FDI IN VENEZUELA’S PETROLEUM INDUSTRY

ASSUMPTIONS• Venezuela nationalizing its oil industry in 1976 and effectively closing the sector to foreign

investors………. Again opening its oil industry to foreign investors in 1991, as falling short of expectations……..

1. Nationalization of oil industry in 1976:Oil jumped up to 91% of total exports from 31% from 1924 – 1934 (just 10 yrs span). The industry proved extremely lucrative to the scores of foreign companies that drilled Venezuelan crude because of the country's low wages and nominal taxes, policies supported by corrupt relations between foreign oil companies and various military dictatorships.

In 40 years period the government and foreign oil companies engaged in a tug-of-war over taxation, regulation, and, ultimately, ownership

Corruption and deceit on the part of the foreign companies and greedy chief such as Pérez Jiménez (president from ‘52 to ‘58) still limited the national benefits of the industry.

http://countrystudies.us/venezuela/30.htm

Contd..

2. Again opening up the oil industry to foreign investors:The country’s state owned oil monopoly – PDVSA failed to develop new oil fields.

Answer 1Closing its oil industry to foreign investment in 1976 because:

The stated goal at that time was to control this important natural resource for the benefit of the country.

In the early 1970’s, oil producing countries of the Persian Gulf began negotiating with Oil Companies in attempt to increase their participation. In 1972 they rapidly obtained 25% later they revised those agreements to obtain up to 60% participation in ownership of the companies.

By 1973, OPEC Persian Gulf states members decided to raise their prices by 70% and to place an embargo on countries friendly to Israel. (Oil crisis). Venezuela being a member of OPEC.

(Assumption also to be considered for this answer)

Answer 2Venezuela reopening its economy for foreign investments because:

First, it recognized that PDVSA (country’s state owned monopoly) did not have the capital required to undertake the investment alone.

Second, it realized that PDVSA lacked technological resources and skills of many of the world’s major oil companies in areas of oil exploration, oil fields development sophisticated refining. For development of PDVSA in timely fashion, it had no other alternative but to turn to foreign co.s for help.

Third, the government believed that PDVSA would be able to use joint ventures with foreign oil companies as a vehicle for learning about modern management techniques in the industry.

Contd…

• Potential benefits that Venezuela saw for its economy: BP being agreed to invest $60mn to develop a marginal oil field that it would then be given rights to for 20 yrs.

Using BP study, PDVSA identified strong prospects for large discoveries of crude oil.

PDVSA planned to share future production, had commercial quantities of oil been discovered.

Answer 3Political Ideologies:

In the 1990s, Venezuela opened its upstream oil sector to private investment. This collection of policies, called apertura, facilitated the creation of 32 operating service agreements (OSA) with 22 separate foreign oil companies, including international oil majors like Chevron, BP, Total, and Repsol-YPF.

To eliminate budget deficits by 1991 through the sale of scores of state-owned enterprises, to restructure the financial sector and restore positive real interest rates, to liberalize trade through tariff reduction and exchange-rate adjustment, and to abolish most subsidies and price controls. The government also aggressively pursued debt reduction schemes with its commercial creditors in an effort to lower its enervating foreign debt repayments

ANSWER 4• Potential implications for

(a) Oil production: In 2003, Chavez was elected as president and took control over PDVSA. 18,000 employees who walked out on strike were fired. He then replaced them by hiring inexperienced employees.Thus, oil production went down to 2.6 mn barrel per day. Oil production was to go down in this state as PDVSA was starved of foreign investment.

(b) Long term profitability of PDVSA: Royalties due the govt to 16.7 percent from 1 percent earlier. Thus investments now may be less. But as oil prices have seen hikes continuously, PDVSA may incur losses only in the first two years. PDVSA increasing stake to 51% and increasing royalties due to govt by 13.3% for new entrants, may prove to be a barrier before the foreign investing companies, but drastic rise in oil prices, can attract the company to overlook this constrain and invest to earn profits on this.

As greater control is acquired by PDVSA with passage of time, by increasing stake from 35% to 51%, better profits can be made in the long run.

(c) Economic growth in Venezuela: Chavez curing “the dutch disease” which affected Venezuela, where in sudden increase in oil had lead to neglecting agrarian sector. Agrciulture accounted for one-third of the total economic production in 1920, but went to one-tenth in 1950. ignoring of social problems such as education, health, infra, agriculture and domestic industry. Chavez had been investing the profits of PDVSA for the development of above sectors. Developing the domestic industry, providing education, etc would contribute to economic growth of the country.

Venezuela's state oil firm PDVSA suffered losses and damages of US$12.8bn as a result of a 63-day strike that brought the country's oil industry to a halt from late December 2002-February 2003, company president and energy and oil minister Rafael Ramírez told reporters.

In spite of a steep increase in oil prices, the company registered a decline in net profits to US$3.28bn in 2003 from US$3.54bn the previous year.

http://www.bnamericas.com/news/oilandgas/Minister:_2002-2003_strike_cost_PDVSA_US*12,8bn

(c) Economic growth in Venezuela:

• The current economic expansion began when the government got control over the national oil company in the first quarter of 2003. Since then, real (inflation-adjusted) GDP has nearly doubled, growing by 94.7 percent in 5.25 years, or 13.5 percent annually.