A National, Popular, and Revolutionary Oil Policy for Venezuela

On May 25, Venezuela's Minister of Energy and Petroleum, Rafael Dario Ramirez Carreno, presented a report to the National Assembly entitled "A National, Popular, and Revolutionary Oil Policy for Venezuela." This report reviews the history and the methods used by U.S. and other foreign multinational oil companies, with the collaboration of the Venezuelan oligarchy, to rob the country's oil wealth. The full report is available on-line www.venezuelanalysis.com. Below we print a synopsis prepared by the staff of the Anti-Imperialist News Service.

Introduction

In beginning his report, Rafael Ramirez points out that "during the decade of the 1990's, the policy of apertura amounted to a veritable assault on Venezuelan oil, an assault coordinated by some international institutions in oil consuming countries together with the big multinationals of yesteryear, all of whom, with the complicity of the self-styled oil meritocracy, and the ruling oligarchy and its political representatives, conspired, against the Venezuelan state."

"The goal of the multinational oil companies was to reverse the effects of Venezuela's nationalization of oil by capturing control of the state oil company, the PDVSA. By gaining this control, the transnational companies worked to minimize the value of Venezuela oil and take control of oil out of the hands of the government and Venezuela people. With the Apertura, foreign capital aimed at expropriating from the Venezuelan people the sovereign management and use of their main resource: oil."

Ramirez points out that from the very formation of the PDVSA, the company's "leadership moreover was entrusted to the executive cadres that had served the foreign multinationals all their lives." The policy taken up by PDVSA's directors was based on making the PDVSA a "global energy corporation" and "maximizing shareholder value."

"As in any private corporation, they [PDSVA's managers] pretended that this value had to be determined after the payment of taxes, rents and royalties. In assuming such a position, they wilfully ignored the fact that the shareholder was the State itself, which also happened to be the recipient not only of general taxes in the country, but, even more importantly, the recipient of rents and royalties generated not by entrepreneurial initiative or investment, so much as by its ownership of a bountiful natural resource. In other words, they willfully ignored the essence of nationalization -- the maximization of the value of that natural resource -- a non-renewable, depleting, valuable natural resource that was the property of the Venezuelan people....

In section three of the report, Minister Ramirez shows how the foreign oil companies and their collaborators at the head of PDVSA undermined and negated Venezuela's Nationalization Law of 1975 and other laws guarantying state ownership and control.

Venezuela's hydrocarbons and oil nationalization laws call for the state oil enterprise to maintain a majority shareholding interest in all oil ventures, mandates supervision of the state oil enterprise and its activities by the national government as well as a system of public accountability and transparency of financial operations.

However, especially from 1990 the managers of the PDVSA, with help from high ranking members of the judiciary and other political forces, carried out a series of changes which resulted in:

-- creation of number of joint enterprises with foreign companies as the majority shareholder;

-- so-called "stabilization clauses" through which the PDVSA agreed to guarantee "fiscal stability" to its foreign partners and to indemnify them, if necessary, for losses. This, in effect, nullified the PDVSA role as a enterprise of the Venezuelan state.

-- elimination of the National Assembly's oversight of PDVSA contracts.

Discount pricing

One of the first ways in which the managers of PDVSA "internationalized" Venezuela's oil was by using the mechanism of price discounts in the selling of crude oil. In the 1980's, the PDVSA had gained complete control, unsupervised by the government, to set and declare prices....

After 1986 this internationzliation program was centered in the U.S. where PDVSA invested $4.5 billion to go into partnership with private capitalist owners of Citgo's refining system.

"The internatialisation process was built around a complex system of more than 70 enterprises, and it was underpinned by an organizational, accounting and financial structure designed to evade state control over these investments...Behind this corporate veil, all sorts of things went on, to wit; discounts in the price of crude oil supplies, liquidation of royalties on the basis of these discounted prices, contracting of external indebtedness by placing our oil export income as a collateral to Citgo's debt (evidently compromising our sovereignty and doing violence to the principles of the unity of the treasury. From 1989 onwards, PDVSA consolidated its accounts on a global basis, which led to all the financial costs of internationalisation being treated as deductible costs for Venezuelan income tax purposes."...

