NMP XXVI Group-13 Sharad Singh(49)

Santosh Kr. Chatla(63)

Free trade is a wonderful thing for boosting the standard of living, improving economic growth, providing consumers with more choices and lowering prices.

Although..... how can a country compete in the global market in an industry where it is lacking advantages and production efficiency?

What happens..... if the business is lacking the finance required to purchase the assets?

What happens..... if the resources required to improve the business cannot be found in the country?

The above scenario is typically faced by Venezuela’s petroleum industry in the late 80’s early 90’s

Issues

A vibrant successful Venezulian oil industry was suffering due to depleting oil reserves, lack of technology to find new oil reserves and poor management practices in comparison to multinational firms within the industry.Resulting in:

1. Throughput was lower than standard.

2. Company revenues were below expectations.3. Employment was stagnating and revenues earned by

the government from the industry were minimal

Prior to 1991 there was no help available to Venezuela’s oil industry as the Government had effectively forbid overseas investors and MNC’s assisting the Venezuela’s oil industry.

Scenario

In 1991 due to the suffering industry and poor government revenues from the industry, the

government relaxed the regulations.   This meant that the oil industry was now able to not only seek help but was quickly attracted to other business and investors who looked as an opportunity to

make some profits by improving the performance in oil production in Venezuela.

The help we are referring to is of course Foreign Direct Investment (FDI)

Golden Step

The oil industry in Venezuela (PDVSA*) needed:1. Capital to finance oil exploration and technology to learn how to discover new oil reserves.2. Management skills that would provide the control required to lead the organisation into the future and also to increase the throughput by a sustainable billion barrels a day.

The noted benefits of FDI resulting are:1. A source of raising finance (i.e. capital)2. Access to new improved relevant technology and admission to superior management skills.3. Increased level of employment and enhanced balance of payments. 

* Petroleos de Venezuela SA – State owned Oil Firm

So far so Good

Trends in foreign investment in Venezuela have been influenced by oil and by politics.” Oil and politics, however, are impossible to separate in Venezuela.

Venezuela's oil riches have long been a curse as well as a blessing.

The country boasts the largest petroleum reserves outside the Middle East. For the better part of a century the commodity has fueled the local economy -- along with the ambitions of politicians.

President Hugo Chavez, a left-leaning populist who draws inspiration from independence hero Simon Bolivar, is reaching deep into PDVSA's coffers to finance a "democratic revolution" to raise millions of Venezuelans out of poverty.

Chavez is pumping some $4 billion of PDVSA's windfall profits into social programs each year.

Oil and politics,

Patriotism and Socialism or Death.” Since leading a coup in 1992 and achieving his first

electoral victory in 1998, Chávez has gathered support by using strong nationalist and socialist rhetoric.

He regularly implies that the people own the country’s wealth, rather than corporations or private investors. The country’s unofficial motto under Chávez , slapped on state-owned buildings and countless billboards around the country, reads: Patria, Socialismo o Muerte, translated as “Patriotism and Socialism or Death.”

Capitalists from abroad are understandably wary of bringing their money into the country.

At PDVSA's headquarters in Caracas, a mural depicts Chovez and a child superimposed on an oil well, with the slogan: "Deepening the Bolivarian Revolution in 2005.“

 Courtesy of Petroleos de Venezuela (PDVSA). Venezuela's state-run oil company doesn't just pay for schooling. It foots the bill for a new community health clinic ,free medicine, and it subsidizes the rice, cooking oil, and other staples from government-run stores. "It's the first time that the government has ever done anything with our oil wealth to benefit the poor,“ people comments

In exchange for access to Venezuelan oil reserves, foreign companies must pay taxes and royalties to the government.

Deepening the Bolivarian Revolution in 2005."

Venezuala Oil and USAPetroleum: production – 2,300,000 barrels a day

(370,000 m3), proven conventional reserves – 79.7 billion barrels (1.267×1010 m3)

Natural Gas: production – 176 trillion cubic feet (5,000 km3) (2010 est), total proven reserves – 4,838 billion cubic meters (bcm) (2007 est)

Turning petrodollars into good works? Sounds laudable. But Chavez is also using oil in his bid to turn Venezuela into a counterweight to U.S. influence in Latin America.

Venezuela, once a dependable American ally, has become a thorn in Washington's side.

It's also none too thrilled that Chavez is using petrodollars to outfit his army with Russian-made Kalashnikov rifles, combat helicopters and MiG fighter jets.

Venezuelan crude and US refineriesVenezuela has little choice but to keep selling

most of its oil to the U.S., where refineries are outfitted to handle high-sulfur, heavy Venezuelan crude.

But if oil-hungry China builds similar refineries, Chavez will have a much freer hand in diverting oil from U.S. customers.

Government Accountability Office of USA to conduct a study to determine how the U.S. might compensate for a drop in Venezuelan imports.

