On the 27th November this year the Venezuelan company Grupo Orinoco and the International Centre for Energy and Environment (CIEA) of the Institute of Superior Administrative Studies (IESA) organized a forum, held in Caracas, entitled the “Recuperation of the Hydrocarbons Sector in the Post-Petroleum Venezuela”.
The objectives of the forum:
- Make known a plan for the recuperation of the Venezuelan national petroleum industry
- Explain how this plan would fit within the macroeconomic policy expected for the transition
- Contribute to the formation of the necessary national consensus to reach a successful political transition
The Moderator, Andrés Rojas Jiménez
As may be appreciated given the difficult situation that Venezuela is passing through at the moment, the forum should be considered to be a very important event, presenting key observations and analyses as well as outlining clear and coherent solutions.
The forum opened with some words on the objectives of the forum by the Moderator, Andrés Rojas Jiménez, Social Communicator, Master in Political Sciences, International Hydrocarbons Business Management Programme, Director of Petroguía.
The speakers then gave the following presentations:
“Why Post-Petroleum Venezuela?” by Claudia Curiel, Economist, Master in Public Policy, Doctorate in Political Sciences, President of Mosaikho Analítica C.A.
“Proposal for the Recuperation of the National Petroleum Industry” by Francisco Javier Larrañaga, Industrial Engineer (Andrés Bello Catholic University, UCAB), Postgrad and Doctorate in Chemical Engineering (Univ. Paul Sabatier, Toulouse, France), Executive Consultant in the Energy Sector, President of the Energy Commission of the Engineering and Habitat Academy (ANIH), member of the Grupo Orinoco.
“Financial Perspective of the Recuperation of the National Petroleum Industry” by Ramón Key, Economist (Venezuelan Central University, UCV), PhD in Economics from the University of Colorado, USA, Consultant and professor at IESA, Coordinator of CIEA-IESA, over twenty-five years of experience in the national petroleum industry in the area of Corporate Planning, economics professor in the Venezuelan Central University, and member of Grupo Orinoco.
“The Economic Development Possible in the Transition” by Asdrúbal Oliveros, Economist, Master in Public Management, IESA Advanced Management Programme, Director of Ecoanalítica.
“Key Actors in the Recuperation of the National Petroleum Industry” by Miguel Bocco, Civil Engineer, MSc in Civil engineering, Advanced Management Programme, founder and former President of Vepica; and Luis Eduardo Paul, Mechanical Engineer, Postgrad in Petroleum Economy, former President of the Venezuelan Petroleum Chamber, President of Grupo OTEPI.
Closing Words by Arnaldo José Gabaldón, Civil Engineer (UCAB), MSc in Hydraulic and Environmental Engineering, University of Stanford, USA, Doctor Honoris Causa (UCAB), Former Venezuelan Environment Minister, Titular Professor UCAB, Coordinator Grupo Orinoco.
Here follow summarized extracts from the presentations:
The objectives of the forum, Andrés Rojas Jiménez:
- To make known a plan for the recuperation of the Venezuelan national petroleum industry (NPI). The NPI is the essential motor of productive activity and the rehabilitation of which will be indispensable for overcoming the national crisis.
- To explain how this plan would fit within the macroeconomic policy expected for the transition.
- To contribute to the formation of the necessary national consensus to reach a successful political transition.
“Why Post-Petroleum Venezuela?” Claudia Curiel:
The intensity of the crisis that is occurring in Venezuela leads to a search for solutions. During the time that the country has been immersed in the agenda of the political model of Socialism of the Twenty-First Century, and adding to this the accelerated collapse in various orders, the world has followed on in its course, marked by profound political, economic and technological developments. Within this process the world energy matrix has seen important changes.
Once Venezuela manages to overcome the present crisis it will not be possible to avoid asking “What will be the route it takes?” One cannot be limited to the analysis of resources or of flows. One has to think in terms of a post-petroleum Venezuela, not because there is nothing else that can be done, but because it is the best long-term option.
It is worth asking oneself whether Venezuela has truly been a petroleum country, or whether it has concentrated on living off the petroleum rent.
Without question, petroleum rent has played a central part in the characterization of the country, from the power and role of the State to determining cultural phenomena.
Post-petroleum Venezuela is an invitation to see whether a country is viable when it has the same configuration that was shaped through petroleum rent.
On this reflection, as a necessary element to propose an alternative development model it is proposed to revise some fundamental paradigms that characterize Venezuela and also put forward a matrix of interrelationships that would allow the building up of a prospective exercise starting out from the present situation of the country.
Within that matrix, the principal challenges that should be put on the agenda in terms of economic, social, environmental and institutional questions will be under revision, as well as the fundamental dynamics that link these areas.
