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Venezuela: The Fight to Regain Position in Oil Market

by Humberto MarquezInter Press Service
April 7th, 2003

CARACAS-- Venezuela's state oil monopoly, PDVSA, one of the biggest companies in the Southern Hemisphere, is facing the challenge of holding onto its status as one of the world's leading oil firms after a two-month lockout that crippled output and the dismissal of nearly half of the company's executives.

The U.S.-led war on Iraq caught PDVSA (Petrleos de Venezuela) in a weak position to take advantage of the market's thirst for oil.

The conflict also threatens to eventually turn Iraq into a major competitor for Venezuela if U.S. and British companies, as expected, resume control of that Mideast country's vast oil fields. Baghdad nationalized its oil industry in the 1960s following a revolution in 1958 that ousted a London-supported monarchy.

Venezuela's oil output, which officially stood at 2.8 million barrels a day in November, "has recovered, and now amounts to 3.2 million barrels a day, 2.5 million of which belong to PDVSA, and the rest" to joint ventures with foreign firms, said the president of the company, Al Rodrguez.

The Paraguan refinery, the world's largest -- with the capacity to process 1.1 million barrels a day of crude -- sent its first shipment - 360,000 barrels of gasoline - to the United States since the December-January lockout on April 1.

Meanwhile, newly discovered oilfields have boosted Venezuela's reserves from 77 to 78 billion barrels, or seven percent of the global total.

Some 5,000 PDVSA managers and executives constituted the core group in the two-month work stoppage with which the business-led opposition movement attempted to force populist President Hugo Chvez out of power.

But the government put the oil company under military control and laid off 15,000 of its 37,000 executives for taking part in the lockout.

In December, when the stoppage was at its peak, Venezuela was producing less than 300,000 barrels a day, its refineries were shut down, and the internal distribution of fuel collapsed.

According to experts, the strike caused around $7.5 billion in losses, or seven percent of the national Gross Domestic Product (GDP). Two-thirds of those losses were incurred by the oil industry, which also had to shell out $900 million to import gasoline, for the first time in seven decades.

"They did us a favor," said Chvez. "Now we will carry out the true nationalization of the industry, with a patriotic PDVSA."

Although Venezuela's oil industry was nationalized in 1976, it began to be opened up to foreign capital in the 1990s.

"Venezuela will remain a reliable, steady supplier. We will guarantee supplies to all of our clients in the United States," said Energy Minister Rafael Ramrez.

Last year, this South American country of 23 million exported an average of 1.5 million barrels a day of crude oil and derivatives to the United States, covering approximately 13 percent of U.S. consumption.

Spokespersons for Gente de Petrleo, the union representing the thousands of PDVSA managers who took part in the strike and were laid off, maintain that today's oil output is lower than the level claimed by the government, the country's reserves are being overexploited, and not enough is being reinvested.

"The natural decline of Venezuela's oilfields is 20 to 25 percent," oil industry expert Alberto Quirs told IPS. "If the needed investments are not made, 600,000 barrels of daily production capacity will be lost by next year."

Quirs also said marketing problems, rising insurance and transport costs, and spending on imports would lead to a drop in the price of Venezuelan oil of up to $9 a barrel, from the current $24.

According to a study by Germany's Deutsche Bank released in March, PDVSA's net earnings, without counting its U.S. subsidiary, Citgo, will fall below $15 billion this year, down from $26 billion in 2001. The 2002 results are not yet available.

PDVSA has a net worth of around $35 billion, while gross sales amount to $50 billion a year. It owns 18 refining and distribution complexes in North America and Europe, and Citgo supplies gasoline to some 15,000 service stations in the eastern and southeastern United States.

Since the strike, Rodrguez has organized an emergency restructuring of the company, dividing PDVSA into two major operators, in the eastern and western parts of the country, and undertaking an in-depth evaluation of the business that the firm conducts abroad. Most experts recommend against selling Citgo.

But the nationalist left criticized the firm's restructuring as too limited. "PDVSA has 90 companies in Venezuela and a similar number abroad, which are functioning as the gears of a denationalizing mechanism," oil industry expert Vctor Poleo remarked to IPS.

Poleo and other specialists are advocating the creation of a State Council for Security, Defence, Energy and Natural Resources, which would arise from a nationwide process of forums and consultations.

"Of PDVSA's $50 billion in gross annual sales, $40 billion are spent and reinvested in the business, and only one- fifth goes to the owners, which are the state and the people. That is why we are a rich country with a poor population," Poleo complained.

In the meantime, a former PDVSA manager, Luis Echeverra, told the Caracas newspaper El Nacional that the outcome of the Iraqi conflict could be negative for Venezuela.

In the medium-term, he said, Iraq could see its pre-war oil output of 2.5 million barrels a day rise two or threefold, "because Iraqi crude is light and sweet," which means it is easy to refine and has low sulfur and nitrogen contents.

Prior to the war, Iraq's oil already competed with Venezuela's in the U.S. market, where it was purchased from third countries, he pointed out.

For years, the British publication Petroleum Intelligence Weekly ranked PDVSA second on its global list of oil companies, based on size of reserves, output, sales, refining capacity, profits and number of employees.

On that list, Venezuela's oil company has been second only to Saudi Arabia's Aramco, and has historically ranked ahead of the so- called "seven sisters": Exxon, Shell, British Petroleum, Texaco, Mobil, Gulf and Socal.





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