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Opinion and Analysis: Oil and Gas

“The Main Obstacle Is the Administrative Structure of the Venezuelan State”

Ali Rodriguez Araque, president of Venezuela's state oil firm PDVSA
Ali Rodriguez Araque
Credit: Venpres

Ali Rodriguez is the president of Venezuela’s state-owned oil company, PDVSA. He is one of the Venezuelan Left’s main oil industry experts, having served for many years as member of the congressional committee that oversees oil issues, representing the party “La Causa R” (The Radical Cause) and later “Patria Para Todos” (Fatherland for All, which split off of Causa R in 1997). With Chavez’ election he served as Minister for Energy and Mines, then as President of OPEC, and since mid 2002 as President of PDVSA. The interview was conducted in Rodriguez’ office in mid July 2004.

 

Oil Industry Sabotage and PDVSA today

Gregory Wilpert: I would like to begin with the oil industry sabotage that happened last year. I had heard in another interview that you gave recently, that one and a half years after the sabotage there still are some weaknesses within PDVSA. Perhaps you could say what specifically are the strengths and weaknesses of PDVSA right now, one and a half years after the sabotage?

Ali Rodriguez: The weaknesses are easy to deduce. Almost 19,000 people left PDVSA and among these were a majority of those who managed all of the operations of the corporation: exploration, production, transport, refining, commerce, supply, finances, and this obviously implied a problem in the reconstruction of all these systems, which, while reestablished, in many cases, such as finances, still suffer certain weaknesses. We are progressively overcoming these. In the sector of production, all of the storage managers had left, who were qualified employees. Of course, this was unavoidable because they abandoned their employment obligations for 62 consecutive days. There was no other option than to apply the legal norms, specifically article 102 of the Organic Labor Law.

The main strength was and is that despite the loss of all of these employees, among which are people who were highly specialized and with a long trajectory of experience within the corporation, who abandoned their obligations, workers of the company were able to substitute them, primarily due to their enormous effort. A fundamental part of the effort depended upon the massive incorporation of workers who substituted those who left. Of course, we also counted upon the reincorporation of retired employees. A characteristic of the oil industry has been that in many cases people retire in their prime and go to work for other companies within and outside the country, often as consultants and other times as employees. This was the main strength that the corporation and the country demonstrated.

GW: About a year ago there still were occasional reports of sabotage. What is the situation like now in this regard?

AR: There is a variety of actions against the company, from the incessant activity, via the media, both within in and outside of the country, which try to present the corporation as one that is virtually bankrupt. These are affirmations that are completely contradicted by the facts. Last year, PDVSA paid $2.2 billion of debt very punctually, of which $800 million was amortization of debt. Today, we are closing a repurchasing of bonds, of $2.5 billion. This shows our financial strength. Some people say that this does not mean much because it is the result of an increase in the price of oil. But the price would not be worth anything of there weren’t the barrels of oil behind it. After all, our income is the result of volume times price. The fact that we have complied with our financial obligations, and not just fulfilled them, but have over-fulfilled them, are evident symptoms of the strength of the corporation. The current debt of PDVSA has been reduced to $3.5 billion, which, in relation to the assets, is a miniscule debt. We are going to continue to reduce the debt, not because we believe that it is something malignant, but simply because it should be reduced in conditions that do not present any danger to the corporation.

Today the operations are completely normalized. PDVSA’s production is above 3.1 million barrels per day. Our refining capacity, including the island of Curaçao, is at 1.17 million barrels per day. We have already begun exporting “ecological” gasoline to the United States. Two loads have left and two more will be leaving soon, of 250,000 barrels each. The refineries are functioning normally.

GW: And what about the El Palito refinery? It was closed for a while recently.

AR: El Palito was closed for maintenance because this was a refinery that was neglected for quite a while, for some important repairs. Also, there was an arbitrariness with the person in charge of one of the processes, who has been submitted to the authorities and is being investigated. In general, except for this incident, things are going quite well.

To return to your original question, there are all of these campaigns against the corporation. This is a continuation of all of the actions that began in December 2002, until March 2003. Of course, with much less effect than what happened then. For example, in secondary offers, which the OPEC monitoring uses, we appear as having a production of 2.6 million barrels per day. However, PDVSA’s own production is 2.6 million barrels per day, to which one must also add the production of the strategic associations, which are 500,000 barrels per day more, which add up to 3.1 million barrels. And sometimes we exceed this production level, even though our OPEC quota is 2.97 million barrels per day, according to the last decisions of the organization.

