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Abstract
Since the early twentieth century, Venezuelas future has been associated with its oil industry and the countrys relation with this resource has been rather uncertain because it has been consistently contributing to socio economic development as well as economic stagnation and declining standards. However, oil has also contributed in underpinning a large range of political regimes in the country. If the relationship between the state and oil in Venezuela is examined in detail, specifically during times of plenty, it becomes evident that the tax revenues from this vital resource have not been transformed into a constant source of growth and social welfare in terms of a structure that favors stability in the democratic system. It can be said that this petro state has not been able to efficiently manage the boom and bust cycles. This phenomenon is characterized with a framework of institutional inducements and policy measures that are inherently present in terms of appropriating external revenue sources. As a country, Venezuela has transformed after it was belatedly institutionalized during the 1930s although it continues to be characterized with perceptions that stem from the ways in which it makes its living; in terms of having assumed the role of collecting and distributing income instead of creating growth opportunities in other economic sectors. Venezuelas economy has demonstrated such patterns during times of boom and a major difference between the present boom and that of three decades back is relative to the enhancement of the negative impacts of the petro state.
Introduction
Venezuela is an oil producing country since 1914, when the first oil well was discovered in Mene Grande area in the Coast of Maracaibo Lake, producing 24 barrels per day (bpd). In 1929, just fifteen years later, Venezuela was the second world oil producer in the world. Today Venezuela has been certified by the Organization of the Petroleum Exporting Countries (OPEC) as the first world country with most proven reserves (296 Billion of barrels), surpassing Saudi Arabia that hold this position for many years, (OPEC 2010-2011, p.22).
The role played by Venezuela in the past as a sure oil supplier and the actual certified oil reserves can provide a picture of the future strategic position of Venezuela in the World Energy market, and the importance of preparing an analysis of Venezuelan national oil company (PDVSA) to define in which direction the oil business is heading and its future perspectives.
Venezuela, a South American country was a founder member of OPEC. According to Lugo (1994), this organization was created in September 14, 1960 by Saudi Arabia, Iraq, Iran, Kuwait and Venezuela, with the firm intention to break the oil prices monopoly from the seven oil companies dominating the oil world market. After an amicable agreement, Venezuela decided to nationalize all the oil business assets from Exxon, Shell and Mobil. According to Bye (1979, p.58), the nationalization of oil in Venezuela was clearly one of the most important and far-reaching nationalizations so far to be implemented by a Third World government . In addition, Bye (1979, p.59) mentioned that oil has totally dominated the countrys economy; and oil activity has been totally monopolized by the worlds oil giants. On this regard, by 1975 oil income for Venezuela represented 77 percent, and the year before was 86 percent, for that reason this country had been heavily dependent of the revenues from the oil business and they wanted to have more control on their most important resource.
In being the national oil company of Venezuela, Petróleos de Venezuela (PDVSA) is the biggest energy producer in the country. It is vertically integrated and carries out large scale exploration and production in oil and natural gas. It also controls internal as well as international refining activities and markets oil and gas products nationally as well as internationally. According to the The Petroleum Intelligence Weekly, PDVSA is the fourth largest oil company in the world (Petroleum Intelligence Weekly, 2008). PDVSA is more than a business entity because it is now widely acknowledged that it serves as the main financier for Venezuelas President Hugo Chávez. It is estimated the PDVSA provides President Hugo Chávezs government with almost 48 percent of its combined revenues (PDVSA, 2011) and supports many of its developmental activities. In fact, the companys long-term business strategies are directly linked with the governments vision for the future. The government relies on Petróleos de Venezuela for funding and implementing a largely interventionist policy that has a number of goals. The inflow of huge hydro carbon revenues has allowed the Venezuelan government to finance programs to initiate social programs, particularly for lower classes. Such revenues have also been used by the government to strengthen support networks and to take over economic entities that have the potential to threaten its existence.
