The good, the bad, and the ugly of the oil business in Venezuela
How to look at Venezuela's oil industry? Well, Venezuela has the largest known crude oil reserves in the world. That is the good. And within those reserves, it has an abundance of extra heavy crude oil, which is hard to refine. That is the bad. Within that challenge, the socialist nation has some of the most inept people in the world managing its industry: Venezuelan politicians. That is the ugly.
Venezuela wrestled with this "bad" problem of extra-heavy oil for decades. Luis Giusti was president of Venezuela's national oil company, PDVSA, in 1994, several years before Hugo Chávez was elected president and set the country on its current course. Giusti had two key visions: consolidate the PDVSA sister companies into one, and develop the extra-heavy crude oil Venezuela held in abundance. Giusti created "la apertura," or "the opening," to invite international companies in as partners, each to secure a field with known extra heavy oil with rights to remove as much as they wanted within a period of 35 years. After that, all assets would revert to PDVSA. There were other provisions such as PDVSA having to have a minority interest in a consortium for the production of oil needed to occur within five years of granting the lease. Giusti wanted innovation from the international community to excel over the short-term lease for Venezuela to benefit even more in the future.
The terms were attractive, and the companies did come. For example, one consortium invested over $3 billion to produce and export 195,000 barrels per day of lighter, sweeter crude from this molasses-like fluid. The comparable "go" price of West Texas Intermediate crude oil needed to be at least $14.50 per barrel for the partners to break even in 1998. If the price of WTI were $54.50 a barrel, the margin would be $40 a barrel. If the system operated 350 days a year for 25 years at this price, the return to the partners would be about $70 billion, so many partners were interested. In fact, international consortia built four of these extra-heavy oil–upgraders in the late 1990s and early 2000s. Exports from these upgraders approached 800,000 barrels per day.
President Hugo Chávez tightened nationalization of the oil industry in 2007 much more than it had already been, expropriated some holdings of foreign investors, and all went downhill from there. He got the profits he was looking for, for a time, at least, and those profits were used to fuel his revolution, pay off socialist cronies such as Cuba and Nicaragua, and line his and his cabal's own pockets. Crumbs were left to maintain production and processing facilities of the oil industry that remained. Then the quality of the upgraded oil product became inferior to the time when the upgraders were being managed by the international consortia.
Now the big, bad ugly is unfolding. The incompetence. The unfit people running the industry. The politicization of the industry in place of what had been professionalism. Water has been shut off in my wife's family's pueblos for three months. There are eight-hour-plus rolling blackouts during the day. Venezuelans do continue to buy gasoline at pennies to the gallon. However, they must wait in lines of 20 vehicles or more and are limited to 30 liters per tank, or about eight gallons. As oil production falls more than 50% of its pre-Chávez highs, the bus-driver in charge, Nicolás Maduro, has no idea what he's doing.
Most people do not realize that oil refineries are designed to receive certain crude oils to process into transportation fuels and other products. One reason why the delay of the Keystone pipeline by Obama was such a disappointment is that the U.S. oil industry pre-invested in refineries to receive and process this oil. That is where the big ugly comes in. Venezuela is now importing very light sweet crude from Nigeria to blend with their lower quality product from their poorly managed four extra-heavy oil–upgraders to be able to sell it on the open market. I would like to hear Representative Alexandria Ocasio-Cortez explain the socialist benefits of this enterprise with her economics degree from Boston University.
Correction: Based on an editor's error, an earlier version of this piece misstated the name of the author.
Image credit: Pixabay, public domain, with modification by Monica Showalter.