Looking beyond oil for future prosperity

In an exclusive interview, Alí Rodríguez Araque, President of Petróleos de Venezuela S.A. (PDVSA), discusses the changing role of oil revenue in the country’s economy and the expectations for the hydrocarbons sector in the future.

ALÍ RODRÍGUEZ ARAQUE President of Petróleos de Venezuela S.A. (PDVSA)

Q: What strengths does Venezuela have as a global energy player?
A: Venezuela has enough energy reserves to supply growing world demand for another 20 years. Its location is a big plus, as it is in the north of South America, facing the Caribbean, within easy reach of the biggest markets in the world – and that’s not only from the point of view of energy, but many others as well. It has great expanses of cultivable land, good infrastructure, that nonetheless needs expanding, and best of all are its first-rate human resources.

Q: Given such riches, what brought about the crisis that the country has gone through?
A: The country’s problems began with the way that nationalization of the petroleum sector took place. Venezuela assumed full responsibility for oil exploration, extraction, transportation, refining, storage and commercialization – all of which took place satisfactorily. But following that, the country’s whole economic framework should have been changed, and that didn’t happen. So when oil prices fell, from $41 a barrel in 1981 to $6 in 1986, there was a big crash.

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Q: What kind of changes do you have in mind?
A: We are aware that there is a great need to bring about profound changes in both state and society, because our culture is rooted in living off a sort of ‘dividend income’ from oil resources; the only problem the state had was how to distribute the growing flood of revenue that came in. In contrast with other countries, Venezuela had no problem in raising funds to cover public administration. On the contrary, so much money was coming in that there was a surplus, and the problem was how to distribute it. This was done without taxes, with an overvalued bolivar [the national currency] for 50 years, and subsidies that enabled great stability of prices.

Q: So what is the situation today?
A: Venezuela has to sacrifice a large part of its oil revenues in paying off debt. The income distribution framework has broken down under the weight of the debt. This has led to a free-fall in social conditions, and enormous impoverishment. The great challenge now facing the country is how to replace living off unearned income with income from national production, which implies a change of culture and society. On the other hand, given the physical base and the human resources that we have, I believe the country’s future is bright.

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Q: What are the challenges for PDVSA in this environment?
A: From the strategic point of view, the most important thing is that the company should have sufficient flexibility to adapt itself to the great challenges that are emerging on the global energy scene. Today, new realities have created a situation quite different from that existing when PDVSA was born. There are changes in global energy structures, for example gas is occupying an ever bigger position. This company needs to align itself with these changes, and I believe that it is acting correctly in this direction.

Q: What is the potential role for foreign investment in Venezuela’s hydrocarbons sector?
A: Everything is possible. One can see in the Delta area that the bulk of investment is in foreign hands. With regards to gas processing we are talking about a refining plant that might require $3.5bn dollars in investment, in association with foreign corporations.
Foreign companies can do all of this because we have changed the laws which previously meant that all activities related to oil and gas were reserved for the state. Everything to do with gas, from exploration and production onwards, is now completely open to private investment.
With regards to oil, downstream activities such as refining and marketing are now fully open to private investment. For exploration and production, there is a limit of 49 percent. The state decided to keep 51 percent control there because oil extraction is the most profitable activity, and the state reserves the right to get the greatest benefit out of this business.