From the resulting concept, plans for both the construction of roadmaps and outlines for public policy can be proposed. The gaps between the Venezuela of today, that which emerges from the crisis, and that which it is possible to build have to be understood in order to have an adequate response from the political point of view with respect to political agreements.
Post-petroleum Venezuela invites us to understand how we can insert ourselves into the dynamic of the world that keeps on advancing without us. It is not impossible. But if we do not conceive it, we will not be able to achieve it.
“Proposal for the Recuperation of the National Petroleum Industry” Francisco Javier Larrañaga:
The recuperation of the national petroleum industry, NPI, is imperative, since its fiscal contribution will be determinant in stabilizing the economy and overcoming the national crisis.
This recuperation should be carried out under a strategy of active participation of private capital, since the shortage of internal financial resources and the accumulated technological gap make it indispensable to massively recur to national and international private investment.
The critical state of Petróleos de Venezuela (PDVSA) and the decrease in national energy security leads one to think that even though Venezuela has enormous reserves of hydrocarbons there is little time to exploit them before the end of the petroleum era.
In this sense, strong early victories will be required to obtain secure and opportune supplies to the internal and international markets – a key aspect for the recuperation of confidence on the part of clients, partners and citizens.
The plan starts with a proposal of guidelines for the political and energy transition that would include basic definitions with regard to:
- The financial situation of PDVSA: revision of international agreements and non-petroleum programmes, deciding on the production goal, physical and operative rehabilitation of the industry.
- Legislation: to facilitate the recuperation of production critical changes should be made to the Organic Hydrocarbons Law and a Hydrocarbons Regulating Entity should be created in a process of opening to private national and international capital.
- Give impulse to economic reactivation: new role of the national and foreign private sector “active participation in the technological and financial opening” in all the value chain; reformulation of the exploitation project in the Orinoco Oil Belt (Faja Petrolífera del Orinoco, FPO); recuperation of production in traditional areas; supply of fuels to the power industry; special stimulus for the petrochemical industry and an increase in private participation in the said industry.
- Energy Transition: creation of the National Energy Council; revision/validation of Venezuela’s commitments on global climate change; impulse for the gas industry; better use of associated gas; programme of energy efficiency; development of renewable energies and revitalization of social and environmental management.
To complement the above-mentioned policy guidelines, three matters of great importance are dealt with: 1) phases and scenarios for the recuperation of the industry; 2) institutional requirements; 3) critical aspects of implementation.
Here follows a body of detailed proposals for the operational and financial rescue of the NPI, with the active participation of the national and international private sector so that the aims of the recuperation can be complied with in the following areas:
- Human capital and organizational transformation
- Corporate safety culture and operational trustworthiness
- Environmental impact. Sustainability
- Corporate security
- Increase in hydrocarbons production capacity
- Recuperation of installed capacity in refining, upgrading and petrochemicals
- Trustworthy and opportune supply of hydrocarbons to the internal market
- Recuperation of commerce and supply strategies
- Redesign of processes and organizations
- Revision of alliances and compromises entered into and in execution
All of these actions and initiatives are sustained in a group of columnar strategies, amongst which stand out:
- Positioning Venezuela as a very appealing option, attracting qualified people, all the technology and private capital necessary to reach such a goal.
- Leveraging value creation by the increase in hydrocarbons exploitation:
- Separating the PDVSA arrangement from the development of production
- Recuperating the Model of Operational Excellence.
- Developing conventional crude as a priority, with private investments via a National Hydrocarbons Agency (ANH), and concentrating PDVSA activity in existing areas.
- Recuperating installed capacity in the FPO and executing low-cost remodeling with the maximum participation of partners. Give impulse to new uses for the FPO though Science, Technology and Innovation (CTI).
- Protecting at all costs the heavy crude market of the Gulf [of Mexico].
To conclude, resuming the principal challenges and opportunities of the NPI’s recuperation in the following terms:
- Confront the obstacles and the causes of the crisis that the country is experiencing through a new policy and model of petroleum management.
- Rescue the NPI’s positioning so that it acts as a catalyst of the economy, providing essential foreign exchange and satisfying the energy needs of the country.
- Make best use of the “window of opportunity” of moderate petroleum income (less than 30 years) in order to build a competitive and diversified economy.
- Adapt to the dynamic of the international petroleum market, oriented to the growing use of renewable energies.
- Achieve a progressive and opportune energy transition, as an opportunity for the diversification of the national economy centred in its human and energy potential (“mindfacture”).
“Financial Perspective of the Recuperation of the National Petroleum Industry” Ramón Key:
The severity of the present economic crisis is owed in great part to the collapse of the petroleum industry. The NPI’s operational results pointing to the decline in crudes production can be observed since the year 2006 when the operating agreements were reverted and the strategic associations in the FPO were renegotiated.