The efficacy of these strategies is not certain because it depends on prevailing oil prices. In fact the present hydro carbon revenues have been maximized at the cost of investments in oil and government control on prices has hidden the apparent disparities within the economy. Consistent increase in spending on social welfare has resulted only in marginal social incentives and it is evident that if there is a crash in oil prices the governments social efforts will be jeopardized. Petróleos de Venezuela is considerably different from what it was before President Chavez came to power. It was established in 1975 and by 2000 was transformed into a big global company with a strong technological base but till this time there was not much state intervention. Rivalry between President Chavez and PDVSA intensified after the election in 1998 that culminated in a massive strike against the state in 2002. Following the strike, almost 18000 workers were removed from their jobs that included many top engineers. After the strike the company surfaced as an entirely transformed organization; although the operational framework did not alter much, there was loss of institutional expertise and the companys management became allied with the government. Government obligations on PDVSA increased considerably and the company gradually transformed from being commercially viable in 1975 to one that was increasingly amalgamated with government priorities.
Petróleos de Venezuela was established by the government to strengthen state control over the oil industry and the companys management became the main motivating force of the nations oil policy. Nationalization was initiated in 1975 by President Carlos Andrés Pérez who introduced legislation that established Petróleos de Venezuela from the assets taken over from private oil companies in the country. However, Petróleos de Venezuela continued operating in a free market environment and its three subsidiaries, Corpoven, Lagoven and Maraven, competed against each other just as business normal business opponents (Mares and Altamirano 2007). The management continued to work independently without pressure from the government and began controlling stakes in countries such as Sweden, UK, Germany and the US. PDVSA also started targeting international customers and in 1986 bought CITGO, thus grabbing distribution channels for oil products in the US. By 1999, PDVSA controlled about 13000 CITGO gas outlets in the US, which accounted for almost 10 percent of the total American market (Economides, Martínez, and Puky, 2007). Additionally, PDVSA adopted a global strategy that allowed it to become autonomous by enhancing its share holdings that were free from government control.
After nationalization, the company had started strengthening its relations with global oil companies. This practice was known as apertua and focused on three aspects:
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Enhancing productivity in existing oilfields
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Developing marginal oilfields
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Increasing investments in non conventional oil
However, all these elements became reasons of strong arguments and debates with the administration of President Chavez. The government argued that contracts established by PDVSA with international oil companies (IOC) were depriving the country of considerable amount of revenues despite the fact that such contracts were necessary to enhance investments in the sector. The PDVSA management was of the belief that by outsourcing work to international oil companies the government would benefit on the premise that the oil sector would eventually lead to growth in other sectors of the economy. According to Tinker-Salas (2005), there were widespread beliefs in the government that the PDVSA had become a state within a state and was giving preference to international oil companies at the cost of tax revenues that could have accrued to the government. Chavez was elected on the strength of his allegations that the PDVSA had compromised with the interests of the lower classes that dependent on government assistance. After being elected, President Chavez started introducing policies that would eventually transform the PDVSA.
In Venezuela, a major difference between the national and multinational oil companies pertains to the difference in the structure of establishments. Multinational oil companies are characterized with high technology and willingness to make huge investments in the oil industry while national companies are mostly dependent upon the meager revenues they get from their low technology operations after they have met revenues mandates from the state. For national oil companies to be successful and viable they have to reinvest a major part of their revenue. It became known from the survey that some national oil companies have started to use better technology in order to increase revenues and productivity. Thus, it is true that although most national oil companies including PDVSA continue to be in the grip of state interference, they are taking initiatives to adopt better technology and to increase revenues. The international oil industry is characterized differently in the context of global operations as compared to national companies in developing nations although PDVSA is different in terms of technology use and revenues in view of its huge size and global operations. In being an emerging economy, the oil industry in Venezuela has not utilized the full potential of the oil sector in terms of using technology, investments and appropriate distribution of funds.
