If Venezuela government changes, what happens to the oil industry?

It’s a complicated question but in light of everyone speculating on Venezuela’s future these days, I figure I could toss in my contribution. These are just a few thoughts about what will happen to Venezuela’s oil industry if President Hugo Chávez has to leave office for any reason, including illness or death — both of which seem freshly possible with his difficult cancer operation this week. But here’s the spoiler: I don’t think anything’s going to change.

Big investments need stability. It doesn’t matter much to Big Oil whether Venezuela is a dictatorship, democracy, or something in between. What matters is stability. Nobody wants to build on shifting sands. So until things are stable, one way or another, expect investment to remain minimal.

Government-government agreements unlikely to fade. President Hugo Chávez has been a proponent of direct talks with governments, with the resulting agreements playing out in the commercial sphere. Tom O’Donnell has written a lot about how Chávez has gone along with China in a quest to escape the US-led project of a “single global barrel.” The problem with the system promoted by Chávez and the Chinese is that once you abandon market logic, and accept either receiving less than top dollar or paying more than market price for something, there are about 7 billion people who want to take advantage of the situation with a little commission here or there. Today, commission-seeking is a way of life in Venezuela, China and Russia, among other countries. Those benefiting from the system aren’t going to allow a reversion to strict market rules any time soon.

Labor inertia not going anywhere. Speaking of vested interests, there are over 120,000 people on the state oil company payroll — about 1% of the country’s employed persons. They aren’t going to accept layoffs and they will be slow to accept anything that appears neoliberal, such as much higher gasoline prices. Any successor to President Chávez is going to face a lot of public distrust, and a layoff or even an insistence on productivity could easily be condemned as a betrayal of the Chávez legacy.

Gasoline prices not changing. Same principle as the prior one. Fuel price increases are widely seen as neoliberal. I think anyone could start a nice project of teaching the public about the real price of fuel, and over time could make some real changes. But that’s a process of several years. The only person who could quickly raise fuel prices without being called “counterrevolutionary” is Hugo Chávez
In other words, don’t expect changes with a regime change. Slightly longer-term — two to ten years, maybe? Things could change in any direction. But it will take a lot of work in reducing the profitability of corruption, buying off workers, and stabilizing the political system. The only way we could see quick changes in the oil industry is if Chávez himself comes back with a different approach. Which I don’t see as likely.

PS: I think if there’s one thing that could change, it’s the windfall oil tax where all the $$ goes to Fonden. I doubt many Venezuelans know or care about the details of tax policy, and that tax has been the great enemy of the foreign investors. So, since I love to contradict myself, I guess there is one item that could change without much drama, and which would have a major impact over the next few years, starting maybe 2 years after the change was made.

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7 Comments

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7 responses to “If Venezuela government changes, what happens to the oil industry?

  1. Juan Cristóbal Nagel

    Makes sense…

  2. Hmmmm…I think you phoned this one in.

    The real problem is http://settysoutham.wordpress.com/2011/07/26/pdvsa-cuts-2015-production-goals/ – year after year chavismo has failed to cut the deals it needs to bring in the investment it would take to hit its own production goals. Not somebody else’s: Chávez’s.

    As time passes and the fiscal horizon darkens, the Venezuelan state’s negotiating position weakens vis-à-vis those with the financing muscle and expertise to stop the rot in terms of missed production targets. The pressure to sign deals on increasingly favorable terms to foreign partners is going to go from ‘immense’ in 2013 to ‘overwhelming’ in 2014. That’s the dynamic we need to keep our eyes on.

  3. antinoo1

    uen artículo.

    Nevertheless, I think you start from an assumption that is not absolutely real. I don´t see Chavismo withering away with Chavez´ death. I even think that Maduro has a big chance of winning a Post-Chavez election, provided Chavismo doesn´t crumble in the meantime.

    My big question here is whether Chavismo sin Chavez will take the measures needed to keep the country afloat; otherwise they risk their own existence, at their own peril.

    A good theme would be to discuss how imminent is the collapse if a paquetazo is not implemented.

    Now, let´s assume there is regime change, and by that I mean no Pro-Chavez president. “There will be blood”, are the words to manifest what is going to happen when, let´s say, Juan Fernandez will be named new PDVSA´s president. The possibilities of opening the industry to those that were, staggeringly, sacked by the moribund with a whistle are not only a mere thought, but they will be popular clamour, particularly by those of us in the Tascón list (any similarities with the Schindler’s list is a mere coincidence).

    I think that the prospect of regime change will suffice to attract several companies back to Venezuela; relieving PDVSA from its none-oil responsibilities will be enough to get back into business. Another matter is what are we going to offer and what constitutional changes are done in the political sphere to spur confidence. And that entails a government that prosecutes demagogues from Chavez era, that retrieves malign changes, that invests on infrastructure and so on.