Now, with regard to acts of sabotage, there have been some actions we have discovered that are obviously acts of sabotage, but that do not have larger consequences, thanks to all of the measures that department of Prevention and Control of Losses has undertaken, of the security measures of the Armed Forces, the National Guard, in particular, and of the workers at PDVSA. Sometimes it is difficult to distinguish between acts of sabotage and acts of common crime, such as, for example, the removal of cables or of motors, valves, etcetera.

PetroSur

GW: Venezuela and Argentina just signed an agreement to form Petrosur. I would like to know exactly what kind of company this will be. What does this mean for PDVSA?

AR: President Chavez proposed already a few years ago the idea of forming what he called PetroAmerica. This is an idea that takes the energetic reality and the opportunities that Latin America has into account. Various countries have important energy reserves, hydro-electric as well as fossil, particularly the latter. Especially the Andean countries, and Brazil, Mexico, and parts of Argentina have not to be discounted resources. Since we have talked about the economic integration of Latin America for many years, there is no doubt that the energy sector of a modern economy can be the backbone of the continental integration. I was member of the Latin American parliament and we discussed this possibility a lot.

But there is a second aspect that is very important to highlight, which is the base upon which the integration is to take place. There is the base of the so-called neo-liberal model, of free competition, of the opening of markets or on the basis of the complementarity of economies. The first always leads to the displacement of certain economic factors from the scene, from the markets. The second, in contrast, implies the inclusion of factors that are often restricted, often by transnationals.

Venezuela has abundant oil and gas reserves. Argentina, which, while it also has especially gas and some oil reserves, does not have them in sufficient quantities at the present moment. Perhaps in the near future. However, Argentina has abundant agricultural and livestock resources, which Venezuela will need for a while – we don’t know for how long. In this case the economic complementarity works perfectly. We are bringing from Argentina seeds, agricultural products, meat. We are exporting fuel oil and gas, in order to cover urgent needs in Argentina.

One must add to this that, as a result of neo-liberal policies, particularly the ones that Carlos Menem brought about, the Argentinean state is left with practically no energy resources. President Kirchner’s decision is to reconstruct the national enterprise and for this he asked for our support, which we, with pleasure, are providing, within the limits of our capabilities. The decision was to create a business, which was submitted to the Argentinean parliament, with the idea that this enterprise establishes an association with PDVSA. We opened up a branch in Argentina, so that the association can be brought about. Probably other enterprises of other countries will become part of this. This all being analyzed.

GW: So Petrosur would be a company that belongs to PDVSA but enters into an alliance with an Argentinean state enterprise? That is, it would be something separate from PDVSA more or less? So we’re not talking about PDVSA actually merging with other companies?

AR: It would be a subsidiary of PDVSA. The idea that we have discussed with Argentina is that this would not be just a state-owned enterprise, but that there would also be private sector participation, both from Argentina and Venezuela.

GW: And this would eventually also involve other state-owned enterprises, such as Petrobras of Brazil?

AR: Probably, yes. This would also depend on the decision of the Argentinean government.

GW: So there is no timeline as to when other companies might join?

AR: No, since this decision depends upon the Argentinean government. This is not our matter, even in terms of giving an opinion.

Oil for Euros?

GW: About a year ago there were rumors that some countries might switch to selling oil in Euros instead of Dollars. Is there any discussion of this still going on or has this idea been dismissed?

AR: A while ago I had the opportunity to participate in a conference in Brussels, where this possibility was analyzed. I recall that one of the conclusions was that currently the most important energy market is the United States. Many other markets conduct all their transactions in Dollars. However, with the disparity that has been happening in the past few years between the Dollar and the Euro, and the circumstance that a good proportion of OPEC countries do their main business with Europe, this creates some problems. It has created a new impetus for the debate about whether to make transactions in Dollars or in Euros. Some countries, such as Iraq, prior to the invasion, its transactions were primarily in Euros. This is an issue that will depend on the specific weight of each currency. In any case, it is a bit early to reach a conclusion with respect to that.

GW: But PDVSA is investigating trade with China now. Wouldn’t sales to China provide a good opportunity to use Euros?

