“OPEC has a Brilliant Future”

Venezuela's OPEC Governor, Ivan Orellana, speaks about the history and future of OPEC and its functions. He stresses that OPEC is still relevant because it helps assure member countries' sovereignty over its resources and a fair price for these.

Venezuela’s OPEC Governor Ivan Orellana
Credit: Gregory Wilpert

On September 14, 2005 the Organization of Petroleum Exporting Countries (OPEC) celebrated its 45th anniversary. For the occasion, Venezuela’s state-owned oil company PDVSA organized a celebration and exhibit about OPEC history in Caracas. At the event, Venezuelanalysis.com caught up with Venezuela’s Governor to OPEC, Ivan Orellana, who agreed to grant an interview.

Orellana is a chemical engineer, with degrees from Venezuela’s Universidad Simon Bolívar, Oxford University in England, and from the Universidad Salamanca, in Spain. After fulfilling a variety of roles in PDVSA-Gas, he was named as planning manager in 1994. Between 2002 and 2003, he was part of PDVSA’s executive planning directorate. Orellana went on to help formulate Venezuelan gas policy and since January 2005 he has been on PDVSA’s board of directors.

Why is OPEC important and, after 45 years, does it still have the same relevance as before?

All institutions that leave their mark, as OPEC has, have a beginning that goes beyond their mere birth. Formally, OPEC was born September 14, 1960, but actually, the impulse has its origins in the 1920’s. That’s when the world financial crisis gestated, as well as the second world war. With the Achnacarry Accords, signed at a castle in Scotland, that’s where the power of the transnationals over oil was institutionalized, establishing their specific oil doctrine. This doctrine was based in five aspects. First, to couple oil demand in any region of the world with production in that same region. Second, to close down production if there is an excess, in order to control prices. Third, to share oil production installations, should it be necessary. Fourth, to control the incorporation of newly discovered reserves. And, fifth, to control prices.

This is when a rejection begins of the transnationals around the world and Juan Pablo Perez Alfonso takes this up and institutionalizes the 50-50[1] in 1941 and brings about the Maadi [Egypt] Agreement in April 1959. This establishes a new doctrine, which involves the increase of oil rents on the basis of reasonable, just, and equitable prices. This is the same doctrine we have today. This had its origins here in Venezuela and spread to the whole world: to support the integration of the chain of values, to avoid fiscal evasion; to increase refining capacity of oil producing nations to provide maximum benefit to these; to assure conservation and use of natural gas – already in 1959 Perez Alfonso established that natural gas should be conserved. The need to establish in every country a body to coordinate, from a national perspective, the conservation and exploration of oil. This created the ministry of oil and energy in Venezuela.

The importance of OPEC today is determinate. It is an actor that must be taken into consideration for the formation of oil prices. No one can hide the fact that oil is a natural non-renewable and exhaustible resource that follows the economics of mining and as such is imperfect. In addition to being imperfect, from the point of view of economic theory, it is also geo-politically strategic. These imperfections are so great that it is impossible to have a market for it like that of oranges. So, OPEC definitely has to be reckoned with.

Two weeks after OPEC was born the New York Times wrote, “A cartel was born in Iraq, but lacking any importance. Even if the Soviet Union were to join this cartel, it would only last one or two years, at most. Afterwards, everything will return back to normal.”

When OPEC started the world’s establishment would not have bet even a penny on it. It had to struggle. OPEC’s strategic birth was not until ten years after its official birth in 1970, when Khadaffi put Arnold Hammer against the wall, of the Occidental Oil Company and obliged it to control the rate of production. Parallel to this, the government of Algeria imposed on oil companies, especially on the French, a tax without consulting or negotiating with them. These two events that occurred in 1970 institutionalized OPEC as a force to be reckoned with from then on, for the formation of prices and for the establishing of power behind oil.

Now that the price of oil is quite high, is OPEC still necessary despite this fact?

If supply and demand of oil is in balance and if there are no intervening factors, such as idle capacity that would allow someone to intervene in the market, then OPEC would not have any power or capacity to intervene. However, what is happening here now, there is a cycle, which occurs regularly. What we see now is that the cycle has expanded because there is a new structural factor, which is the demand of a giant such as China. While the market gets used to this new structure, we will have volatility in prices.

There is a will within OPEC to produce and invest, so that there might be excess capacity. There is a will among consumers to have a dialogue with producers, to understand that the cost implies the assumption of this excess capacity, which benefits both producers and consumers. We have seen how a hurricane can savagely drive the prices up. So, there is a willingness for dialogue, so that the factors of power, the producers and the consumers, can stabilize each other. I think OPEC thus has a brilliant future, also because OPEC countries hold 70% of the world’s oil reserves.

The danger is that oil might be replaced by a different combustible, such as hydrogen. This would happen when the cost of energy reaches a point where there is an opportunity cost for developing this type of energy and there is the technology and an infrastructure for managing hydrogen, which is an element that is very difficult to manage. This type of replacement will not happen from one day to the next, though. It won’t even be as fast as the replacement period of liquid hydrocarbons for coal. It will be much longer. More than 60 to 70 years are needed for this replacement. In this interval, the need of the world for energy and for clean combustibles will be important.

