The Past, Present and Future of Venezuela’s Oil Industry

Oil expert Carlos Mendoza Pottella talks to VA about the reasons behind Venezuela’s severe drop in oil production and the future of the country’s economy.

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Oil wells in the Maracaibo Lake, in the west of Venezuela. (AP)
Oil wells in the Maracaibo Lake, in the west of Venezuela. (AP)
By Cira Pascual Marquina and Carlos Mendoza Potella – Venezuelanalysis.com
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Carlos Mendoza Pottella is an economist and oil expert at Venezuela’s Central Bank (BCV). He recently spoke to Venezuelanalysis.com about the current crisis in the Caribbean country’s oil industry.

There is a discourse focused on rentierism in Venezuela that goes as follows: “We must leave behind rentierism. We must become a productive country.” This is reflected today in President Nicolas Maduro’s claim that “we must end our oil culture, our rentier culture.” Do you believe that oil is really a curse for Venezuela?

I don’t. But it is the case that the problem with oil and gas rents and the “distortion” that they create in the economy has long been an object of study and debate. The Norwegians call it the “Venezuela effect” and have tried to avoid the “distortion” by allowing only a very small percentage of the income generated by their oil industry to enter the economy. Others call it the “Dutch disease.”

The truth is that Venezuela is the owner of enormous profits that are not the result of human labor carried out in Venezuela but rather an international monopolistic structure. Our wealth has a very specific origin: we are owners of something that is finite, a scarce resource that is universally necessary... This has a great potential to foster a diversification of the economy. But it can also have a negative effect on the productive apparatus.

It is true that when you introduce an overwhelmingly rentier component [profits not derived from labor carried out in the nation itself] into a developed capitalist economy, as would be the case in Norway, it tends to create distortions. But that is not the Venezuelan case. When oil exploration began here, this was not a developed country. We had nothing to protect. We were the poorest nation in the continent, a country that had passed through two savage wars (the Independence War and the Federal War), a country with stilted population growth, with illiteracy and malaria. It was a country without a notion of “nation,” without frontiers, a no man’s land. Venezuela was the most abandoned territory on the continent.

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Carlos Mendoza Pottella in his office in Venezuela’s Central Bank (BCV). (Sintesis)
Carlos Mendoza Pottella in his office in Venezuela’s Central Bank (BCV). (Sintesis)

In other words, when oil exploration and exploiting begins, Venezuela’s productive apparatus could not be destroyed by the rent, since the country was severely underdeveloped and peripheral.

Right, when the oil industry began in Venezuela, capitalism was implanted here like a cancer, but it did not displace “productive” capitalism. With the oil industry, there came a reorganization of the society and the territory. The oil profits were (and are) managed from Caracas. Caracas was where the money was, everything else was a backwater. Thus the country began to be reshaped, with the Caracas‐Maracay‐Valencia‐Maracaibo corridor containing the vast majority of the population.

Back in the 1930s, Alberto Adriani, our first economist, described how our wealth was not the result of our own labor, but rather due to particular circumstances: we are that owners of a finite resource that is internationally required, causing large sums of money to flow into the economy. From there – and based on the Ricardian perspective – comes the moralistic perspective that interprets rent as “sinful.”

Leaving behind the moralistic attitude, what Venezuela really must do is look for ways to distribute the rent rationally. And yes, it makes sense to invest in healthcare, education, infrastructure, and national defense. There is nothing sinful there. Also, investment in culture and science is important, and Venezuela has made great advances in those fields.

Now, it is true that the economy’s rentier character leads to limited development in other areas. What has happened in Venezuela, and what tends to happen in rentier economies, is that the state facilitates the buying of hard currencies by subsidizing exchange rates. This, in turn, implies that the local currency is overvalued, making foreign production cheap, and everything that is produced locally expensive. As a consequence, everything is imported and national production dies out.

The first to describe this situation, as I mentioned earlier, was Adriani. He predicted that Venezuela would become an enclave and buy everything abroad. He reflected on how the oil income would disappear in trips to Paris and the purchase of fine silks. Later, in the ‘70s and ‘80s, we witnessed the trips to Miami and the “Está barato, dame dos” (“It’s cheap, give me two”) phenomenon.

From Adriani’s reflection comes Arturo Uslar Pietri’s hypothesis about “sowing petroleum” as a way to develop a more diversified economy.

Going back to the Manichean interpretation of Venezuela’s future, it is virtually a commonplace that Venezuela has two possible destinies: a productive one which is good, and a rentier one which is bad.

Yes, we must firmly reject the discourse which goes as follows: the rentier destiny, the “bad” one, consists in using the rent for social investment, thus promoting parasitism. The productive and good destiny, according to this interpretation, is conceived as investing in private businesses, with investment in schools, hospitals and housing being “bad” rentierism.

In fact, what we must decide then is what we will do with the resource we collectively own as Venezuelans: should the destiny of the rent be social or private?

You have claimed elsewhere that a part of the surplus must be reinvested in oil production, another part must be directed at social programs, and a percentage must go toward diversifying the economy. But how is the latter done, given the economic and historical processes that you have described?

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Carlos Mendoza Pottella in his office in Venezuela’s Central Bank (BCV). (Sintesis)
Carlos Mendoza Pottella in his office in Venezuela’s Central Bank (BCV). (Sintesis)

Obviously this is hard, but since the income coming from oil has been drastically reduced, we are forced to diversify. The oil industry will continue to generate an income for the nation, which has to be administered to satisfy social needs, but it's never going to be what it once was. So economic diversification must take place, and it has to happen with resources from the diminished oil profits, with planning and good management.

