PETROLEUM PRAGMATISM

 

Given that oil is the central theme of our June edition, it is natural that one of the main considerations should be to determine the future of our own national oil industry.After all, that is what we live on:almost half of the nation’s fiscal income is derived, so to speak, from oil.But where to start? To try to determine oil price movements is a very difficult task, and oil experts shy away from giving firm predictions.Until a couple of years ago, at least consensus was the norm:the standing joke was that compared to oil analysts, sheep were independent thinkers.Nowadays, even that solidarity has disappeared; the only convergence between analysts is their resolute resistance to give specific forecasts on prices. To the degree that a much respected oil expert gave at the beginning of the year his best prediction on oil price: between 50 and 100 dollars per barrel! We don’t know where oil prices are going. And trying to guess where world production and demand levels are heading is a very risky proposition, given that new fields are being discovered, signs of recession in leading consumer countries, the stimulation of new technologies due to high prices, and the now well established high correlation between crude production zones and volatile political scenarios.Perhaps the only hard facts are that supply is currently lagging behind demand, and that there is a strong speculative component driving the high market prices.

 

Likewise, it’s not easy to predict the future of our own oil industry.Reading the recently published financial reports of PDVSA, the first thing that strikes us is a strong emphasis on horizontal diversification, with PDVSA announcing that that they will devote significant resources to enter areas as varied as agricultural production, domestic equipment manufacturing, and food procurement and distribution. The current version of the Plan Siembra Petroleo (“Sowing the Oil Plan”, or PSP) contemplates, in addition to more traditional oil projects, the objectives of promoting energy integration in Latin America and the Caribbean, diversifying markets, benefiting developing countries, and constructing a new economic development model to fight poverty.At the same time they plan to increase domestic crude production to 5.8 MM barrels per day (up from the current official figure of 3.2), and all this at a total cost of 78 billion dollars between today and 2012, of which PDVSA will contribute 75% of the funds.This is an extremely ambitious and complicated plan, and it raises many questions, the first one being, is PDVSA biting off more than it can chew? Should it not concentrate on the efficient exploitation of our most important natural resource and provide funds to the state so it can improve social conditions through other channels and organizations? And what happens if oil prices should fall?

Another worrisome issue is the reduced role of the private sector and foreign investment that can be inferred from the PSP.Even though the plan contemplates more participation of mixed companies in future production, in the absence of clear rules of the road and adequate investment incentives, it will be difficult to attract the leading oil companies with their advanced technology and their capacity to manage large scale projects. Without them, it will also be an uphill battle to raise the amount of financial leverage required for the massive projects envisioned.And to further worsen the situation, there are factions within the government who have stated that they would prefer that there be no foreign participation whatsoever in the PSP.Evidently, none of this benefits our expansion plans. It is therefore important to point out that it is virtually impossible for Venezuela to double its production levels from here to 2012 without a very significant level of participation of foreign oil companies and private capital, and that creating the appropriate environment for foreign investment is a must in order to achieve the stated objectives.

Nationalism and state control have always been present in oil to varying degrees – one cannot forget that oil giant BP started as a government initiative to supply fuel to the British navy. However, you can be at the same time patriotic and pragmatic, and to guide us, what better example than that of Juan Pablo Perez Alfonso, the Venezuelan genius who founded OPEC and who left such an indelible mark on the Venezuelan oil industry.Perez Alfonso was a nationalist, but he did not address oil from an ideological point of view. He saw in oil not a political idol, but rather an instrument of well being and social progress for all. The idea was not to nationalize for doctrinarian reasons. He chose to view oil as a means, not an end, for economic policy.As such, he recognized the need for private investment and foreign oil company participation in order to better serve the public interest. Interestingly, in all probability he would have viewed favorably the process of the “Apertura Petrolera” which generated the successful Faja projects, for the simple reason that with a relatively small contribution of capital, Venezuela received 600 thousand barrels of additional production of a difficult to extract crude, which represents today almost one fourth of our export capacity.

It is therefore important to concentrate on the “what for” of things and not the “why”, particularly when one is dealing with something as important as the development of our national oil industry.It is essential to recognize the benefits that private sector participation brings to the table. It is important to analyze carefully the perceived advantages of diversifying markets to obtain fewer dollars per barrel from distant buyers versus developing a strategic partnership with the world’s largest energy consumer, who happens to be located just around the corner.And we must learn from our own history: we cannot forget that one of the reasons that Perez Alfonso created OPEC was because at the time, Venezuela proposed the idea to the US government that they establish a fixed volume quota for Venezuelan oil, given the country’s status as a reliable supplier, and this mutually beneficial proposal was turned down.An interesting lesson to remember for all involved.

It is evident that PDVSA and therefore the Government have a crucial decision to make. One option is to continue on a development program with a strong ideological component, significant focus on non oil activities, and considerable contributions to other countries.The other one is to focus on core activities, reduce direct social spending, and try to maximize revenues to the state.In both cases the importance of partnering with the private sector is essential; in both cases the main risk is not to take advantage of a unique situation of sustained high oil prices. And the decision taken will impact the country for far longer than one or two presidential periods.