AR: China is a market that has been expanding for several decades. For a long time it was growing around 13% and now is around 7% or 8% growth per year. Together with India it represents a growing market. These are the countries that most contribute to the growth of world demand. In the case of Venezuela, they are interested in Venezuelan oil, which is perfectly reasonable. A country with a high level of consumption will want to diversify its supply sources. And we, as a provider of energy, are interested in diversifying our markets.

Some have commented that we intend to replace our U.S. market with that of China. That is absurd. Our principal client is the United States, but this does not prevent that we would be interested in selling to countries in the Caribbean, in Europe, in Latin America, and of course to Asia – not just China, but also to India, Singapur, Korea, Japan. To the extent that we develop transport systems, the prices will allow us to reach more markets, no matter how far away they are. Also, we are exploring “swap” exchanges with other countries, so that we might take advantage of certain markets. Perhaps, and I am speculating now, some of these exchanges could take place in Euros.

OPEC

GW: At the last OPEC meeting Saudi Arabia was able to convince the member countries to increase OPEC production quotas. Some say that this was the result of an agreement Saudi Arabia had with the United States to lower the price of oil. What is Venezuela’s position on this decision?

AR: These are things that are the responsibility of the Ministry of Energy and Mines. But, taking into account what the Venezuelan government has said, which is internationally well known, Venezuela’s policy has been in favor of the stabilization of the oil markets and to contribute to the strengthening of OPEC, via the mechanism of the regulation of production. The worst thing to happen for producers is the volatility of prices, which makes economic planning extremely difficult.

Currently, in the past year, what has most influenced prices is not the relation between supply and demand. There is plenty if evidence that the market has been sufficiently supplied with oil. What have been more influential are other factors. First of all, non-economic factors, such as the situation in Iraq and the impact that this situation generates not just in the Arabian Peninsula, but also on an international level. No one can predict what will happen in Iraq.

Secondly, an internal problem in the United States, but which projects itself towards the Atlantic, which is the insufficient refining capacity. For a little over two years, when we first realized this problem in OPEC, the conclusion we reached was that the United States needed to expand its refining capacity by 2.7 million barrels per day. For over 25 years the United States has not constructed any new refineries. This obliges the United States to constantly import gasoline and this, in turn, raises the price on the market, which has an impact on prices on all of the Atlantic. When the price of gasoline rises, this impacts the price of oil between 60% and 80%. This is another factor that plays a role.

Another factor that distorts prices a lot is the speculation on the futures markets. On the NYMEX large paper volumes of oil, of contracts, are negotiated. When speculators perceive that there could be an increase in demand or of prices, they buy significant numbers of contracts that could represent 160, 180 thousand barrels of paper, while in the physical market 80 to 82 thousand barrels are being negotiated. These are the markers, NYMEX, IPE, that can artificially increase the price of a barrel. And all this might have nothing to do with OPEC’s actions.

The position of the government of President Chavez has been consistent, of working for the stability of the market when the market suffers an insufficiency, production is increased and when there is an oversupply that could provoke a strong drop in prices, we want to reduce the supply, in order to maintain this relation between these market fundamentals.

PDVSA and Social Programs

GW: The opposition has been saying recently that the expenditures for social programs that PDVSA is supporting are not sustainable because right now there is a lot of income, but who knows what will happen a year from now, which could require cutting back all of these programs. What is your response to this, that this is unsustainable?

AR: These people are discovering lukewarm water. For countries that have such a high dependency on oil, not only for social spending, but for spending in general, are very conditioned on the fluctuations of the prices and of the oil income. This is nothing new. It does not require any genius to reach this conclusion. But as long as there are resources, it is normal that these should contribute to the extremely important problem of poverty in Venezuela. This would be more sustainable to the extent that the resources are oriented towards increasing our productive capacity and that they diversify these.

We are investing in the most important capital of the oil industry, which is the development of knowledge of our citizens. The point of departure for this development of knowledge is that there are no illiterate persons in the country. This is why PDVSA has joined the battle against illiteracy. It is a national shame that such a phenomenon should still exist in this country. It is an indicator for a country’s backwardness. It is elemental for the productivity of a country that one attacks the problems that affect the health and particularly if it affects a majority who are poor, who do not have access to health care. 15 million cases have been attended by the “Barrio Adentro” program,[1] which PDVSA supports quite a bit. The problems of housing… We could be accused of building thousands upon thousands of homes – but these will remain. This is independent of a drop in prices. The houses will not collapse just because the price of oil drops. Or that a literate person becomes illiterate again just because the prices drop. Or that a healthy person becomes sick just because prices fall.

