Petróleos de Venezuela S.A. – A Study in Petrocracy

I strongly recommend a terrific article by Tina Rosenberg in the New York Times magazine which describes the unexploited promise – and many problems – associated with Petróleos de Venezuela S.A. (Pdvsa) under the current Venezuelan political regime in particular and nationalized oil in general. As the article notes:

“…77 percent of the world’s oil reserves are held by national oil companies with no private equity, and there are 13 state-owned oil companies with more reserves than ExxonMobil, the largest multinational oil company. The popular perception in the United States is that if leaders of oil countries nationalize their oil, they are bucking a global trend toward privatization. In reality, nationalized oil is the trend. And the percentage of oil controlled by state-owned companies is likely to continue rising, mainly because of the demographics of oil. Deposits are being exhausted in wealthy countries — the ones that exploited their oil first and generally have the most private oil — and are being found largely in developing countries, where oil tends to belong to the state…”

“…Ten years later, Pdvsa is no longer an oil company, at least by Espinasa’s standards. It now exists to finance Chávez’s transformation of Venezuela… If the Pdvsa of the 1990s thought it was Exxon, today’s Pdvsa amounts to the president’s $35 billion petty-cash drawer.”

…Pdvsa is also subsidizing Venezuela’s domestic oil consumption. Cheap oil for Venezuelans is nothing new; when President Pérez tried to raise gasoline prices in 1989, the riots nearly toppled him. The Venezuelans feel it is their oil; why should they have to pay for it? But the subsidies are much deeper and the quantities greater today. A gallon of gasoline costs 6.3 cents at the pump at the unofficial exchange rate. And Venezuela is now gorging on gas. Venezuela will add 450,000 new cars this year — about four times the number of four years ago. Six Hummer dealerships are set to open early next year.”

….To finance all these ambitious projects, Pdvsa must produce oil. Theoretically this should not be a problem. When Chávez was elected, Venezuelan crude went for about $9 a barrel (about $11 today). At press time it was about $78. (Venezuela crude trades at slightly under the average OPEC crude price.) Chávez is the beneficiary of the greatest oil windfall the world has seen, one based in part on political upheaval in Iran, Iraq and Nigeria but also on a surge in demand from China and India that is unlikely to end soon. So, for the foreseeable future, there should be money for everything.”

“…Yet Pdvsa is in trouble.”

“…Some of the private companies that the old Pdvsa had brought in are still working in Venezuela, but they are now only minority partners and are paying higher taxes and royalties. On May 1, foreign companies working in the Orinoco were told to cede majority control of their projects to Pdvsa. Two companies, ExxonMobil and ConocoPhillips, left and are now negotiating with Venezuela about compensation. Other companies, seemingly chosen for their geopolitical value, have come into the Orinoco to take their place and develop virgin areas: national oil companies from big producers like Russia, China, Brazil and Iran, but also Cuba, Chile, Uruguay, Argentina and Belarus, which presumably can bring little expertise to the business of heavy oil.”

This entry was posted on Tuesday, November 6th, 2007 at 6:39 am and is filed under Petróleos de Venezuela, Venezuela.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.