Venezuela's National Oil Company's Vision for Social Development

National oil companies (NOCs) are in the ascendancy throughout the world, and the traditional oil and natural gas model relating to international energy development and markets must be revised accordingly.

By Bernardo Alvarez - Energy Tribune
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Until recently, international oil companies (IOCs) managed the world’s oil and natural gas markets, essentially solely for the profitability of their shareholders. Invariably, this model worked to the detriment of the countries whose natural resources were being exploited. This approach could never be justified; new realities no longer make it tenable.

NOCs have become sophisticated, extremely capable, and quite profitable business entities in their own right. Compared to IOCs, NOCs enjoy comparative advantages, and are also gaining competitive advantages throughout the value chain. As such, a major shift from the IOCs to the NOCs has occurred in control of reserves and production of both crude oil and natural gas.

In the 1970s, IOCs controlled more than 80 percent of the world’s oil reserves. Today they control less than 10 percent. As noted by the James A. Baker Institute at Rice University, state-owned enterprises now represent the top ten reserve holders internationally. By comparison, the big IOCs – Exxon Mobil, BP, Chevron, and Royal Dutch Shell – now rank 14th, 17th, 19th, and 25th, respectively, in crude oil reserve holdings.

What must be understood and accepted, moreover, is that NOCs appropriately have another mandate as well. As state-owned enterprises, they also serve as social contributors to their countries’ overall sustainable development, and are an economic engine to be harnessed for the benefit of their populations. In this respect, it is difficult for some in the United States to recognize the legitimate aspirations of those in the developing world to control their own destiny. A country has the sovereign right to develop and manage its non-renewable energy resources as it sees fit. For too long, the benefits from the developing world’s resources have flowed in only one direction – to the developed countries – at the expense of the developing world. Venezuela is committed to changing this dynamic. There is an urgent need for energy-consuming countries to recognize that energy-producing countries also have legitimate needs and sovereign rights. It is within this context and with these goals that Venezuela’s national oil company, Petroleos de Venezuela, S.A. (PDVSA), now operates.

The role of the Venezuelan energy sector in the worldwide energy equation will continue to be significant and will expand in importance in the years to come. Venezuela’s crude oil reserves will soon be certified at 316 billion barrels, the largest in the world, surpassing even those of Saudi Arabia. Regarding natural gas, Venezuela has the potential to become the fourth-largest holder of natural gas reserves in the world and the largest in the Western Hemisphere. PDVSA’s total revenues in 2006 exceeded $85 billion, and its net income was over $7 billion. The company is on track to have an equivalent or better year in 2007.

PDVSA, in conjunction with third-party capital, will spend a total of $120 billion in capital and operating expenditures from 2006 through 2012, $77 billion of which will be provided by PDVSA itself. In 2007, PDVSA will spend $10 billion on exploration and production projects, almost twice what it spent in 2006.

Venezuela produced approximately 3.3 million barrels of crude oil and condensate per day in 2006. This is comprised of production from PDVSA’s own operations, joint operating agreements between PDVSA and private companies in traditional fields, and the Orinoco Belt projects that produced approximately 600,000 bpd of synthetic crude in 2006.

These production numbers square fully with the average per barrel cost of Venezuelan crude oil in 2006 and the level of export revenues that everyone agrees Venezuela received in 2006. PDVSA’s business plan envisions substantially higher Venezuelan total crude oil production by 2012, and the necessary investment dollars are being dedicated to achieve this goal. PDVSA’s investment levels will be commensurate to what is needed, as determined by Venezuela, to maintain price stability, to assure healthy profits, and to provide sufficient money for both the oil industry and economic development.

Venezuela’s refining assets and commitments to refinery expansion are equally impressive. Venezuela is responsible for 3.3 million bpd of crude oil refining capacity in 24 refineries worldwide. Those include the U.S. refineries of CITGO Petroleum Corp., joint ventures with Exxon Mobil and ConocoPhillips, and a 50/50 joint venture with Amerada Hess Corp. in the U.S. Virgin Islands. PDVSA’s plans call for increasing Venezuelan refining capacity, currently 1.3 million bpd, by an additional 500,000 bpd by 2012. PDVSA also intends to expand its presence in the Caribbean and South America by providing more than 87 percent of an anticipated $16.3 billion total investment in refining capacity in Jamaica, Brazil, Cuba, and Uruguay.

There is no question that the current and future well-being of the Venezuelan people depends on revenue from a vibrant Venezuelan energy sector, and we are committed to the proposition that the business of PDVSA is business. But whereas before, the oil riches benefited only the Venezuelan elites and the IOCs, Venezuela is now strongly committed to ensuring that its natural resources provide the maximum benefit for its citizens and the Hemisphere as a whole.

For the first time in Venezuela’s history, its government is putting oil revenues to work for the people, thereby creating a new economic model that tackles the problems of our country and of our sister countries in the region, where economic inequality and poverty have long been the dominant aspect of society.

PDVSA is helping to directly fund sorely needed education, medical, and poverty-reduction programs throughout the country. Moreover, PDVSA’s social contribution will expand. Results so far are impressive: 1.5 million illiterate Venezuelans can now read and write; millions of Venezuelans who could not continue their schooling beyond the elementary level are now going to high school and college; and 14 million people who had never been to a doctor now have access to health care.

As the Center for Economic and Policy Research reported in July 2007, Venezuela’s poverty rate has decreased substantially from 43.9 percent in 1999 to 30.4 percent by the end of 2006 (a drop of 31 percent); unemployment has decreased from 15 percent in June 1999 to 8.3 percent in June 2007; and Venezuela’s economy grew 10.3 percent last year. To critics who say that this economic recovery is only sustained by state spending, it should be noted that 1.9 million private-sector jobs have been added since 1998, compared to 478,000 new jobs in the public sector. In 2006, private employment was actually a slightly higher percentage of the labor force (75.2 percent) in 2006 than it was in 1998 (74.9 percent).

Venezuela also believes it has an obligation to its sister countries in the region, and PDVSA has a significant role in this regard. For instance, through the Petrocaribe program, PDVSA directly provides Caribbean nations, among the poorest in the world, with affordable oil by offering generous financing terms. The program helps these countries upgrade their energy supply and distribution infrastructure. Significantly, this program is not unlike the benefits Venezuela provided Central American and Caribbean countries under the San Jose Accords signed in 1980.

The shift in power to the NOCs is the new reality, and the developed world must adapt to this fact. For example, as the Financial Times has reported, Saudi Aramco is poised to “consolidate its position as the world’s most powerful oil company” with its plans to increase its production capacity from 11 million bpd to 15 million bpd. In Russia, the state’s role in its oil and natural gas industry is increasing substantially. The government of Russia assumed control of Shell’s natural gas project on Sakhalin Island just last year, and it has announced that Gazprom, the state-owned energy company, will lead the development of the potentially huge Arctic Shtokman natural gas field.

In Venezuela, as in other oil-producing countries, we see a long overdue awakening of their people to regain – and maintain – control of their national sovereignty and to rely on themselves to spur economic, industrial, and endogenous development. The rise of the NOCs is a clear manifestation of this trend. The old ways are over, particularly the neo-liberal view of the world’s non-renewable energy resources and their use. That approach – virtually unlimited production by, and exploitation of, oil-producing countries at the dictate of the United States and other developed countries – led to the complete price collapse of crude oil and the economic ruin of oil-producing countries, both in the 1980s and the 1990s. It will not be repeated again.

Bernardo Alvarez is the Venezuelan ambassador to the U.S.

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