Opinion and Analysis: Oil and Gas
"In this largest energy reservoir of the world, great interests placed their sights here"
In this second part of the interview with Minister of Energy and Mines, Rafael Ramirez, he discusses the damage the oil industry's internationalization policy did to Venezuela.
Walter Martinez: To refer to PDVSA [Petroleos de Venezuela, the state-owned oil company] and its shut-down, all talents were used and without integrity because there is no doubt that the shut-down was organized with premeditation and much intelligence.
Rafael Ramirez: Yes. On top of it all they used all the resources of the Venezuelan state that are concentrated in PDVSA in order to plan for eight or nine months the sabotage which was supposed to recreate the situation of instability and coup that we lived through in April 2002. But what models and what policies are in confrontation with each other? Well, here we need to say that the management that was in control of PDVSA was a management that was aligned with the interests of transnational oil companies, which have always been in conflict with our national interests. That is, on a global level there is a confrontation between the countries that are the owners of recourses and the producing countries that want to vindicate the sovereign right to administer their resources—resources which, in addition, are natural and non-renewable—to administer them in the best way and which values them.
Walter Martinez: In the long run this resource must be used optimally—one must take advantage of the current situation.
Rafael Ramirez: Of course, and this is a right we have. But in addition, this contradicts the interests of the oil consuming countries, which are gathered in the International Energy Agency, its transnational companies, and the interests of the investors who try to obtain maximal benefits at the cost of our resources. This confrontation was unfortunately best expressed within PDVSA as the policy of the “oil opening” (apertura petrolera), which was a policy directed from within PDVSA, whose main proponent probably was the former PDVSA president Luis Giusti. This policy meant in the first instance the take-over of our oil industry. We unfortunately have to say that this national enterprise, which was created here after the nationalization with the firm intention of being run by the state, of defending the interests of the state in the face of international competition, was taken over by transnational interests. The ideological and clearest expression of this take-over has to do with the oil opening, with which PDVSA experimented and which was expressed in various elements.
First, it was a policy and an ideological position which was reinforced, fed off of, and extended to all PDVSA directors via a selection system that was known as the “meritocracy.” What they did was to simply impose the will of a group that had a clear political position in opposition to the rest of the PDVSA managers. Those who were in disagreement with this position were simply placed aside. The system did not award talent and integrity, but awarded those who took a particular political position with regard to the industry. This is how in 1999 we had an industry that at that moment was controlled by this position.
Walter Martinez: Now this is where Luis Giusti comes from. The goal was to produce five million barrels per day.
Rafael Ramirez: Yes, the policy was to prioritize volumes over price.
Walter Martinez: We were selling oil below cost in order to subsidize Citgo, which is another way of subsidizing the U.S. economy.
Rafael Ramirez: Yes. So what forms did this policy of Giusti’s take? First, it was clearly to privatize PDVSA. PDVSA was heading towards a piecemeal privatization. That is, using this euphemistic term that managers use, of “out-sourcing,” the entire data processing system of PDVSA was turned over.
Walter Martinez: They fabricated the need to turn over the entire computing system to a company and this company is now investigated and it turns out to be a subsidiary of large U.S. company whose top executives are former directors and high officials of the CIA, ex-generals, and ex-admirals.
Rafael Ramirez: Yes, that’s it. On top of it all, it was a terrible deal for PDVSA, from a management perspective. This was done because there was the ideological conviction that this information had to be turned over because it is not only the brains of the organization, but also a treasury of information. There is nothing more valuable for an oil producing country nor for any enterprise than the information about its deposits, its production, its capacity. That is, this information is worth very much and also has a strategic geopolitical value.
Walter Martinez: When they turned off the switch at Intesa, and I verified this, PDVSA was left at the level of fax, and that only when it was lucky, because not even the computer of the company’s president worked. They had taken it to the extreme that in order to fill a tanker in the port one had to push a button, a key on a computer in Caracas.
Rafael Ramirez: Yes, along with passwords and codes and software, all of which had a mirror in Houston. All of this information was copied in Houston, which was a disaster. We are now in litigation, following that which a contractually established arbitration process. We are now in the midst of a heavy discussion, even though we recently had a decision in our favor—a court order, which allowed us to recuperate all of the assets of this association with Intesa, all of the equipment, all of the software. But obviously our country suffered great patrimonial and strategic damage due to disinformation.