"In the twenty years going from 1983 to 2004, the opportunity costs of the discounts granted by PDVSA to all of its overseas affiliates averaged $1.03 per barrel, for a grand total of $7.5 billion! [$11.4 billion in 2004 dollars]....In 2003 alone, "a total of 193 MBD of crude were sent to Citgo's refineries...at an average unit price of $2 under the true market value, for a total discount of $394 million."

Dividends

"Together with the goal of minimizing the fiscal contribution of the oil industry in Venezuela, the old PDVSA also sought to minimize the repatriation of dividends from its international operations. In fact, throughout the best part of twenty years, the internationalization programme did not pay any dividends to PDVSA’s ultimate shareholder. Consider, as an example, what happened when in 1999, president Chávez demanded that Citgo declare dividends for the 1998 fiscal exercise. One could have supposed that, finally, some justice would prevail and the profits derived from price discounts would be repatriated. But no! Granted, Citgo did declare 486 million dollars in dividends -- three times as much as the total amount of dividends declared since 1990, when PDVSA had taken over the whole of this company -- but, in accordance with the structures devised by the Meritocrats, these funds were actually were remitted to Citgo’s parent company, PDV America. This company, in turn, declared dividends to its own parent, PDV Holding Inc., but not before reducing the amount from 468 million dollars to only 268 million dollars. And PDV Holding then proceeded to reduce this amount even further: to zero, to be precise. What happened was that the funds were simply recycled to PDVSA’s various US businesses. But that was not the end of the story, because PDVSA itself, from Caracas, extended an interaffiliate loan to PDV Holding Inc., to the tune of 40 million dollars. That is to say that the net result of a direct instruction that the government was hoping would lead to the influx of 468 million dollars that were sorely needed to face an acute financial and economic emergency was actually that 40 million dollars left Venezuela. And all the Venezuelan public got to read in the press about this affair was that Citgo had, in fact, declared the dividend that the government had requested."

Operating Contracts

"Throughout the decade of the 1990s, PDVSA organized three bidding rounds for Operating Contracts: in 1992, 1993 and 1997....at the moment the total number of operating contracts with private investors comes to 32. "

These operating contracts "quite simply turned over to third parties the activities of exploration and production that had been expressly reserved by the Nationalisation law either for state enterprises or for Association Agreements carried out by a state enterprise." Instead of service agreements, many of these operating contracts boil down to "concessions pure and simple" which, in effect, cede ownership of Venezuela's oil to foreign companies. This can be seen in the fact that these companies count their Venezuelan reserves as assets with the approval of the American Securities and Exchange Commission.

Some examples given in the report include:

-- "In the case of the three contracts adjudicated during the First Bidding Round, the contractors’ invoices to PDVSA come to around 80 per cent of the unit value of the crude. In other words, they produced 34 thousand barrels a day, at an average value of 30.29 dollars per barrel, and the invoice for their "services" comes to 24.09 dollars per barrel. Taking into account that PDVSA -- not the contractor -- has to pay a 30 per cent royalty and that long-term administrative costs can be approximately estimated at 3.33 per cent of the unit value, we come to the conclusion that PDVSA would have lost around 3.14 dollars for every barrel produced, for a total loss of 9.7 million dollars. And we say that it "would have" because we have put an end to this absurd situation on April 12, 2005, by means of a Ministry of Energy and Petroleum Directive that, with immediate effect and in all circumstances, caps the payments to these Operating Contracts at 66.67 of the unit value of crude, so that PDVSA will not experience any out of pocket losses through their operations..

