Diversification is key to reducing national energy dependence
HYDROCARBONS HAVE BEEN THE BEDROCK OF THE ECONOMY, BUT NOW THE GOVERNMENT IS TAKING STEPS TO SWITCH TO A MORE PRODUCTIVE MODEL

RESOURCE WEALTH in oil and gas has been a double-edged sword as 90 percent of economic activity relies on the energy sector

Venezuela has one of the largest reserves of oil and gas in the world. It is of particular interest to the United States, figuring among the country’s four major oil suppliers, alongside Canada, Mexico and Saudi Arabia. It is also far from the hotspots of the Middle East, as well as geographically well-placed for serving the U.S. market.
Venezuela was a founder member of OPEC, and the current government has strictly adhered to OPEC quotas, unlike some of its predecessors. During 2001, daily oil production ran at about three million barrels, whereas capacity is estimated at nearly four million. Slightly more than 15 percent of oil output is consumed domestically, while the rest is exported.

Oil revenues have been the lifeblood of the Venezuelan economy for decades, leading to a degree of over-dependence, which the government is keen to overcome through diversification. At the same time, efforts are being made to maximize revenues through greater efficiency and an increase in value-added products.

EXTENSIVE reserves mean output could well exceed current production, which is restricted by strict adherence to OPEC quotas

The dominant player in the local oil industry is a huge state company, Petróleos de Venezuela S.A. (PDVSA), whose privatization is banned by the constitution of 1999. During the 1990s, however, PDVSA opened up some of its activities to foreign participation, establishing several strategic alliances. All existing operating contracts are guaranteed by the present government, but the new Organic Hydrocarbons Law that came into effect at the start of this year has redefined future foreign participation more narrowly.

Collaboration between the company and the Ministry of Energy and Mines is extremely close. Indeed, the President of PDVSA, Alí Rodríguez Araque – well known on the international circuit because of his term as Secretary of OPEC – was previously Minister of Energy and Mines, and works closely with Rafael Ramírez, the current Minister.

RAFAEL RAMÍREZ Minister of Energy and Mining

“The Ministry brings together all public policy in the energy sector,” says Mr. Ramírez. “Our mandate is everything to do with electricity, oil and gas. Moreover, we cover the mining sector. That is because an article in our constitution says that everything underground belongs to the Republic.”

Venezuela has both advantages and disadvantages because of its wealth of hydrocarbons. “Energy is the basic motor of our economy,” says Mr. Ramírez. “More or less 90 percent of these activities are linked to our energy resources, or stem directly from them. This has been a blessing, but also a problem, in that all our economic activity has been affected by mining and extraction activity, creating a sort of rentier state.”

The Minister believes the new law helps to clarify the situation regarding investment potential. “Basically, it establishes that the fundamental goal of the oil sector should be to incorporate national capital in so-called upstream activities, while downstream activities can forge alliances with private capital through big companies in the hydrocarbons field. That way we will acquire considerable economic potential and big opportunities for foreign investment, because everything related to transport, storage, refining and processing can be done with the participation of private capital.”

Mr. Rodríguez Araque says that more people in Venezuelan society need to benefit from future development and reform in the sector. “Our oil strategy needs to kick-start this change to a more productive economy. Paradoxically, the industry which generates the most wealth for the country is one of the things most alien to the ordinary Venezuelan.”

At the same time, PDVSA, like other energy giants around the world, has to adapt to changing trends in the global market, not least the increased importance of natural gas. Fortunately, Venezuela is well endowed with gas reserves as well as with oil, as Fernando Puig, the President of PDVSA’s gas division, points out.

STRENUOUS efforts are now being made to maximize oil revenue through greater efficiency and an increase in value-added products

“Venezuela’s gas reserves are very important on a world level,” he says. “We currently figure at eighth place in terms of proven reserves. But much of that gas is associated with oil, and so its production depends on the levels of oil production. And much of this gas is used to maintain pressure in the oil wells, to help production.”

However, reserves of non oil-associated gas have been discovered, mainly offshore. The chances of developing those have increased substantially due to heightened domestic demand. Thermal power stations are also likely to be required to supplement or replace some of the electricity generation capacity of hydroelectric stations, in order to meet the demand.
The opening of the gas markets in the U.S. and the European Union is also a big impetus for development of the sector.

Much investment will be needed. “Moreover, a peculiarity of gas is the difficulty in transporting it over long distances,” says Mr. Puig, “unless one has pipelines or is able to process it to make it more transportable. At the same time, globally, gas is taking on a new character, because it is a much more simple form of hydrocarbon, burns better, contaminates less and is cheaper.”