    Government-Government agreements will have to be revised, revisited, and I don’t think China will scape to that. Chavez himself made sure the Apertura Petrolera was wiped out the map without even thinking which of these agreements were beneficial, which ones were not. Quid pro quo…

    The workers. 25,000 workers were sacked. We want them all back. Some of them will want to come back, some not. Those who work for PDVSA since 2002 will have to be checked. Let’s call it the Fernandez’ List, are they going to paralise the industry? So we did, to no avail…

  4. Gustavo coronel

    a few comments:
    1. Volumes going to Cuba, Bolivia, Nicaragua, Ecuador, might be curtailed entirely or partially in the short term. This would liberate some 150,000 barrels per day for the commercial market.
    2. Many companies from iChavez’s ideological friends: Belarus, Vietnam, Iran,etc, might leave in the short term. Russian and Chinese companies will wait and see. Some contracts with China might be re-examined.
    3. ExxonMobil, Shell, BP, ConocPhillips might return within the firts year
    4. The top management of PDVSA will change and some ky technical staff will return. The 125,000 employees consist of a core of true oil people and a fat, adipose mass of reposeros. These can be shifted to other agencies where they at least will do no harm
    5.Gasoline prices, yes, will contuinue to be a religious issue, unless a way is foun to establish a two tier price for public mass transport and for individual car and a gradual revision upwards.

    • Thanks, Gustavo. I agree that all of those are possible if there is a non-Chavista government in place. 1. Yes. 2. They wouldn’t leave. They have contracts and want oil. Maybe their commissions would shrink, but if they can actually start pumping oil (!) they can get rich off that, and will be happy. 3. Don’t hold your breath. 4. Yeah, I think you’re more or less right, that is all possible over the course of years. In fact, in a non-chavista government, much of PDVSA’s management would be prosecuted. But that is exactly why we’re so unlikely to see such a government take power. 5. Two-tier prices don’t work for anything. (See SITME.) There are other ways to start raising fuel prices, starting with clear labeling at the pump and in ads showing how much of a subsidy drivers are getting, and what sort of people drive most.

  5. I am with Gustavo on some of this…the only thing is we can be sure there will be a more than important amount of Chavistas trying to sabotage big time. What does this mean? Physical sabotage at PDVSA. Bombs or the like. Killing some minor figures of their own people so as to blame the government.
    Do you know why José Vicente Rangel and others like him kept telling us for years that the opposition was looking for violence and destabilization?
    Because that’s what they would do in the first place and that is what they did in 1989 for the Caracazo (yes, you should ask yourself what several of their guys were doing on those February days).

  6. Setty, Gracias for the plug on my blog – much appreciated.
    – You raise the issues here that are important. (and Gustavo makes some good nuanced point.).

    One thought (I want to wrote a lot more on these issues soon): It is possible things could get quite a bit worse in the oil sector after a change of government. I think it depends on the conditions of the transition. If, say Caprilles won an election this March or April or so, then his administration would likely be a weak government. One should think soberly about the intrinsic weaknesses of the opposition. There is no coherent, experienced national political party of the opposition. It is ideologically diverse/heterogeneous and organizationally at at an early stage of development. When they take over a state with little competent civil service and little competency in the state oil firm, etc., only if the new president comes in with a strong party organization, that has experienced cadre who have worked together for years in the opposition, with lots of links to civil society (mass organizations, unions, etc.) can he appoint people in key posts that can take over hold of the beast (the state bureaucracy and public companies) and put things right in a reasonable matter of time (that is, if they do not face too much opposition from the old Chavista functionaries.

    Aside from this weakness of the present opposition IN-AND-OF-ITSELF, various factions of Chavismo might not recognize the authenticity of Caprilles’ electoral win.

    So, In reality, what would take place after Caprilles is declared the winner is that he and his team would likely enter into negotiations with elements of the military (and perhaps Chavismo) about a transition. Who knows what concessions and understanding might be struck to prevent violence. For example, if it were obvious that elements of Chavismo were going to forcibly oppose the transition by going to the streets, what conditions might the military place on the new administration? They are not going to protect a new administration that is “too radical” in its new policies and just make its work harder.

    The opposition in Venezuela is simply NOT now a physical force in the streets, so it can not now itself enforce an electoral victory. Untill they can prove they can go to the streets in a disciplined manner and enforce the will of the electorate, …like people in the Middle East have done, for example) the opposition is ultimately dependent on the present military and police to enforce its electoral victories

    So, certain types of changes in the oil sector (like bringing back a lot of the people fired from the paro) might simply not be feasible (these are still sensitive issues among people who were on opposite sides of that strike). So too with any major changes in employment policy, in social spending, on nationalizations, etc., etc. A President Caprilles may or may not have the discretion/power to do much. Just keeping the lights on and keeping the oil pumped at a minimal rate could be very difficult…. It already is! Hmmm.