-- "Eleven Operating Contracts assigned during the Second Bidding Round are currently active, and their vital statistics are as follows: they produced 192 thousand barrels per day, at an average unit value of 37. 68 dollars, and with a unit service invoice of 24.81 per barrel (that is, 66 per cent of the total value)....[In addition] the Meritocracy embedded veritable time bombs, in the form of incentives that are triggered once production reaches certain volumes. And these provisions have been triggered in the past two years. Hence, there are currently some Operating Contracts whose invoices for services amount to 93 per cent of the unit value! For certain contracts, the invoiced incentives amount to half a million dollars per day. In other words, every two days we have to pay a one million dollar incentive to these companies to produce oil in our country, and to cause immediate out-of-pocket losses to PDVSA!"

Income Tax

"The factors mentioned above show that the Operating Contracts were structured in a way that the contractors would pay no royalties, which PDVSA was supposed to take care of. At the same time, they were structured in such a way that they would not have to pay the income tax rate applicable to oil activities -- 67.7 per cent at the time they were assigned -- but the non-oil tax rate of 34 per cent....Here one can discern a massive and deliberate evasion of oil taxes.

"Quite apart from the issue of the appropriate applicable rate...the majority of these companies, and among them the large multinationals, are simply not paying any income taxes whatsoever, because their accounts have shown fiscal losses year after year....the contractors accounts also show that some of them finance their operations with up to 100 per cent debt. In other words, their equity in the ventures is zero. They then pay high interest rates on these debts and, in that way, they transfer profits abroad while paying minimal amounts of income tax, when any income tax is paid at all. These debts, it goes without saying, are as a rule owed to the parent companies of the contractors."...

The Association Agreements

In his report, Ramirez focuses on "four association agreements for upgrading extra-heavy crude oil from the Orinoco Oil Belt currently produce around 660 thousand barrels of extra-heavy per day, which results in the production of around 600 thousand barrels per day of upgraded crude."

In addition to such methods as underpaying income tax and majority foreign owned operations, PDVSA has used the association agreements to enable foreign companies to underpay royalties and to plunder much more of Venezuela's oil than the amounts authorized by contract.

"The reduction of the royalty rate from 16 2/3% to 1% was effected by means of a self-serving interpretation of article 41 of the 1943 Hydrocarbons law, which established temporary reductions in royalty rates for active projects, whose degree of maturity called for such a measure. In other words, this exception contemplated for mature active projects was applied to associations which had not even been fully fleshed out as paper projects. The reduction in royalties to a one per cent rate was to have lasted for 9 years."

In the case of Sincor, the Venezuelan Congress was presented with "a project which was to have produced, approximately 114 thousand barrels per day of extra-heavy crude oil with a gravity of 8 to 9º API, to be transformed into 100 thousand barrels per day of upgraded crude. As things turn out, Sincor is currently producing 210 thousand barrels per day of extra-heavy crude, and it intends to expand this output in the near term to 250 thousand barrels per day. The upgrading plant built by the association has a capacity 0f 200 thousand barrels per day, double the 100 thousand barrels per day originally foreseen. In the same way, according to the Project, Congress was asked to set aside for the project a surface of 250 km2 containing 1.5 billion barrels in proved reserves (enough, in other words, to produce 144 thousand barrels per day over 35 years). Well, it turns out that Sincor has in fact been assigned an area of 324 km2 (which contain 2.5 billion barrels of reserves), and it also has a reserved area totalling a further 170 km2 which it wants to incorporate on a permanent basis the next year. By the same token, it disposes of the natural gas produced in its wells at its sole whim, even though it does not have the legal faculties to do so."

Conservation Policy

"There is a further point of maximal interest, and that is that in two of the projects presented to the National Congress for its approval, Sincor and Petrozuata, the partners committed themselves to injecting steam into the production wells, thereby increasing the recovery factor in the reservoirs."...