The high potential of the oil industry in Venezuela in serving the long-term interests of citizens is evident from the fact that it is one of the biggest oil companies in the world with potential for massive revenues that can be utilized for the welfare of the country and its people. Although it cannot be said that there are no barriers to adopting better measures in PDVSA, the present environment in terms of state role and availability of adequate funding are making it difficult to improve the situation.
The experience of Venezuela relative to the recent oil boom is suggestive of the presence of ineffective public institutions, weak macro economic management and unsatisfactory long term economic accomplishments. The major factor that explains the governments selective management of the huge oil revenues is the countrys political framework. Given President Chavezs high political rating, it appears the main issue relates to the electoral mechanism in terms of accountability as people in the country do not have complete information because of which elected politicians increase their benefits by following short sighted strategies. Because oil resources provide funding for such ineffective strategies, the abundance of natural resources assists in strengthening the position of the incumbents, thus rendering the mechanisms of democratic accountability to become ineffective. This hypothesis is also evident from the literature relating to the relationships amongst economic performance and political organizations in resource rich nations. Such characteristics provide reasons to conduct further research in the context of comparing performance of nations and regions.
The government in Venezuela has depended heavily on PDVSA to finance and implement several short-term goals. However, this strategy cannot succeed for long because the government has set its revenue collections goals on the higher side as compared to other mechanisms of revenue collection. Additionally, many of the government systems used in collecting this revenue, such as extra budgetary mandates, prove to be very uncertain for Petróleos de Venezuela to strategize efficiently. The long-term objectives of the government relative to PDVSA are not credible because more emphasis is placed on prices than on productivity. Moreover, this policy cannot succeed in the long term as the government does not have adequate negotiation strength in OPEC in restraining members from production. Another factor is that there are many things that are not within the control of OPEC such as demand for oil and supply alternatives that have a bearing on future oil prices.
The main objective of the oil sector in Venezuela is to provide for President Chavezs immediate finance and implementation needs. Although the state proposes to reform the constitution so that Chavez can remain President for a longer period, its strategies for collecting revenue relates primarily to the short term. In 2007, PDVSA had to comply with state mandates to give huge sums of money, which amounted to almost 80 percent of its total revenues. This short-term strategy has perhaps been adopted to prioritize immediate goals in comparison with long term sustainability of revenues. This has become possible because President Chavez enjoys almost complete control over the process of revenue disbursement. Chavez believes that by spending currently on social objectives and on nationalization, will allow him to strengthen his rule through such social indicators and enhanced government authority over the economy.
Venezuela has been presented with a large number of infrastructure challenges in the context of providing adequate motivation to PDVSA to expand its operations and improve its efficiency, albeit all benefits will go to the government under the present circumstances. Moreover, management in PDVSA is not completely ready to recognize and comply with global standards while handling global functions because of government mandates and interference. A major concern of PDVSA is to address issues pertaining to it global performance by using the latest technological options that are presently being used across the world. Global oil companies have established facilities in a number of oil producing countries so that economies of scale can be utilized in a competitive environment. Most respondents felt that PDVSA is not operating efficiently and measures should be taken to improve its performance and image within the country as well as internationally. Functions need to be handled with competence and by trained people as per norms established by global bodies and the standards set by the global practices. Respondents agreed that PDVSA performance had declined after President Chavez came to power. Good performance in the oil industry can be achieved only if quality management practices are adopted in keeping with the countrys circumstances relative to the international environment.
A major way in which the Venezuelan government forces Petróleos de Venezuela to share its funds with non government entities is to sell in the domestic market at highly discounted prices relative to global prices. Several governments in Venezuela have been subsidizing petrol in view of political aspirations. The government feels that such a policy provides delivery of oil benefits directly to citizens. The Chavez government has been collecting huge revenues from Petróleos de Venezuela but it has failed to increase revenues in the short term. Additional risks have been created that will harm PDVSA in the long term. Mechanisms of budgetary revenue collection have allowed the government to get enormous revenues but the uncertainty and huge size of these mechanisms have the potential to render the investments non viable.
