NMP XXVI Group-13
Santosh Kr. Chatla(63)
Free trade is a wonderful thing for boosting the standard of
living, improving economic growth, providing consumers
with more choices and lowering prices.
Although..... how can a country compete in the global
market in an industry where it is lacking advantages and
What happens..... if the business is lacking the finance
required to purchase the assets?
What happens..... if the resources required to improve the
business cannot be found in the country?
The above scenario is typically faced by Venezuela’s petroleum
industry in the late 80’s early 90’s
A vibrant successful Venezulian oil industry was suffering
due to depleting oil reserves, lack of technology to find
new oil reserves and poor management practices in
comparison to multinational firms within the industry.
1. Throughput was lower than standard.
2. Company revenues were below expectations.
3. Employment was stagnating and revenues earned by the
government from the industry were minimal
Prior to 1991 there was no help available to Venezuela’s oil industry as the
Government had effectively forbid overseas investors and MNC’s
assisting the Venezuela’s oil industry.
In 1991 due to the suffering industry and poor
government revenues from the industry, the government
relaxed the regulations. This meant that the oil industry
was now able to not only seek help but was quickly
attracted to other business and investors who looked as an
opportunity to make some profits by improving the
performance in oil production in Venezuela.
The help we are referring to is of course
Foreign Direct Investment (FDI)
The oil industry in Venezuela (PDVSA*) needed:
1. Capital to finance oil exploration and technology to
learn how to discover new oil reserves.
2. Management skills that would provide the control
required to lead the organisation into the future and also to
increase the throughput by a sustainable billion barrels a
The noted benefits of FDI resulting are:
1. A source of raising finance (i.e. capital)
2. Access to new improved relevant technology and
admission to superior management skills.
3. Increased level of employment and enhanced balance
* Petroleos de Venezuela SA – State owned Oil Firm
So far so Good
Trends in foreign investment in Venezuela have been
influenced by oil and by politics.” Oil and politics, however,
are impossible to separate in Venezuela.
Venezuela's oil riches have long been a curse as well as a
The country boasts the largest petroleum reserves outside
the Middle East. For the better part of a century the
commodity has fueled the local economy -- along with the
ambitions of politicians.
President Hugo Chavez, a left-leaning populist who draws
inspiration from independence hero Simon Bolivar, is
reaching deep into PDVSA's coffers to finance a
"democratic revolution" to raise millions of Venezuelans
out of poverty.
Chavez is pumping some $4 billion of PDVSA's windfall
profits into social programs each year.
Oil and politics,
Patriotism and Socialism or
Since leading a coup in 1992 and achieving his first
electoral victory in 1998, Chávez has gathered support by
using strong nationalist and socialist rhetoric.
He regularly implies that the people own the country’s
wealth, rather than corporations or private investors. The
country’s unofficial motto under Chávez , slapped on
state-owned buildings and countless billboards around the
country, reads: Patria, Socialismo o Muerte, translated as
“Patriotism and Socialism or Death.”
Capitalists from abroad are understandably wary of
bringing their money into the country.
At PDVSA's headquarters in Caracas, a mural depicts
Chovez and a child superimposed on an oil well, with the
slogan: "Deepening the Bolivarian Revolution in 2005.“
Courtesy of Petroleos de Venezuela (PDVSA). Venezuela's
state-run oil company doesn't just pay for schooling. It
foots the bill for a new community health clinic ,free
medicine, and it subsidizes the rice, cooking oil, and other
staples from government-run stores. "It's the first time that
the government has ever done anything with our oil wealth
to benefit the poor,“ people comments
In exchange for access to Venezuelan oil reserves, foreign
companies must pay taxes and royalties to the government.
Deepening the Bolivarian Revolution in 2005."
Venezuala Oil and USA
Petroleum: production – 2,300,000 barrels a day
), proven conventional reserves – 79.7 billion
Natural Gas: production – 176 trillion cubic feet
) (2010 est), total proven reserves – 4,838 billion
cubic meters (bcm) (2007 est)
Turning petrodollars into good works? Sounds laudable.
But Chavez is also using oil in his bid to turn Venezuela
into a counterweight to U.S. influence in Latin America.
Venezuela, once a dependable American ally, has become a
thorn in Washington's side.
It's also none too thrilled that Chavez is using petrodollars
to outfit his army with Russian-made Kalashnikov rifles,
combat helicopters and MiG fighter jets.
Venezuelan crude and US
Venezuela has little choice but to keep selling most of its
oil to the U.S., where refineries are outfitted to handle
high-sulfur, heavy Venezuelan crude.
But if oil-hungry China builds similar refineries, Chavez
will have a much freer hand in diverting oil from U.S.
Government Accountability Office of USA to conduct a
study to determine how the U.S. might compensate for a
drop in Venezuelan imports.