VA: Ninety-six percent of Venezuela’s economy is based on international oil sales, but oil production has been falling dramatically. In 2012, Venezuela received USD$97 billion from oil sales. Three years later, in 2016, Venezuela got just USD$39 billion, and in 2017, a mere $28 billion! Part of the explanation for this drop in income is the falling oil prices (the external factor), but there also is an internal factor, the collapse of oil production, which has dropped by half in a decade, to about 1.5 million barrels a day, and the loss of well over half a million barrels a day in the last year alone.

Let’s first focus on what I consider to be the main problem. For the last decade and a half, or even longer, the focus of oil exploration and exploitation has been the Orinoco Belt.

It was a flawed plan, because it went hand in hand with the expectation that oil prices would stay well above USD$100 a barrel. Everyone got roped into this idea: that Venezuela had the largest oil reserves without taking into account the real nature of the oil in the Orinoco fields.

It is correct that we are the owners of 15 to 20% of the oil on the planet, but the truth is that a lot of that oil cannot be exploited today. When we think about the extra heavy oil in the Orinoco Oil Belt, it is indeed an enormous reserve that can last for many hundreds of years (some say it will last 500 years), but these projections are absurd. They have absolutely no economic meaning today! To give an example, big corporations project a maximum of 15 years into the future.

So Venezuela cannot say that it has 600 million barrels in its reserve, for it is impossible to exploit that in the foreseeable future. There may be an enormous accumulation in the Orinoco Belt, but only a small part is actually exploitable, and exploiting it is very expensive. In truth, Venezuela has a 15.000 to 20.000 million barrel reserve. That is what can be tapped in the foreseeable future.

In turn, Venezuela should shift production to the northwest oil fields in Zulia.

Yes. The exceptionally high oil prices 10 years ago led us to neglect our limited but real and important production capacity. We forgot that our conventional fields produce 30, 24, and 20 API[1] oil that goes directly to the refinery, and that we should focus on stimulating that kind of light oil exploitation. The fields in the Maracaibo Lake and elsewhere [conventional wells with lighter oil] are indeed declining. Perhaps they will last for only another 50 years, but five decades of profitable production is very good!

The temptation of investing in the Orinoco Oil Belt – of developing the largest exploitation project which could potentially yield six million barrels a day – was based on the projection that the price of oil would permanently remain well above USD$100.

So instead of updating existing wells (there are some 30,000 perforated conventional wells, half of them not in use), which could increase production by 25,000 BPD per well, all the investment went to the Orinoco Belt.

Since I don’t believe in magical solutions, I hold that what we should focus on now is updating these conventional wells. In other words, a cost‐benefit analysis indicates that we must shift our investment away from the Orinoco Belt and back to the conventional wells. That alone would help to stabilize production.

Some analysts are coming to the conclusion that the decision‐makers of the oil industry in Venezuela are pushing towards privatization. Do you believe that to be the case?

When you have a plan that requires USD$60 billion, in investment and your income is USD$5 billion per year, what are you implying? That you are looking for someone to come and invest. That is the logic of privatization and anyone can read it between the lines.

So the conditions for privatization are here. The Venezuelan state seems incapable of managing oil production now. On the other hand, I would not say that the tendency toward privatization is planned. I think it is involuntary. I think it is the result of a perfect storm. The collapse of production opens the door to “outside saviors” who will take on operations.

With regard to this, we must understand that if private companies run the operations piecemeal [exploration, servicing, exploitation, distribution], and this is likely to happen, then PDVSA as such is not literally privatized, which would be unconstitutional. What is likely to happen then is that subsidiaries [de facto private undertakings] run the operations.

Through the subsidiaries [“filiales” in Spanish] there would be an indirect privatization, which is permitted by a loophole in the Constitution of the Bolivarian Republic of Venezuela: Article 303 states that PDVSA and the wells are non-transferable and are the property of the Republic, but that subsidiaries can assume operations.

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Carlos Mendoza Pottella in his office in Venezuela’s Central Bank (BCV). (Sintesis)
Carlos Mendoza Pottella in his office in Venezuela’s Central Bank (BCV). (Sintesis)

We understand that one of the factors pushing toward privatization is the plummeting production. Thus, I think it is important to understand why Venezuela’s oil production has gone from 3 to 1.4 million BPD. What are the main factors that have led to the current production crisis?

In addition to my assessment, which is that we shouldn't have focused our strategic planning on the Orinoco Belt because pumping oil there is only sustainable with very high oil prices, the main issue is that there has been a snowballing of management and operational problems. Combine these with serious corruption, which the government is perhaps trying to address, lack of control, a massive exodus of qualified workers in the last year, and lack of resources and daily maintenance, and we come to the current catastrophic situation.

Lack of maintenance is accelerating the closing down of conventional wells, and production in the Orinoco wells is not profitable, so it is also being reduced. All this leads to a possible standstill.

But there is a way out, and I repeat myself here: fomenting conventional oil production.

Chavez bequeathed us, as a tangible legacy, the state control of the oil profits. As Chavistas, how should we fight against the privatization of the oil industry.

Well, it has to be talked about, it has to be discussed, we have to explain, and we have to push for a campaign. The problem is that this discussion and campaign is not happening, because we are in a political context in which, when a critical voice emerges, then that person is categorized as opposition, as the enemy. There is no capacity to reflect scientifically from above, and those with critical perspectives within do not want to get involved in the game, as it may have negative political consequences.

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[1] API gravity measures the weight of oil in relation to water: less than 10 is heavier than water and sinks.

Interview conducted on April 18, 2018.