History of the Venezuelan oil industry

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Contents 1 Pre-Discovery Years - 1907 2 1908-1940 – The Birth of the Venezuelan Oil Industry 2.1 The Dutch Disease 2.2 Xenophobia 3 1940-1976 – The Road to Nationalization 3.1 Creation of OPEC 3.2 Oil Embargo of 1973 3.3 Nationalization 4 1977-1997 - Years of Decline 5 1998-Present 5.1 Chávez's Role in the Reinforcement OPEC 5.2 Tension between Chávez and PDVSA 5.3 "Re-Nationalization" and Tax Reform 6 Today and the Future 7 External links 8 Notes 9 References

[edit] Pre-Discovery Years - 1907

In the years before the Spanish conquistadors, the indigenous people of Venezuela had already encountered crude oils and asphalts that seeped up through the ground to the surface. Known to the locals as mene, the thick, black liquid was primarily used for medicinal purposes, as an illumination source, and for the caulking of canoes^[1].

Upon arrival in the early 1500’s, the Spanish conquerors learned from the indigenous people to use the naturally occurring hydrocarbons 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^[2].

[edit] 1908-1940 – The Birth of the Venezuelan Oil Industry

Despite the knowledge of oil in Venezuela for centuries, the first actual oil wells of significance were not drilled until the early 1910’s. 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^[3]. 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 April 15th, 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^[4]. 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. 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^[5].

[edit] 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^[6]. With such a dramatic development of the industry, the oil sector had begun to dominate all other economic sectors in the country. From 1920 to 1935, oil’s share of exports increased from 1.9 percent to 91.2 percent^[7]. This sudden increase caused the Venezuelan economy to suffer from a phenomenon known to economists as the Dutch Disease. Basically, the drastic exploitation of petroleum led to a decline in both the agricultural and manufacturing sectors that could no longer compete, which eventually led to Venezuela falling behind other Latin American nations as an industrialized country.

[edit] 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.

[edit] 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^[8]. 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. 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^[9]. Even after the war, oil demand continued to rise due to the fact that there was an increase from twenty-six million to forty million cars in service in the United States from 1945 to 1950^[10]. By the mid 1950’s, 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.

[edit] Creation of OPEC

Main article: OPEC

In response to the chronically low oil prices of the mid and late 1950’s, oil producing countries Venezuela, Iran, Saudi Arabia, Iraq, and Kuwait met in Baghdad in September of 1960 to form OPEC (Organization of the Petroleum Exporting Countries). 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. The main idea come from a Venezuelan, Juan Pablo Perez Alfonzo, who works hardly in his country and out of him to create this organization.

[edit] Oil Embargo of 1973

Main article: 1973 Oil Crisis

In the early 1970's, 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^[11]. 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. With 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^[12].

[edit] Nationalization

Well before 1976, Venezuela had taken several steps in the direction of nationalization of its oil industry. In August of 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^[13]. 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^[14]. 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 who's 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 January 1, 1976, and along with it came the birth of Petróleos de Venezuela S.A.(PDVSA) which is the Venezuelan state-owned petroleum company.

[edit] 1977-1997 - 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 "oil glut" of the 1980's. OPEC member countries were not strictly adhering to their assigned quotas, and once again oil prices plummeted. By the 1990's, 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 GDP compared to a decrease of 36 percent to 29 percent for the rest of Latin America^[15]. 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^[16].

[edit] 1998-Present

On December 6, 1998, current Venezuelan president, Hugo Chávez, won the 1998 presidential election with 56% of the votes^[17]. He officially took office the following February and since then has made several policy changes involving the country's oil industry.

[edit] Chávez's Role in the Reinforcement 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 suffered 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)^[18]. 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 September 11, 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^[19].

[edit] Tension between Chávez and PDVSA

Chávez's goals of reinstating quotas and strictly adhering to them 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 of 2002, PDVSA officially went on strike creating a complete halt on oil production in Venezuela. The aim of the strike was to pressure Chávez into resigning and calling early elections. The strike lasted approximately 2 months, and the government ended up firing 19,000 PDVSA employees and replacing them with workers loyal to the Chávez government^[20]. 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^[21].

[edit] "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^[22].

[edit] Today and the Future

Today, Venezuela is the fifth largest oil exporting country in the world with the largest reserves of heavy crude oil. Venezuela has the greatest potential for capacity expansion in the Western Hemisphere and could possibly increase its production capacity by 2.4mmbpd from 2001 level (3.2mmbpd) to 5.6 mmbpd by 2025^[23].

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^[24].

For more information in regards to Venezuela's current involvement with China and India, refer to the first external link below.

[edit] 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

[edit] Notes

[edit] References

• Kalicki, Jan. Energy and Security. Woodrow Wilson Center Press; 2005.
• Yergin, Daniel. The Prize: The Epic Quest for Oil, Money, and Power. Simon and Schuster. 1991.
• Toro-Hardy, Jose. Oil: Venezuela and The Persian Gulf. Editorial Panapo; 1994.
• Randall, Laura. The Political Economy of Venezuelan Oil. Praeger; 1987.
• Coronel, Gustavo. The Nationalization of the Venezuelan Oil Industry. D.C. Heath and Company; 1983.
• Martinez, Anibal. Chronology of Venezuelan Oil. Purnell and Sons LTD; 1969.
• Wilpert, Gregory. The Economics, Culture, and Politics of Venezuelan Oil. http://www.venezuelanalysis.com/analysis/74#_ftn15. Accessed April 5, 2008.
• Fundacion Empresas Polar. Historia de Venezuela Para Nosotros. http://www.fpolar.org.ve/nosotros/educacional/economia/petroleo.html. Accessed April 15, 2008.
• World Development Report 2000/2001, p.297
• Mommer, Bernard. “Venezuelan Oil Politics at the Crossroads.” Oxford Institute for Energy Studies, Monthly Commentary. 2001.
• Trinkunas, Harold; Jennifer McCoy (February 1999). Observation of the 1998 Venezuelan Elections: A Report of the Council of Freely Elected Heads of Government (PDF) p. 49. Carter Center. Retrieved on 2006-12-30.
• UN News Centre. "UN labour agency discusses repression in Myanmar, China, Colombia, Venezuela". http://www.un.org/apps/news/storyAr.asp?NewsID=10242&Cr=Myanmar&Cr1=&Kw1=Venezuela&Kw2=&Kw3=. Accessed April 9, 2008.
• Venezuelanalysis.com. "Venezuela's economy shows strong signs of recovery after lock-out/strike". http://www.venezuelanalysis.com/news/127. Accessed April 9, 2008.
• Radio Netherlands Worldwide. "'Oil Chinese' in Venezuela are treading carefully". http://www.radionetherlands.nl/specialseries/mrli/080408-li-oil-venezuela. Accessed April 9, 2008.