The major factor that explains the governments selective management of the huge oil revenues is the countrys political framework. Given President Chavezs high political rating, it appears the main issue relates to the electoral mechanism in terms of accountability as people in the country do not have complete information because of which elected politicians increase their benefits by following short sighted strategies. Because oil resources provide funding for such ineffective strategies, the abundance of natural resources assists in strengthening the position of the incumbents, thus rendering the mechanisms of democratic accountability to become ineffective.
Transition to Stronger State Control
President Chavezs government passed the Gas Hydrocarbons Law in 1999 that was considered to be investor friendly but in due course the government started withdrawing PDVSAs apertura policies, obviously to the disappointment of the companys management. Rather than agree with the PDVSA plans for increasing oil production, the government directed the company to limit its production as per OPEC quotas, obviously to increase oil prices. The Hydrocarbons Law was passed in 2001, which required that foreign investment will have to be made by way of joint ventures in which PDVSA will have majority stake. As a result, royalty rates for new partnerships in the sector shot up from 1 17 percent to 20 30 percent although a few tax rates were reduced. The government literally forced international oil companies to shift from the old apertura agreements so that they could be covered under the Hydrocarbons Law of 2001. Such developments did allow PDVSA to have more control in the oil industry but there was a lot of opposition from within the company because it was felt that government intervention will lessen investments in the sector and put the companys long term profitability at risk.
The government was determined to alter PDVSAs organizational culture and started introducing changes within its working systems. President Chavez appointed a new board of directors in 2002, which was considered illegal by the management because they alleged that political allies were given entry in the board and merits were not considered. This action angered the companys employees and there were a series of strikes in 2002 and 2003 against the government. These strikes were aimed at starving the government of funds and to eventually remove it from power (Mares and Altamirano 2007). Following large scale violence and government excesses on protesters, the military revolted against President Chavez and took over control from him. However, after some tine, the military restored him back to power because pro Chavez supporters revolted against his removal. Very soon Chavezs popularity increased and a second strike was launched in December the same year, following the Supreme Courts verdict against holding referendum to test Chavezs popularity. This strike too was a failure and people began blaming PDVSA for harming the economic interests of the country. In having survived the strikes, the government took up the task of further reshaping some areas of the company. Over 18000 engineers were fired but Chavez took steps in ensuring that the new PDVSA was loyal to him.
The main argument of this paper is that the Venezuelan government had used practices to strengthen the petro state whereby a single resource was used as the main pillar of revenue and as the major means to govern the country. Chavez put an end to the traditional independence of the oil industry that resulted in considerable loss of revenues to the company as well as the nation. Oil policies are known to strongly impact the socio-political balance in any country. Although the flow of money has created some changes in the Venezuelan economic environment, it has not impacted development substantially. Previously, oil was used by Venezuelan leaders to create alliances and impact global relations; President Chavez used oil intensively to set up anti-capitalist and anti-American alliances. These alliances have created energy arrangements that have led to the creation of regional blocs in Latin America, which are now known to be favoring alternative world orders.
In this context, it is meaningful to examine issues relative to the links between economic performance, mineral resources, the governments competence levels and the process of democratization. It is also important to analyze the historical significance of oil in transforming Venezuelas political systems prior to 1998. Venezuela is a typical example of a petro state whose major revenues come from abroad by way of oil sales that form at least 40 percent of combined exports and 10 percent of the Gross Domestic Product. Petro states are largely dependent upon resources that are dispensable, capital intensive, susceptible towards external factors and upon factors that offer high levels of monopolistic incomes. The economic performance of petro states is mostly considered to be poor and the oil wealth created in these states tends to have negative impacts on the processes of democratization and on maintaining democratic regimes.