Oil-guzzling America Some of this is bluff and bluster. But Chavez knows

he has oil-guzzling America in a corner. The U.S. depends on Venezuela for 15% of its oil imports, and when a strike at PDVSA disrupted crude shipments in 2003, American refineries were left scrambling.

To curb Venezuela's dependence on the U.S., which absorbs 60% of the country's oil exports, Chavez has been working to find new markets.

China deal: Venezuela to sell 120,000 barrels a month of fuel oil to China and is eyeing pipelines that could ferry larger amounts of crude to Pacific ports.

Cuba and Latin America oil The White House takes a dim view of Caracas'

sales of subsidized oil to Fidel Castro's Cuba.

Ever since the Bush Administration appeared to endorse a short-lived coup d‘etat against Chavez in 2002, the Venezuelan leader has accused Washington of trying to oust him. He warned that George W. Bush plans to have him assassinated. If that happens, the U.S. will not receive another drop of Venezuelan oil for a 1,000 years.

A STARVING GIANTThe oil industry is controlled by PDVSA, the state-run

oil company, which has full rights to Venezuela’s oil. But PDVSA has encouraged foreign oil companies to help extract Venezuela’s most valuable natural resource.

In 1999 PDVSA earned $ 2,4 B as profit and producing oil 3.5 million barrel per day.

Venezuela's chances of making that target depend hugely on foreign oil companies, which today account for almost half of total production. The opening of the nation's oil sector to outside capital 10 years ago has netted some $25 billion in investments, with 22 foreign oil companies now present in the country.

PDVSA launched another 10 year plan and investment target $53 B. , with $ 31 B as FDI.

International CollaborationPDVSA has taken particularly active steps to

attract foreign national oil companies, including Cupet (Cuba), Petronas (Malaysia), CNPC (China), Repsol (Spain), Petrobras (Brazil), ONGC (India), and Petropars (Iran). Though these companies are primary foreign investors in Venezuela, private oil companies like ConocoPhillips, ExxonMobil, BP, Total, and Chevron Texaco have invested large sums as well.

Conspicuous silenceYet in October, Chávez hiked royalties on

major heavy-crude exploration and refining projects in the country's Orinoco belt from 1% to 16.66%, arguing that the hike was justified based on market conditions.

With the exception of Exxon Mobil Corp. (XOM), which protested the increase and says it wants to negotiate a better deal, the oil majors have kept quiet.

New Tax lawA little new investment has arrived since the

passage of new tax laws in 2000 that raised the costs of oil production for foreign companies.

The one percent royalty paid by companies to drill for oil before 2000 became a 16 percent royalty. Additionally, companies were charged fees that did not exist before, sometimes paying taxes of up to 30 percent.

Any remaining foreign investment in Venezuelan oil today is largely left over from contracts agreed upon before the new tax laws.

Further tightening The terms on new ventures will be even less favorable --

30% royalties and a 51% stake for PDVSA. That could dampen enthusiasm for a new round of projects, especially since the new rules will not be finalized until mid-year. "We need a legal framework. Sanctity of contracts is key for us demanded by Foreign investor.

The irony is that Venezuela's need for foreign investment in its oil industry will probably only increase. "That means the country will have no choice but to open even further to private international capital.“

Chávez supporters counter that the old PDVSA was staffed by overpaid executives who cared little about using oil profits to improve the lot of poor Venezuelans. "Now employees are much more conscious of how important the company is for Venezuela.

PetroamericaChávez has even more plans for PDVSA. In

February he signed agreements with Brazil that call for Petrobrás (PBR), the state-run oil company, to help develop Venezuela's production and refining capacity. It's part of Chávez' dream of creating "Petroamerica," a Latin oil-and-gas giant controlled by the region's state-run oil companies. It may be far-fetched -- but it's abundant proof that Chávez' aggressive oil diplomacy has just begun.

Goose and the Golden EggA common saying is “Don’t kill the goose that laid the

golden egg.Hugo Chavez did the same to Venezuela’s

Petroleum Industry.Chavez reaped short term “profits” for the

government, but in the long run he will have much less money with which to finance his social programs.

Chavez can only hope for much higher oil prices, or that he can convince foreign firms to come back and set up shop after previously stealing their assets. he can continue to seize assets and dig himself into an even deeper hole.

Chavez has started a downward spiral that can only be corrected by a massive infusion of cash back into the industry; cash that he no longer has.

Venezuelan's Government attitude towards FDI should be important in deciding where to locate foreign activities and where to make foreign direct investment.

Venezuelan Government should note that MNCs are concerned in investing that have permissive policies towards FDI.

A firm considering FDI in Venezuela should provide an opportunity to negotiate specific terms (multilateral agreements*) of the investment with the Government.

* Sets the parameters under which negotiations can proceed to remove impediments to cross border investments

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