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Opinion and Analysis: International | Oil and Gas

Multipolar Machinations: Chávez Endeavors to 'Sow the Oil' with Russia and China

During Hugo Chávez's tour of nine countries across northern Africa, western Asia and Europe in early September, the Venezuelan president orchestrated the signing of a flurry of energy accords. Much ink was spilled over Chávez's agreement to exchange oil for machinery and technology with the West's favorite pariah, Iran. But the most far-reaching commitments Chávez secured on his trip took place in Moscow - a series of accords with Russian oil and gas firms to develop a block of the massive Orinoco belt in northeastern Venezuela, one of the largest oil fields in the world.

The main accord is a joint venture between Venezuela's state-owned hydrocarbon company Petróleos de Venezuela (PDVSA) and a consortium of Russian firms, including Lukoil and Gazprom, to explore for, refine and market the oil from a field in the Orinoco belt known as "Junín 6 Block." The Russian consortium will pay US$600 million to the mixed company, securing 40% control for a span of 25 years, during which time 60% will be held by PDVSA. Russia's Transneft will construct a major transportation system for the delivery of oil extracted from the block. Once operational, the Junín 6 Block is expected to produce more than 400,000 barrels per day.

In recent years, Venezuela has been pursuing a "multipolar" strategy in trade and investment, which couples deepened regional integration with the pursuit of new markets and investors. Venezuela's regional engagement principally occurs within the frameworks of the market-based Common Market of the South (MERCOSUR) and the cooperative-solidarity oriented Bolivarian Alternative for the Americas (TCP-ALBA). A principal component of the TCP-ALBA is multilateral cooperative energy agreements, PetroCaribe and PetroAndina, which combine Venezuelan investment and technology transfer, low-cost oil and gas purchasing arrangements, and the funding of social programs in participating countries.

Russia and China are becoming major players in Venezuela's trade relations. In addition to the aforementioned investment by Russian firms, Russian-Venezuelan trade doubled to US$1.1 billion in 2007, largely due to imports from Russia.

More significant is China's increasing involvement for Venezuela. Between 1995 and 2005, the value of exports to China swelled from US$6.5 million to US$1.02 billion, while Chinese imports expanded from US$57 million to US$958 million. China has also committed US$8 billion to a joint strategic fund to finance projects in Venezuela, largely related to oil exports to China. Venezuela has additionally sought to make inroads in Europe, as indicated by the $25 billion investment by the French oil company Total, announced in September 2009.

Implicit within a multipolar approach is an effort to move out of the orbit of U.S. dependence, pushing further into the past the conditions under which Time magazine could refer to Venezuela in 1953 as "the biggest colony of U.S. businessmen overseas." However, despite efforts toward diversification, the United States remains Venezuela's top trading partner. The United States is the destination of around half of all Venezuelan exports (mostly oil), and is the leading source of Venezuelan imports (approximately 24%).

Invoking the common Venezuelan metaphor of '"sowing the oil," as have many of his predecessors since oil was first discovered in the 1920s, Chávez has asserted that the sector should serve as the motor of a sustainable and diversified economy based not just upon hydrocarbons, but also manufacturing, services and agriculture.

In an April 2005 speech, Chávez declared, "Now, we have to... sow the oil, to utilize the petroleum wealth... as a lever for social and economic development."

Echoing the president, the strategic plan for the Orinoco oil fields states as its goal: "To convert the belt into an axis that drives forward the country's economic, social, industrial, technological and sustainable development." PDVSA President Rafael Ramírez stated in September 2009 that around US$26 billion would be invested in the Orinoco basin as part of the region's overall development plans. Although the bulk of this will go to highway and electricity infrastructure, more than US$1.5 billion is to be directed toward housing, education and health care.

There are several indications that Chávez has made progress where his predecessors had failed to sow the oil into productive development. The administration's first step was the reversal of the gradual privatization of PDVSA that had been initiated by previous governments; instead, Chávez has been heavily investing oil revenues in national economic and social programs. Revenues from oil are being used to develop new industries and expand upon existing ones, including low-cost Linux-based computers, cell phones, steel and aluminum, automobiles, petrochemicals, and sugar. The country's infrastructure has undergone several important expansions in recent years, including new subway lines in the cities of Caracas, Valencia and Maracaibo, and a second bridge over the Orinoco River.

Most significantly, however, Chávez has eclipsed former presidents in pouring oil revenues into social programs, increasing social spending from 8.2% to 13.6% of GDP between 1998 and 2006. This spending has improved Venezuelan health, education and income to such a degree that the country was one of the world's top climbers in the United Nations' 2009 Human Development Index ranking, having advanced from 65st to 58th globally since 1998, the year Chávez came to power. Meanwhile, the number of Venezuelans living in poverty declined from 56% to 31% between 1997 and 2006.

Yet these gains cannot mask the disconcerting fact that oil has surged from around 70% to 90% of the value of Venezuelan goods exported between 1998 and 2006, suggesting Venezuela is still very much reliant on the hydrocarbon sector. To be sure, this increase is largely due to the global rise in oil prices, and it is notable that non-oil exports have gradually climbed since 1998. Nonetheless, it remains the case that the cycle of the world's addiction to oil imports, reproduced as Venezuela's export dependence, has not lent itself to an easy exit. In what has been termed the "Dutch disease" - named for the diminution of Dutch manufacturing that resulted from the dramatic growth of natural gas development - Venezuela's currency has become problematically overvalued, artificially driving down the price of imports, which has spurred the influx of manufactured goods and thus impeded non-oil exports. In other words, it has made economic diversification difficult to achieve.

Economic sustainability aside, environmental groups have called attention to the impact of the administration's development program on both the country's ecosystems and the global climate. In a 2005 interview, Alicia Garcia and Maria Eugenia Bustamante, activists associated the environmental group Society of Friends in Defense of the Gran Sabana (AMIGRANSA) asked the rhetorical question, "How can you support the Kyoto Protocol, lash out at the USA for not signing the Protocol, and at the same time announce increases in oil and gas production?"

For its part, the Chávez government has initiated several innovative conservation projects, such as Mission Energy, which involves the substitution of tens of millions of energy efficient light bulbs for conventional ones, and the installation of solar power systems in hundreds of rural communities. These programs notwithstanding, present plans for expanded oil exploitation indicate that Bolivarian socialism can compete with (or at least complement) the free market in the realm of environmental degradation.

Chávez cannot be blamed for the oil-based economy he inherited, and his plans to extract Venezuela's oil wealth are arguably more constrained than those of his predecessors. However, there is little doubt about the significant environmental cost for Venezuela's present approach to development. Sowing the oil to create a diversified and sustainable economy offers a way out of Venezuela's dilemma. The extent to which Chávez can navigate away from oil's curse remains to be seen.

Jason Tockman is a NACLA Research Associate. This article was originally published by NACLA on October 15th 2009.

Source: NACLA