07 Dic The crossroads of the Venezuelan oil industry
In 2009 when Hugo Chavez was still president of Venezuela, he announced on television that the country surpassed Saudi Arabia as the nation with the largest oil reserves in the world.
It was an announcement with pomp, on national television, foreshadowing that a country considered rich in resources would be even more prosperous.
The area, a formation called the Orinoco Oil Belt in the south of Venezuela, is located just below the riverbed with the same name, Orinoco. It is equivalent to 42 times Los Angeles’ city extension, or the size of the whole of Croatia.
Chavez and his XXI Century Socialism project won the lottery overnight.
Although it was not many years ago, fossil fuels were still playing a fundamental geopolitical and economic role on the board of international relations, regional accommodation, and even a country’s creditworthiness.
The current ranking of oil reserves looks like this:
The Orinoco Oil Belt contains some 235 billion barrels of extra-heavy oil (between 4 and 16 API grades), which, although challenging to extract, the technology available had made them reachable. Problems such as the refining cost were of little importance compared to the barrel’s price in the market, which average between 2010–2012 was around US$85.
It would be a matter of time before exacerbated nationalism took control of the oil company, a couple of years before the industry resisted being dominated by the nationalist, socialist, and anti-elitist approaches. They based their intervention on the thesis that oil had been a tool of the rich and had served only a few, increasing class differences.
The oil activity itself requires a high degree of reinvestment of the capital obtained, amortizing the equipment, and acquiring new devices. However, the government opted to distribute the funds from the sale of oil in social programs called “missions.”
Even though these programs paid for part of the social injustice and inequality present in Venezuela, they were at the same time a source of corruption. They constituted an instrument of political propaganda to strengthen the influence of the XXI Century Revolution among the sectors with fewer resources.
A perverse process was then beginning. Not only was disinvestment in exploration, prospecting, extraction, and refining, but the state oil company was losing a significant part of the talent generated after decades of formation.
Simultaneously, a second phenomenon was taking place; the general deterioration of the capacity to do business in the country was diminishing the ability to produce in other areas of the economy. Tourists numbers fell, textile, food, and auto parts industries, among others, shut their doors and in some cases relocated their plants abroad.
The latter’s consequence is that oil was not only the largest source of income, but its weight in the overall export revenue was increasing, resulting in more power to the government.
Carbon Footprint and Global Warming
Today, in 2020, these two concepts are commonly used, both by institutions and their leaders, and by the media, even by girls as young as 15 years old, who are demanding in front of their country’s parliament in the “Skolstrejk för klimatet.”
If we consult Google Trends, we will see that it was in 2006 when the term ”Global Warming” became popular, the year Al Gore made public the documentary “An Inconvenient Truth,” showing clearly the direct relationship between carbon emissions and rising temperatures.
Even though the UN had been working since the 1990s on conferences such as the Kyoto Protocol, the problem itself did not reach the rank of a global threat until mid-2007 onwards. In 2015 the Paris Climate Agreement was signed, whose first objective is to achieve carbon neutrality through the transition to new forms of energy. Oil-producing countries are still digesting the idea.
Paris Agreement’s central aim is “to strengthen the global response to the threat of climate change by keeping a global temperature rise this century well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius”.
The main instrument to achieve this is to make the planet carbon neutral by 2030, that is, making greenhouse gases (GHG) volume equal to the volume the planet is capable of absorbing.
The interesting point about this agreement is that it does not speak of ‘stopping using fossil fuels,’ but of being ‘neutral,’ so it leaves the window open for new technologies (carbon sequestration perhaps) to continue with the business as usual and still meet the goals of the agreement.
Nowadays, the main ways to deal with emissions are either reducing them or through the carbon offset market. Assuming that carbon sequestration tools won’t be developed, these two visions will have different implications for the future of Venezuela’s oil activity.
In November 2020, the Financial Times published an article in which it raised the possibility of Venezuela to use its reserves in the midst of the new energy scenario.
Pundits were consulted for writing the article, from which we can extract two opinions from people that really know the scenario where the Venezuelan oil industry would have to play, first is Ricardo Hausman, former minister, who said: “[oil ]“will never be as important a driver of the economy again as it was”
And the second is Francisco Monaldi, “You can already see there are companies leaving Canada because of climate change. None of them will even consider Venezuela . . . there’s no doubt that there is a finite window for investment.”
When looking at Venezuela’s oil industry history, we notice that it has been deeply linked to politics, leading it to continuous power struggles and sudden changes in its objectives.
Beyond the immense value of what is under the country’s earth, which raises the doubt to its extraction’s impossibility is to determine if it is realistic to think whether or not this situation will change soon.
The graph shows how Venezuela has been losing production capacity as the socialist government remains in power. The oil industry has been decimated by corruption and mismanagement of available resources, leading to an abrupt fall in production and refining capacity.
Getting oil out of the ground requires large investments, so having an abundance of it is no guarantee that it can be exploited. It is an activity that can only be carried out if the returns from extraction are positive.
If a country like Venezuela, in which oil belongs to the state, and whose government lacks any credibility concerning the capacity to repay its debts, most probably won’t have access to the necessary capital to invest in exploration, prospecting, and therefore extraction.
Additionally, oil prices are expected to fall (or at least remain relatively low) due to a clear mandate from the large consumer countries to transcend the use of fossil fuels. Even in those where there is no government pressure, consumers opt for new forms of energy, arising the question about whether or not it is worth to make large investments to keep the oil flowing in.
The only window that remains open (which represents a zero-sum game for the planet) is that the transition to greener options could be slowed down or even discouraged by developing countries governments. The reason for this is simple; the profitability of oil use is much higher than that offered by renewable energy.
In terms of Return on Energy per unit invested (EROEI), fossil fuels have no competition, except nuclear energy.
Potential Future Scenarios
Venezuela currently has limited options, despite the conditions, and the more time goes by, the possibilities of developing them will diminish. These are:
1. Opening to international capital
Dismantle the system in which the government regulates all economic activities, allowing the free circulation of capital. Suppose this measure is accompanied by an aggressive fiscal measures package, with exemptions for those who create jobs and invest in gross fixed capital formation. In that case, it can bring about a domestic economic reactivation.
This can boost the development of the domestic economy as well as production for export. Venezuela could be host to companies searching for cheap energy for their industrial activities or hosting of virtual infrastructure (crypto-currency, servers in general).
This scenario includes the privatization of the industry or public-private co-ownership, promoting confidence in the producing company.
2. Playing with ‘neutrality’ as a concept
The country could easily propose schemes to raise funds from the fight against climate change. It could generate income for the non-pollution that its resources could cause, allocating enormous amounts of resources to developing other forms of energy (hydroelectric, for example) and developing a business network promoting a green economy.
Despite looking complicated at the beginning (the total carbon credit market reaches only 215 billion dollars), it is a valid scheme if we consider how monetary policy is managed in the large economies. It is common to see how the Central Banks’ (or Federal Reserve) balance sheets multiply and extraordinary magnitudes to energize the economy in difficult times. If this concept is extrapolated to the ‘health of the planet,’ the countries with high productivity can finance those with lower productivity to keep them away from fossil fuel production.
It may seem distant, but as the UN Secretary-General mentioned, the “central objective” for next year (2021) will be to build a global coalition around the need to reduce emissions to net-zero.
There are at least two concepts that are accepted as valid in this analysis; the first is that Venezuela has systematically destroyed its capacity to produce oil, and the second is that the weight of oil in geopolitics is decreasing and will continue to decline as new generations of leaders take the reins of their respective countries.
Juan Carlos Golindano S.
Dec. 6th, 2020