What is the goal of this dialogue between oil producers and oil consumers? What is it about?

The dialogue, from the point of view of the consumer, has to do with understanding that they cannot tell the producing countries to assume the cost of having excess capacity—which benefits the consumers because it stabilizes the prices—but that they also develop conservation policies, that they cannot be fundamentalists, ideologically, in not intervening in the demand for oil because that goes against a specific ideological philosophy.

From the point of view of the energy producers, we also have to understand that we should coordinate policies in some way. To negotiate individually is to weaken ourselves. Rather, we should negotiate en bloc, because the consumers are very powerful. We could negotiate one on one, but only if were a transparent dialogue, without manipulation, but things are not like that. Also, we have to stimulate conservation on our side. We shouldn’t be competing amongst ourselves. For example, a country cannot be competing with another in terms of who will require less taxes, less royalties. We should share the burden, between producers and consumers, so that we can have excess capacity.

The dialogue has to establish that the costs of production have to be shared in some way. The flow of capital has to be transparent. Also, the profits have to be reasonable, related to a resource that is exhaustible. Volatility of prices is not good for anyone. When we are at the top of a cycle wealth is transferred from consuming countries to producing countries, and the reverse, from producing countries to consuming countries we are at the bottom of a price cycle. This volatility and transfer of resources is unjust.

The current high price is not due to OPEC. It comes from the lack of investment in refining capacity, from the lack of investment in production and exploration and it comes from the transnational oil companies which did not want to understand that the excess profits that were generated should be reasonable and equitable.

How do OPEC countries see Venezuela’s strategy and philosophy with regard to energy, such as with respect to the creation of Petrocaribe, Petroandina, Petrosur, etc.?

Ever since President Chavez has been in power we have worked in favor of OPEC. President Chavez reaffirmed, during the second ever summit of OPEC leaders, the principles of Achnacarry – each one of them. We have a very specific oil policy. The first is to support regional integration on the basis of energy, with the aim that its benefits depart from the energy context. So we have the San José pact, the Pact of Caracas, Petrocaribe, Petrosur, and Petroandina, which will be concretized in December. Also, we have a policy of assuring full oil sovereignty. This is no more than the application of the principles of Maadi.

Some of our partners in OPEC see what we do with reticence because some countries have submitted themselves to the same strategies that had been in effect here, which is the creation of elites, “meritocrats,” for linking their oil industry to the needs of oil consuming countries and to forget about their neighbors and their peoples. In several OPEC countries there are clear policies for the opening of the oil industry, which we respect—because sovereignty must be respected—but the important thing is that we are sharing out experiences with them.

There are people who listen to us. Even in those countries there are institutions that listen to us, who know that the Venezuelan experience is very important and see, continuously, how, despite all of the changes we have made, capital continues to come here because they understand that to invest in Venezuela with a fiscal regime such as we have is acceptable for global oil companies, such as ChevronTexaco and Gazprom, who invest in natural gas, which has a much higher risk than oil. We share our experiences with our partners in OPEC, with ministers, governors, technicians. Just last year we organized a workshop here on upstream contracts and shared our experience. We have seen replication of what we have done here in other countries.

Exactly what are the policy differences with regard to OPEC between the Chavez government and previous governments?

The attitude was one of weakening and converting it into an agent for doing business. Luis Giusti [the former PDVSA president] once explained on national TV what the role of OPEC should be, where he first hypocritically expressed his support for Perez Alfonso [the founder of OPEC] and then says that OPEC’s role should be to enable transnational countries to invest in OPEC countries. In other words, a simple agency for facilitating business. This is where earlier governments were heading. The idea was to disconnect OPEC from its original function of exercising its negotiation capacity so it might find a reasonable price for its products.

In contrast to this, President Chavez’s position is that OPEC should be involved in the just and reasonable defense of a natural resource. Also, the validation that OPEC is a public and legal institution and acts in favor of its member countries and seeks to re-take its sovereignty over oil resources. Re-taking sovereignty over oil means the capacity to sovereignly establish fiscal and legal regimes. The transnational, private companies, must learn to accept this. This is a powerful message.

Now that oil prices are fairly high, what is Venezuela’s position within OPEC with regard to this?

President Chavez has said that the prices are currently at a fair level, which represent the value of a resource that is exhaustible. He also realizes that this has a strong impact on the poorest countries and is prepared to share the resource, above all with countries of Latin America. We have reached the upper edge of the fair price of oil now.

So does this mean that Venezuela is currently not interested in production increases for OPEC?

As the minister said yesterday, it all depends on our analysis of the market. Saudi Arabia is currently making important investments in developing its productive capacity, beyond what is necessary for maintaining its position in the market. It has the greatest flexibility. Considering that the price is currently fair, we should not see this as something negative, I believe, especially considering the recent natural disasters that have affected the oil industry. This is my personal opinion, based on what the president and the minister have said, since I am not authorized to talk about prices.

[1] “50-50” refers to the principle that oil companies and the countries where the oil is being exploited share the proceeds from the sale of oil in a ratio of 50% to 50%.