Between 2006 and 2014 a reduction in the indicators of total factor productivity of over 60% was experienced. This fall in productivity is at the same time the result of the economic and social model in force since 1999, the so-named Socialism of the 21st Century where the company was assigned a role of operator and financier of social policy and of development.
This model, being centralist and statist creates a paradox where all society makes itself even more dependent on petroleum resources, but at the same time weakening productivity and petroleum production.
This situation was further made worse by the implicit energy subsidies (98% subsidy for the internal market on comparing it with opportunity costs), which weakened the sector’s cash flow and the capacity to finance infrastructure for production and refining.
The recuperation of the NPI supposes that the state petroleum company returns to its original role of operator, that para-fiscal pressure is eliminated; upstream, that the participation of the private sector is increased; downstream, that the financial and non-financial debt is renegotiated, and that the implicit subsidies for the internal market are dismantled.
What is to be highlighted in relation to these “levers of recuperation” is that they should be activated simultaneously. No single one of them by itself leads to the solution of the NPI’s financial problems. An integral focus should prevail in the sector’s reforms. The opposite supposes a greater deterioration of the sector and the negative consequences of this on the well-being of the population.
“The Economic Development Possible in the Transition” Asdrúbal Oliveros:
Venezuela finds itself in a social emergency without precedent that continues accelerating as the government recurs to the only strategies that allow it to survive without making a change to the economic model that brought the country to this situation. The import cuts on the one hand, and the fall in real salaries on the other are the most clear illustrations that the government has decided to place its survival above the deterioration of living conditions of the Venezuelans. In this way, without the possibility of recurring to international help and with credit markets closed, the country has been led into a profound humanitarian crisis the consequences of which are still unknown.
To face the emergency, Venezuela will need in the most short term to re-establish the imports of goods and services in order to cover the basic needs of the Venezuelans with regard to foods and medicines, as well as to supply the raw materials for what remains of the productive apparatus. This emergency puts the country in a true dilemma, since all the Republic’s reserve assets have been used up, and the little that remains to this date could be consumed between this moment and the occurrence of the political transition.
Taking into account price projections in the petroleum market and the levels of Venezuelan production and exports, to bring imports of goods and services to the level of the year 2015 (US$50,000 million) maintaining the service of the debt as much financial as to the Joint China-Venezuela Financing Fund (FCCV) would provoke an external gap greater than US$40,000 million. This figure does not take into account the investment requirements needed to detain the productive decline in our petroleum fields. Neither does it include what is required to recuperate the electrical infrastructure of the country, which in its present condition has constituted one of the principal restrictions on growth. Not included here are the previsions to pay the pending demands in the International Court of Arbitration for the concept of expropriations. Nor does it include the enormous commercial debt accumulated with all the chain of suppliers through the figure of Authorizations for Forex Clearance (ALD) pending. And this is only to name the most outstanding commitments amongst those that are known. The experience of failures in other countries that have adopted policies of a communist or socialist cut of the character which have been implemented in Venezuela, suggests that there could exist other commitments acquired behind the back of the nation which will go on appearing once the political transition occurs.
Something similar happens in the fiscal area, where the implementation of a social protection programme is urgently needed through a direct subsidy that would allow the rescue of families in situation of need, whilst growth recovers and the bases are established of a new social policy. This programme should be financed within a context of a fiscal deficit of more than 10% of GDP, in essence financed with monetary expansion by the Venezuelan Central Bank (BCV).
Venezuela should focus on the production of tradable goods and services, on the decentralization in the taking of decisions, in fiscal transparency, in the diversification of investment opportunities and on the gradual decrease in the dependence on petroleum; in an environment where the State is the guarantor of respect for private property and for other political, civil and economic liberties. Fiscal management should be more efficient and transparent, for which the unification of the national treasury is required which would bring State income and spending back into public scrutiny, and be subject to formal mechanisms of accountability. In this sense, in the Budget Law ordinary income should be determined according to a frank estimate of the price of a barrel of petroleum, and not according to a fraction of this figure as has occurred over past years, generating serious distortions in fiscal policy. The process of reorientation of fiscal management should be carried out in a gradual manner and with much caution. In the same way, and within the previous parameters, the transfer of resources to the states and municipalities should be guaranteed, complying with the upper limit established in the Constitution of 20% of ordinary income of the budget for the concept of budget distribution to states and municipalities, the Situado Constitucional.
Taking into account that it does not correspond to the State to be the only provider of goods and services, growth of the of private productive activity should be promoted in an environment of legal security and economic stability favorable to investment, thus turning into an increase in job creation and into a substantial improvement in the productivity of the Venezuelans. Likewise, it does not correspond to the State to fix the prices at which each good or service should be sold, and for this the policy of price controls should gradually be made flexible, by consensus and contingent, recognizing the existence of inflationary pressures of fiscal and foreign exchange origin and the possible distributive effects of the liberation.