PDVSA actual situation
All the foreign oil companies operating in Venezuela were nationalized in 1975 and a unique state oil company was created called Petróleos de Venezuela (PDVSA). 1998, PDVSA was the best State managed oil company in the world and the second private oil company worldwide, as measured by usual management practices. Actually, PDVSA is the fourth larges oil company in the business (PDVSA, 2010 p.22) and controls carries out its activities through a vertical integration process in upstream, midstream, and downstream areas.
PDVSA has lost its reputation of being the best administered oil company worldwide and one of the most efficient oil firms in the world market because there has been considerable deterioration in its services and productivity. The companys volume of oil produced has decreased from 3.5 million of barrels in 1999 (Espinasa, 2006) to the actual production volume of 2.8 million of barrel per day presently (OPEC 2010, p.28). The refining capacity in Paraguana Refining Center, which is the most important in the country, has been reduced from 720 thousand barrel per day (tbd) in 2006 to 678 tbd in 2010 (OPEC 2010, p.37). The gas importing process increased from 0 million cubic meter (mcm) in 2006 to 1.446 mcm in 2010 (OPEC 2010 p.60). The oil capacity tanker transportation fleet decreased from 1348 deadweight tonnage (dwt) in 2006 to 1091 dwt in 2010 (OPEC 2010, p.64). The operational cost per barrel has almost doubled from $4 per barrel to more than $8/barrel (Espinasa, 2007).
The number of completed wells has declined from 1508 in 2006 to 890 in 2010 (OPEC 2010, p.26). According to America Economía (2003), PDVSA in terms of efficiency is now ranked among the lowest of the fifty most efficient companies, far below any of its state owned competitors. Additionally, the numbers of workers have almost doubled with the incorporation of new activities under PDVSA objectives that have no relation with the medullar business of the corporation, which is producing, and processing oil in global markets. The company has moved from a workforce of 52,816 employees in 2006, to 99,867 workers in 2010 (PDVSA 2010 p.41). In addition, and according to the Financial Accounting Report issued by PDVSA in December 2010, the liabilities of the company are 76,451 million $, while the assets are 75,314 million $, with a total assets of $151,765 million (PDVSA, 2010 p.4). In other words the financial situation of PDVSA in 2010 shows that the company is not financially solvent.
These findings provide an initial idea of the delicate financial situation of the company, as there is evidence of the firm weak performance and the results are going bad by the day. Consequently, the roots and causes of such poor performance is the basis of this research work. It is known that Venezuela continues to be and will be an important player in the energy worldwide market in the fossil fuel area. Therefore, the author of this research aims at looking for answers to this situation. Some initial questions that need to be examined are: i) what kind of decisions have been taken in the company?, ii) what are the reasons/fundamentals behind such decisions, iii) who and why have been taking these decisions? and especially, iv) why has PDVSAs performance been affected in such a way that its productivity, efficiency, and efficacy have deteriorated during the past years.
Research question
It is believed that the answers to the above questions, are somehow connected to the new socialist government that came into power in Venezuela in 1998. The government started implementing structural and organizational changes within PDVSA. During his 1997 political campaign president Chavez argued that PDVSA was a State within the State and according to Severo (2009), the new government changed 6 Presidents in five years with the firm intention to break the corporations organizational structure and drive it towards more direct state control from the Presidency of the Republic Such attempts have adversely impacted the performance of PDVSA in terms of oil production, overall productivity, and low revenues. All these issues are apparently created because of political factors in the context of a company that was state owned but administered with private optics before year 2000.
Therefore, the objective of the present dissertation is to analyze if there are links between the political decisions made by the Venezuelan Government since the year 1998 in relation to PDVSA and its performance. This objective becomes more pertinent in view of the poor financial and operative performance of PDVSA, which have damaged PDVSAs global reputation as a financially solvent firm and a well administered corporation. The author has researched all these aspects and their causes, defined them and reached some concrete conclusions that help in gaining a better understanding of the factual circumstances that PDVSA has been going through in the last few years since President Chevez came into power. The research has also examined the major challenges for the future in PDVSA.