Privatization even went so far as to include turning over our wharfs. We stopped this when the Chavez government came to power, just before we turned over our tanker fleet, our gas compression systems. All of this was a policy that we prevented. Another very important element of this policy of outsourcing or of turning over to third parties, are the operating agreements. This is a discussion we are having right now. We have the clear intention, and of this we have already given notice, we will not continue with this policy. But what is the danger of this policy? It’s that PDVSA, under the same concept by which turned over its information systems to Intesa, is turning over 500,000 barrels of oil to private companies. It did this via contracts, where under the cover of service contracts real oil concession were hidden, at a very high cost to the oil industry. Today these 500,000 barrels are the most expensive barrels in the industry because contractually all possible costs of the companies operating under these are being recognized. In PDVSA we have identified a debt which was not on the books and which exceeded 9 billion dollars, in relation to the operating contracts. This is barbaric.
Walter Martinez: This is in addition to the ten billion dollars which the oil industry shut-down cost…
Rafael Ramirez: We are now beginning to reverse terrible business deals—deals which were made on the basis of a sacrifice to the state. So this is the privatization.
Walter Martinez: But the famous expression, which oil industry executives like so much, also in the north, of accountability—here no one was responsible…
Rafael Ramirez: No, because here there was an extreme weakening of the Venezuelan state. There was of course a complicity of the authorities who led the governments here. The information was hidden. It was impossible to see the numbers and they used much of their engineering talents to hide these numbers. The report of the Commissar from 1999 is very important because it provides a bottom line as to how they turned over the oil industry to us. Already there is a warning about the operating agreements of Intesa, of the internationalization policy, of the discounts they provided in the billing. This is part of the historical record because it is important to understand that his is how they turned over the industry. There was a process, just as in all of the country, where a contradiction between two models became more acute, so that now the real management of the new PDVSA can begin, which we started with the beginning of 2003.
In addition to the dimension of the privatization, which is very important, they were probably going to try to apply the pattern which was applied in the Soviet oil industry, that is, for the management itself to take over the industry, something which was already happening. The big partners of PDVSA in the outsourcing program were companies that belonged to the managers themselves. Then, in addition to the privatization, there was the program of internationalization.
Walter Martinez: This is why one can see all of these managers, who are outside the industry now, crying like widows over their project.
Rafael Ramirez: Yes. So, the other very serious aspect of this policy was the internationalization. Here, in a systematic manner, a transfer out of the country began of over ten billion dollars, from a country of the south to the north, in investments, in the purchase and acquisition or participation in a very complex circuit of refinancing. They did this with the argument that this was a very good business deal and secondly that we had to place our crude oil. Today, the reality is such that only 50% of these refineries use or process our crude. Also, PDVSA has turned into a purchaser of crude, a trader. We have to purchase in order to maintain these refineries, to the tune of 17 billion dollars per year, in order to supply the refineries.
Walter Martinez: Excuse me minister, what are you saying? In order to maintain refineries that we bought with the argument that they were a great deal, we are purchasing crude at international market rates in order to supply our refineries?
Rafael Ramirez: Yes indeed. We are spending 17 billion dollars. This is a situation which we have already stopped and are beginning to close the trader offices in Houston. Not only that, there was a policy of not turning dollars over to the state. That is, this money was used to reinvest in more and more purchases of goods in such a way that they would not have to be declared as dividends to the principal shareholder – the state. But the worst thing about this situation was that these long-term contracts, which were established with these refineries, were based on an economic profitability due to the discounts in the oil billing. That is, we sold to these companies on a long term basis with discounts of between two dollars, four dollars and some at six dollars. But this is a completely harmful issue for the country. When the government of President Chavez came in, identifying this problem, we asked for this information and always it was denied. PDVSA was not even audited in this country.
Walter Martinez: How is it that it was not audited in Venezuela? And the sovereignty, where did it go?
Rafael Ramirez: Other companies audited PDVSA. For this year we are now demanding that the same auditor who audits PDVSA within the country is the same auditor as for its international operations. This was a situation where Venezuela was not losing its sovereignty because all commercialization of our lubricants and of combustibles were passed to the U.S. via an affiliate called Sila. There was an ideological position of transferring out of the country, that is, of converting more and more of our oil activity around Citgo. It is a fact that 48% of our income-generating operations are produced there, outside of the country. We have already prepared, using the information we have gained in the past few months, an evaluation of these business deals, which we will publish. We will publish an analysis we did of the entire internationalization policy. Now we’ve got the information about the contracts, now we’ve got the information that was previously within the black box, which we are opening.
Another important aspect that should be mentioned that has to do with how these policies entered into conflict with our constitution, with the management of the Orinoco Oil Belt (Faja Petrolifera del Orinoco). In order to get into this issue one has to state that Venezuela possesses 77 billion proven oil reserves. But in the Belt we’ve got 1.2 trillion barrels of [extra heavy crude] oil, with the technology that currently exists, we could declare 275 billion barrels of oil.
Walter Martinez: That puts us on a planetary scale.
Rafael Ramirez: Yes, that places us as the country with the largest reserves in the world.