The social vision that existed in PDVSA previously was a philanthropic one. It involved occasional contributions in order to deal with an occasional problem, but did not attack structural problems, such as poverty and the phenomena that poverty generates. Our strategy is clearly defined. The principal effort of the enterprise as enterprise is the valorization of our oil resources and all processes are being re-aligned so that in every phase of this process value will be added to the natural resource. This means a larger contribution to the state, which would allow it, in turn, to attend to the problems just mentioned, in addition to many others. After all, we are part of the state, even while being a corporation. That is, our effort is not just to add value to natural resources, not just to increase contributions to the state, not just to increase the income of the corporation, but to also valorize the human being.

Self-Management at PDVSA

GW: Recently there have been efforts to create “steering committees” (comités de guía) within PDVSA, which would contribute to the self-management of the company. How do you perceive such efforts, efforts of workers to participate in the management of PDVSA?

AR: The main obstacle for advancing towards the objectives that are proposed in the Bolivarian constitution of Venezuela is the administrative structure of the state. This structure is of no use for any project, neither for a revolutionary project nor for a conservative project – for many years already. I recall a book by a neo-liberal, Pedro Tinoco, who wrote about “the efficient state.” Twenty years ago he criticized the structure of the state. There are embryonic structures that are emerging, of a new institutionality. What is the CTV[2] today, if not an empty drum? There is a search for new forms of organization, for a new institutionality and within this are also the oil workers.  

The steering committees for a part of this search. Here in the board of directors there are two workers, among the eleven members. In some areas of the country there have been some first experiences of co-management, but these are still very new experiences, embryonic. They still are not fixed into an institutional form. Within these are the steering committees that have emerged as a new experience.

Orimulsion

GW: There have been many controversies surrounding Orimulsion.[3] PDVSA is currently phasing out its production and is working towards applying other techniques for processing extra-heavy crude, which it says are more profitable for PDVSA. Does this mean that there is no future for Orimulsion in PDVSA? There are many people who are adamantly opposed to the abandonment of Orimulsion and it is not clear to me why there should be so much controversy around something that really seems to be a technical issue more than anything else.

AR: It really is quite simple. Orimulsion is a mixture of 70% extra-heavy crude and 30% water, to which a surfactant is added in order form a stable emulsion. Originally this technique came about in order to solve a transportation problem. Later it was found that it was possible to burn it directly, so that it could be used for the generation of electricity. This is the origin of Orimulsion. Since it was very polluting, research was conducted and the sulfur content was reduced and many filters had to be used.

I was a defender of Orimulsion when I was a member of congress. Also, I was the one who had proposed a tax reduction from 66.7% to 34% because this business would not have been viable otherwise. But later, with a better understanding of this business, we concluded that the barrel of extra-heavy crude that is mixed into Orimulsion sells at $4.25 per barrel, while this same barrel mixed with an oil of 30º API, generates a mixture, a “Merey” of 26 º API, which now sells for $26 per barrel. This is a simple matter of business, very pragmatic. So, why should we continue to sell a barrel that is several times below the value of the same barrel that is mixed with another crude? In addition, there is the transportation cost. When you take one million barrels of Orimulsion from Venezuela to China, in those one million barrels there are 300,000 barrels of water. You are basically taking water from the Orinoco to the Yangtze. This is a transportation cost. If you instead of the water take a crude of 30º, you save a lot in transportation costs. This is just one of many reasons that led us to make the decision to close this business. Of course, we still have some obligations, which we are negotiating with clients, so that we do not violate the contracts that were signed in the past.

The point of departure is to do good business, not just to do business for business sake. Today, when technology allows us to improve the crude we have, from one of 7º with a high sulfur content to produce one of 32º API with a very low sulfur content, which sells at a very good price, then it is absurd to continue with a technology that had its indisputable virtues at the time. But, as happens with all technology, one will substitute the other.


[1] A program which provides free health care in the country’s poorest neighborhoods.

[2] The old union federation, which was founded by the former governing party and now an important part of the opposition.

[3] Orimulsion is a Venezuelan process for processing extra-heavy crude, of which Venezuela has one of the largest reserves in the world, 35 billion barrels.