"Neither Sincor nor Petrozuata have ever injected any steam into their wells. They simply limited themselves to extracting oil in the cheapest way possible, that is, through cold production. In this manner, the recovery factor barely reaches 7 per cent. In other words, around 93 per cent of the oil in situ is lost, probably for ever. From a foreign perspective, it seems logical to go for the option of extracting the maximum oil at the lowest cost possible, even at the cost of damaging the reservoir. This, after all, has been the traditional behaviour by multinational companies in producing countries....

"We have taken the decision to tolerate no longer the predatory exploitation to which the Orinoco Oil Belt is being subjected at this moment. We will demand from all companies operating in the area that they increase, in a significant way and effective immediately, the oil recovery factor. We are therefore demanding that our natural resource be accorded the consideration and care that its value demands, and also that a conservation policy based on best industry practice be adhered to, in light of the fact that this is a cause for concern at a global level. We will not give any more authorizations in the Orinoco Oil Belt to any company that does not heed our orders to preserve and manage our natural resources!"

Overall Balance Sheet

Looking at the overall balance sheet, Rafael Ramirez points out that adding together the income from the oil import tax, income tax and royalties -- the 3 main instruments used by the Venezuelan government -- "between 1976 and 1993 on average, out of every dollar of oil exports, 66 cents ended up in the government’s coffers; from 1993 to 2002, the average fell to exactly half, that is, 33 cents. It is this that explains why the second Caldera government, in desperation, had to resort to dividends to supplement its oil income....In the end, all that the declaration of dividends achieved was to take those 33 cents out of very dollar and increase them to 45 cents. The net balance represents a tangible loss of 21 cents for every export dollar. In absolute terms, the reduction in oil fiscal income for the ten years going from 1993 to 2002, in comparison to the previous 17 years going from 1976 to 1992 inclusive, amounted to 34 billion dollars, or 3.4 billion dollars per year. Behold one of the main causes for the brutal impoverishment of the country throughout the decade of the 1990s."

At the end of the report, Minister Ramirez outlines the orientation and plans of the new PDVSA which is working to re-assert Venezuela's sovereign control over the oil industry. Ramirez writes:

"What the new PDVSA has done is to restore in an extraordinary manner our production, the operations at our refineries, our operational and control systems, our fuel supplies, our international marketing and all the facilities that they sabotaged!...

"PDVSA and its workers are now an integral part of the country, committed to the reconstruction of the enterprise and committed to building a better future for the whole Nation. The maximisation of the natural resource is its lodestar, because this PDVSA is at the service of the people. The new PDVSA is a Venezuelan company, proudly Ven ezuelan, profoundly rooted in the soil of the Motherland."

Popular Distribution of Petroleum Rent

"This conception of the new PDVSA goes hand in hand with another one, over the ultimate destination of petroleum rent. The meritocracy and its followers were willing to "globalise" our natural resource and grant free access to it to the powerful consuming countries. Under the leadership of President Chávez, the people defended our main resource and rescued it, in order to make it serve our Nation. Under this same orientation, it is also the people who will be the beneficiary of petroleum rent: the popular distribution of this rent constitutes the revolutionary dimension of our oil policy, beyond its eminently national character. It is, at the same time, a popular vision of the sowing of oil. The sowing of the oil in the past failed, certainly, because it rested on an elitist vision of an exclusionary Venezuela. The meritocrats, the oligarchy and their political representatives greet this, of course, by screaming to the skies. But this is the extension of the struggle that has been ongoing from the coup d’etat of April 11 onwards; the popular and revolutionary orientation of our Government, which has made the firm commitment to rescue and redistribute petroleum rent to the benefit of the people....But for the forces of reaction, for the traditional seats of economic power, the popular distribution of oil rents is unacceptable. What is acceptable is if the oil rent is channelled towards foreign capital and the economic elites which traditionally have appropriated it in our country (as happened, with grave consequences, during the decade of the 1970s). That is why the lodestar of our policy of distribution of the oil rent is to put it at the disposal of the people, of human beings, who are the focus and essence of our Revolution."