Walter Martinez: With the new technology it would allow us to leave the heavy oil of the Orimulsion epoch behind. There are many people still who are debating, who still defend Orimulsion. But with the new technology, to what API degree can this heavy crude be raised?
Rafael Ramirez: We’ve got associations here that can bring it up to 32° API, as in the case of Sincor. In other cases to 16°.
Walter Martinez: This used to be unthinkable. And will there be a technology transfer in favor of Venezuela?
Rafael Ramirez: Well, in this largest energy reservoir of the world, of course the great interests placed their sights here. So what was planned here in order to wrest control from us over the Oil Belt? Two things were planned here. One was Orimulsion and the other were the cooperation agreements. With regard to the cooperation agreements, the idea was that we did not have to preserve our reserves, but we had to place them in the market, let the price of oil fall, and…
Walter Martinez: I recall a well known individual who once said, “We have to take advantage of this now because later it will not have any value.”
Rafael Ramirez: Yes, exactly. This is how the idea was sold to us and this was the same argument with which they said that we had to privatize our basic industries—that one had to get rid of these things. So how did they establish a policy that allowed them to appropriate control over our resources? First, they created the Strategic Associations, which went against all that was established in the Hydrocarbons Law of the time and against the nationalization. Recall that various personalities of the country, among them Dr. Ali Rodriguez Araque introduced an injunction to the Supreme Court against these types of associations. In these associations various things were established. The first was that PDVSA entered into the agreements as a minority share holder, with the story that this was a “golden” share.
Probably the most serious thing that they did was a huge amount of fiscal sacrifices and exemptions to the income tax laws. And so the management of Giusti, of the oil opening, placed itself on the side of the transnational interests in order to take away from all Venezuelans our riches. But perhaps the most irregular activity had to do with the royalty payments. Previously the law established a royalty of 16.66% for all oil production. With the new law we increased it to 30%. We did this on the basis of the valuation we did as owners of the resources. These strategic associations were signed with contracts that said that from the beginning of production until nine or ten years into the future the associations would pay only one percent royalty. They originally wanted zero percent, but had to put it at one percent because the law did not permit zero percent. So while we sell the same heavy crude for 6.80 or 4.80 dollars per barrel, while in the associations, via the royalties we receive only 0.15 dollars per barrel.
The problem is that this makes production unsustainable for us. Because we have a country that produces three million barrels per day, of which 500,000 are produced via associations that are extremely expensive because they pay only one percent in royalties. Now, the most amazing thing in all of this is that the people who signed these contracts in the past are now saying that they produce so much. Well, they do, because these people allowed it. Contractually they placed a ceiling which we, of course, will not go beyond. We will not allow more oil to be produced under these conditions, which are harmful to our national interest.
The other dimension in the treatment of our heavy crude has to do with Orimulsion. This is something I want to discuss because it has been manipulated a lot. I will start by acknowledging the tremendous technological effort that Orimulsion has implied. It was at first an option for transporting our heavy crude oil. At some point it was realized that one could use it as a combustible and so the idea came up to burn our Orinoco Belt, delivering the extra heavy crude via Orimulsion at a very low price. They said that it was a combustible that would only compete with coal, which is false because it has been displacing fuel oil, which is another of our products, but placing coal as its price reference, to give it the same price as coal, makes it the cheapest oil one could have. In order to make this change, they called the Belt, instead of Oil Belt, “Bitumen Belt.” However, this is first of all a technical inaccuracy, since bitumen only exists in Canada. Bitumen has is stuck to rocks…
Walter Martinez: A completely different extraction technology is needed for Bitumen.
Rafael Ramirez: It’s as if you were extracting iron. Here in Venezuela there is no bitumen, but by positioning it as bitumen they tried to remove it from the OPEC quotas. They tried to remove it from the classification of crudes. This was a policy directed against OPEC. In addition, they converted our most important extra heavy reserves, through the work and grace of lawyers and lobbyists, into a coal belt, which is a crime against our future because while at that time there was no adequate technology for extracting these immense extra heavy reserves of crude oil. Now we see that it is possible and what they were doing is mortgaging our future by turning this oil belt into a coal belt.
 Citgo is the gas station chain PDVSA owns in the U.S., which has over 13,000 affiliated gas stations.
 Intesa is the company to which all of PDVSA’s data management was out-sourced. Intesa is a joint-venture of the U.S. company SAIC, on whose board of directors are numerous former CIA and U.S. military officials.
 A pre-refining process that produces a synthetic crude oil, which the Chavez government wants to phase out.
 The current president of PDVSA, former president of OPEC and former member of the Venezuelan Congress.
 Extra heavy crude, which is in the Orinoco oil Belt, is too viscous to transport via pipelines. Orimulsion turns the extra heavy crude into a crude that is more manageable.
 Fuel oil is the fuel used for the power generators at electricity plants.
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