Some of this is bluff and bluster. But Chavez knows he has
oil-guzzling America in a corner. The U.S. depends on
Venezuela for 15% of its oil imports, and when a strike at
PDVSA disrupted crude shipments in 2003, American
refineries were left scrambling.
To curb Venezuela's dependence on the U.S., which
absorbs 60% of the country's oil exports, Chavez has been
working to find new markets.
China deal: Venezuela to sell 120,000 barrels a month of
fuel oil to China and is eyeing pipelines that could ferry
larger amounts of crude to Pacific ports.
Cuba and Latin America oil
The White House takes a dim view of Caracas' sales of
subsidized oil to Fidel Castro's Cuba.
Ever since the Bush Administration appeared to endorse a
short-lived coup d‘etat against Chavez in 2002, the
Venezuelan leader has accused Washington of trying to
oust him. He warned that George W. Bush plans to have
him assassinated. If that happens, the U.S. will not receive
another drop of Venezuelan oil for a 1,000 years.
A STARVING GIANT
The oil industry is controlled by PDVSA, the state-run oil
company, which has full rights to Venezuela’s oil. But
PDVSA has encouraged foreign oil companies to help
extract Venezuela’s most valuable natural resource.
In 1999 PDVSA earned $ 2,4 B as profit and producing oil
3.5 million barrel per day.
Venezuela's chances of making that target depend hugely
on foreign oil companies, which today account for almost
half of total production. The opening of the nation's oil
sector to outside capital 10 years ago has netted some $25
billion in investments, with 22 foreign oil companies now
present in the country.
PDVSA launched another 10 year plan and investment
target $53 B. , with $ 31 B as FDI.
PDVSA has taken particularly active steps to attract
foreign national oil companies, including Cupet
(Cuba), Petronas (Malaysia), CNPC (China), Repsol
(Spain), Petrobras (Brazil), ONGC (India), and
Petropars (Iran). Though these companies are
primary foreign investors in Venezuela, private oil
companies like ConocoPhillips, ExxonMobil, BP,
Total, and Chevron Texaco have invested large sums
Yet in October, Chávez hiked royalties on major
heavy-crude exploration and refining projects in the
country's Orinoco belt from 1% to 16.66%, arguing
that the hike was justified based on market
With the exception of Exxon Mobil Corp. (XOM),
which protested the increase and says it wants to
negotiate a better deal, the oil majors have kept quiet.
New Tax law
A little new investment has arrived since the passage of
new tax laws in 2000 that raised the costs of oil production
for foreign companies.
The one percent royalty paid by companies to drill for oil
before 2000 became a 16 percent royalty. Additionally,
companies were charged fees that did not exist before,
sometimes paying taxes of up to 30 percent.
Any remaining foreign investment in Venezuelan oil today
is largely left over from contracts agreed upon before the
new tax laws.
Further tighteningThe terms on new ventures will be even less favorable --
30% royalties and a 51% stake for PDVSA. That could
dampen enthusiasm for a new round of projects, especially
since the new rules will not be finalized until mid-year.
"We need a legal framework. Sanctity of contracts is key
for us demanded by Foreign investor.
The irony is that Venezuela's need for foreign investment
in its oil industry will probably only increase. "That means
the country will have no choice but to open even further to
private international capital.“
Chávez supporters counter that the old PDVSA was
staffed by overpaid executives who cared little about using
oil profits to improve the lot of poor Venezuelans. "Now
employees are much more conscious of how important the
company is for Venezuela.
Chávez has even more plans for PDVSA. In February
he signed agreements with Brazil that call for
Petrobrás (PBR), the state-run oil company, to help
develop Venezuela's production and refining capacity.
It's part of Chávez' dream of creating "Petroamerica,"
a Latin oil-and-gas giant controlled by the region's
state-run oil companies. It may be far-fetched -- but
it's abundant proof that Chávez' aggressive oil
diplomacy has just begun.
Goose and the Golden Egg
A common saying is “Don’t kill the goose that laid the
Hugo Chavez did the same to Venezuela’s Petroleum
Chavez reaped short term “profits” for the government, but
in the long run he will have much less money with which to
finance his social programs.
Chavez can only hope for much higher oil prices, or that he
can convince foreign firms to come back and set up shop
after previously stealing their assets. he can continue to
seize assets and dig himself into an even deeper hole.
Chavez has started a downward spiral that can only be
corrected by a massive infusion of cash back into the
industry; cash that he no longer has.
Venezuelan's Government attitude towards FDI should be important in
deciding where to locate foreign activities and where to make foreign
Venezuelan Government should note that MNCs are concerned in
investing that have permissive policies towards FDI.
A firm considering FDI in Venezuela should provide an opportunity to
negotiate specific terms (multilateral agreements*) of the investment
with the Government.
* Sets the parameters under which negotiations can proceed to remove impediments to cross border investments