Caracas
also granted CNPC the right to explore the Orinoco oil belt and develop the
Zumano oil fields' proven reserves of about 400 million barrels of light oil and
four trillion cubic feet of natural gas. Also, several Chinese firms presently
operate in the Caracoles oilfield.
In recent days, PDVSA announced plans
to nearly double its existing oil tanker fleet by purchasing 18 oil tankers from
China for $1.3 billion, a move that would facilitate the 24,140 kilometer
(15,000 miles) voyage to China. PDVSA and CNPC also discussed a joint venture
for the marketing, transport and sale of energy products in Asia.
The
Chavez Effect
Big Oil's reaction to this turn toward nationalization
is a mixture of caution and optimism. Royal Dutch Shell C.E.O. Jeroen van der
Veer labeled actions such as Chavez's as a "new reality" and stated, "The higher
the oil and gas price is, the more national thinking you get. In the end,
governments are always the boss." Speaking about the situation in Venezuela,
Total C.E.O. Thierry Desmarest summed up the hopes of his counterparts in the
industry by saying, "the rules of the game have been changed several times and
in quite a brutal manner. Let's hope reason will triumph."
Nevertheless,
the decision to nationalize the energy sector made by Chavez and Bolivian
President Evo Morales with his country's gas industry is not without risk. As
Caracas imposes its will on foreign companies, its newfound political power and
economic autonomy is contingent on global oil prices remaining high. While the
political and material realities of the 21st century make a return to the days
of cheap oil highly unlikely, if not impossible, Chavez would be wise not to
burn every bridge to the West. [See: "Economic
Brief: Bolivia Takes Control of its Energy Industry"]
For now, his
Bolivarian vision spreads across South America, creating a network of leftist
leaders in Argentina, Brazil, Bolivia and Chile. In the next two months, Mexico
will choose between a center-right candidate that is friendly to Western
interests and a leftist candidate that promise major, nationalist reforms.
Should Mexico choose the latter, this network centered in large part on Caracas
will arrive at the doorstep of the United States. Already alarmed by Chavez's
popular support, Washington surely must be bracing for such an
eventuality.
Conclusion
The tenets of neoliberalism -- open
markets, privatization, deregulation -- taken as gospel by economists,
governments and industry for the past 30 years, are facing a direct challenge
from the model proffered by Hugo Chavez and his fellow Latin American leaders.
Seeking to bypass the United States and instead tap into the thriving Asian
market, the Bolivarian Revolution stands to undermine the existing economic
order. Time will tell whether it is a viable economic plan or merely a
short-lived trend.
As oil prices hover around the $70 mark and increased
energy consumption in China and India continue to fill state coffers in oil-rich
states, Venezuela will continue toward a fully nationalized energy industry and
an emboldened Latin America will remain on its current path independent of the
Washington Consensus. Of equal importance is how Washington and the energy
industry will react.
Report Drafted By:
Michael Piskur
The Power and Interest News Report (PINR) is an
independent organization that utilizes open source intelligence to provide
conflict analysis services in the context of international relations. PINR
approaches a subject based upon the powers and interests involved, leaving the
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