Therefore, the basic research question of the dissertation is:
Which were the decisions taken by the Venezuelan government that has affected the overall performance of PDVSA in the last 10 years. This main question will be supported by an analysis looking at the political, financial and organizational dimensions. Since its creation in 1976, PDVSA was a state company but was managed professionally as a private owned firm But the political interference by President Chavezs government has caused a detrimental status in the companys finances as also in the organizational structure of the corporation.
The topic for the present dissertation proposal is to evaluate the link between political decisions in the conduction of PDVSA as a corporation and the consequences from such decisions as clearly presented on the previous section. Thus, this research will focus in the firm performance using a triangulation approach to gather information that will be used to evaluate, analyze and generate a sound critical analysis on the proposed topic. The author then, will use three different strategies to collect the required information. First, the analysis will start with a case study, which is a qualitative method that focuses in specific topics, in this case PDVSA. There are important sources of information available about PDVSA and the oil industry in Venezuela, such as specialized magazines, reports from energy international agencies and financial and business reports from the corporation itself that can provide information related with the research topic. The second strategy to collect information is the use of questionnaires which is a quantitative method that will help to compile the opinion of experts and related specialists in the oil and gas area.
The third strategy to be followed is going to be based on a deep review of existing literature in the area, where academic, professional and any other relevant sources will be the basis of this research. The information to be collected will be based on the firm finances statements, income and revenues, organizational structure, operational performance, and infrastructure. The literature review is very useful for understanding such complex phenomena, especially in the context of the internationalization process of the management of multinational enterprises. When all this information is compiled, it will be used to prepare a critical and objective analysis of the PDVSAs performance and its relationship with the government political decisions that lead to those negative results.
Feasibility
The author has compiled all the information related to Venezuela and PDVSA oil business and has prepared an analysis based on existing academic literature like the work developed by Espinasa (2006), Baena (1999), Giusti (1999), Monaldi (2010), OPEC (2010-2011), and PDVSA (2010), and others relevant sources. In addition, the author is quite familiar with the main research topic as he has worked in the oil and gas industry for over 24 years. Additionally, the author has already started contacting experts in the area that will be willing to share their oil and gas experiences that will be used as the basis for arriving at conclusions in this dissertation. It is important to notice that the initial receptivity among experts was high, and it did not take more than three months to complete the research, which is the estimated time frame for the research development and data collection.
How This Work Fits Existing Published Work
A number of authors have analyzed the situation in attempts to understand how the Venezuelan government has managed the oil industry and PDVSA during the last ten years. Many amongst them are against the political measures that affected the industry (see for example: Giusti, 1999; Monaldi, 2007; Espinasa, 2006; and TinkerSalas, 2005). All these authors seem to agree that PDVSA was well managed before 1998, and their financial disclosures where transparent and clear, even though many critics referred to PDVSA as a black box. Additionally, the companys operations were focused toward an increase in the production level and thus towards an increase in revenues.
Others researchers have written in favor of the political measures taken by the government (Parenti, 2006; Severo, 2009; Pirela, 2007), defending the position that drastic changes were necessary to clean the corporation from its internal enemies. Another line of research demonstrates a more neutral position, whereby authors such as Baena (1999) and Billig (2004) limited their work to just presenting their findings and facts. When the author of this research commenced with his research he found that the Venezuelan Government has changed the PDVSA President 6 times in the last 12 years. Each CEO came with new ideas, without following a consistent corporate strategy or strategic business plan This research has analyzed such ideas, programs, and actions taken by these functionaries and determined how their actions affected the corporations performance.
In 1998, there was a change in the Venezuelan government, whereby President Hugo Chávez became the countrys president and he started making changes in the Presidency of the corporation and the composition of PDVSA Board of Directors, with the intention to abort a possible privatization of PDVSA. Chávezs intention was to change the mentality of the top executives that were running PDVSA, which at that time was the 2nd best managed oil company in the world. Chávez appointed a series of loyal
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