Foreign exchange policy should be oriented to the unification of the distinct markets and mechanisms that facilitate Venezuela to sell its products to other countries and produce for internal consumption and investment. Just as important is the solidity of the institutions, which will protect the economic system from the volatility of petroleum prices, guarantee the prudent use of the income that will generate and promote the development of new sources of energy. These institutions will have to provide stable conditions so that the productive forces can aim at long-term scenarios, with clear rules for the economic decisions of the State and for the application of the regulatory framework to which the private actors will be subjected.
In order to tackle the gaps of the magnitude that have been described here and establish the bases for reconstruction, Venezuela needs to recur to all possible methods of financing, including the multilateral banking system – the International Monetary Fund, World Bank, Inter-American Development Bank, Development Bank of Latin America – CAF, organizations for cooperation and humanitarian aid, bilateral loans also, and programmes for the attraction of investments in key areas, as for example petroleum, as well.
It is necessary to build a wide front for the recuperation of Venezuela that will allow us to reform the economy and reestablish the system of incentives for work and production, whilst the enormous deficit of social attention and inherited humanitarian crisis is attended to.
“Key Actors in the Recuperation of the National Petroleum Industry”
Miguel Bocco:
He gave a brief description of the change that has occurred in the transformation of the foreign companies in the country into national companies and their behavior with the Venezuelan companies that tried to convert into suppliers of services, especially engineering, which until that moment was provided by companies from abroad.
In that process it was necessary to meet in order for each side to find out the possibility of using the services of national engineering companies for the projects of the industry; at the same time, the Venezuelan personnel in the operating companies did not have the experience of the national groups that were trying to lend those services. Long discussions led to national participation in the engineering of PDVSA’s operators without putting their functioning at risk.
The present situation has changed, and the Venezuelan firms are being contracted abroad as a result of the decrease in opportunities in Venezuela, a situation that would reverse itself as soon as a change in régime is produced that assigns the required priority to the participation of the national private sector in the recuperation of the hydrocarbons industry.
Luis Eduardo Paul:
The dramatic situation of the NPI, which puts it in the worst moment of all its history, can only be reverted through an aggressive push for the incorporation of the national and international private sector into all of the operations of the industry. It is not a question of privatizing PDVSA but incorporating private companies in exploration and production activities and in the management of operations and in the handling of production installations, of transport and processing of the hydrocarbons, with clear rules and with adequate incentives to attract the interest and the necessary capital for this purpose.
The National Hydrocarbons Agency (ANH), which has been proposed as the public autonomous regulatory entity of the hydrocarbons sector, would be the call to define the reach and the required mechanisms for the participation of the private sector in all areas of the industry.
The experience of the petroleum opening (Apertura Petrolera) during the 90s represents a reference of the first order for starting this new stage. The results obtained were extraordinary and, in our opinion, the process can be replicated.
When this started, 25 years ago, PDVSA had already applied a model of organic growth that produced very good results for recuperating and relaunching the industry after its nationalization. However, in order to comply with expansion plans, voluminous capital resources and technology of a much higher level than that available were necessary, and it was from there that came the initiative to attract private capital.
If then, that was necessary to grow, today it has become indispensable for the recuperation of the industry. What one is dealing with is is an aggressive policy of incorporation of the private sector into the industry as a matter of urgency. This is the formula that can guarantee results in the short- to medium-term, since PDVSA does not at the moment have the capacity to revert the present critical situation.
In conclusion, the foundations must be laid in a very brief period of time in order to start this process of incorporation of the private sector into the industry. And it should be undertaken taking into account the asymmetries that present themselves between the foreign companies and the national ones, which are today very weakened, effectively levelling the playing field and offering an economic environment and incentives that would again allow them to progressively assume an important role in the industry.
Closing Words, Arnoldo José Gabaldón:
Grosso modo, he highlighted that the central message we should draw for the immediate future is that the recuperation of the NPI will be possible insofar that as a society we have the good sense to be able to attract the qualified people and all the technology and private capital necessary to reach such an aim.
“One has to be very emphatic in pointing out that in order to attract the technology and the private capital that we need in such a high amount to recoup our hydrocarbons industry, we will need goodwill, great creativity and above all much honesty, in circumstances in which we have suffered the greatest deficit in this in recent times. We have to conceive truly competitive strategies to be able to excite the investors, that are on hunts around the world, with good business opportunities.”
Sources: Grupo Orinoco: www.grupoorinoco.org ; CIEA: ciea@iesa.edu.ve