PDVSA Company and the Influence of Political Decisions

Abstract

Since the early twentieth century, Venezuela’s future has been associated with its oil industry and the country’s relation with this resource has been rather uncertain because it has been consistently contributing to socio economic development as well as economic stagnation and declining standards. However, oil has also contributed in underpinning a large range of political regimes in the country. If the relationship between the state and oil in Venezuela is examined in detail, specifically during times of plenty, it becomes evident that the tax revenues from this vital resource have not been transformed into a constant source of growth and social welfare in terms of a structure that favors stability in the democratic system. It can be said that this petro state has not been able to efficiently manage the boom and bust cycles. This phenomenon is characterized with a framework of institutional inducements and policy measures that are inherently present in terms of appropriating external revenue sources. As a country, Venezuela has transformed after it was belatedly institutionalized during the 1930s although it continues to be characterized with perceptions that stem from the ways in which it makes its living; in terms of having assumed the role of collecting and distributing income instead of creating growth opportunities in other economic sectors. Venezuela’s economy has demonstrated such patterns during times of boom and a major difference between the present boom and that of three decades back is relative to the enhancement of the negative impacts of the petro state.

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Introduction

Venezuela is an oil producing country since 1914, when the first oil well was discovered in Mene Grande area in the Coast of Maracaibo Lake, producing 24 barrels per day (bpd). In 1929, just fifteen years later, Venezuela was the second world oil producer in the world. Today Venezuela has been certified by the Organization of the Petroleum Exporting Countries (OPEC) as the first world country with most proven reserves (296 Billion of barrels), surpassing Saudi Arabia that hold this position for many years, (OPEC 2010-2011, p.22).

The role played by Venezuela in the past as a sure oil supplier and the actual certified oil reserves can provide a picture of the future strategic position of Venezuela in the World Energy market, and the importance of preparing an analysis of Venezuelan national oil company (PDVSA) to define in which direction the oil business is heading and its future perspectives.

Venezuela, a South American country was a founder member of OPEC. According to Lugo (1994), this organization was created in September 14, 1960 by Saudi Arabia, Iraq, Iran, Kuwait and Venezuela, with the firm intention to break the oil prices monopoly from the seven oil companies dominating the oil world market. After an amicable agreement, Venezuela decided to nationalize all the oil business assets from Exxon, Shell and Mobil. According to Bye (1979, p.58), ”the nationalization of oil in Venezuela was clearly one of the most important and far-reaching nationalizations so far to be implemented by a Third World government”. In addition, Bye (1979, p.59) mentioned that oil has totally dominated the country’s economy; and oil activity has been totally monopolized by the world’s oil giants. On this regard, by 1975 oil income for Venezuela represented 77 percent, and the year before was 86 percent, for that reason this country had been heavily dependent of the revenues from the oil business and they wanted to have more control on their most important resource.

In being the national oil company of Venezuela, Petróleos de Venezuela (PDVSA) is the biggest energy producer in the country. It is vertically integrated and carries out large scale exploration and production in oil and natural gas. It also controls internal as well as international refining activities and markets oil and gas products nationally as well as internationally. According to the The Petroleum Intelligence Weekly, PDVSA is the fourth largest oil company in the world (Petroleum Intelligence Weekly, 2008). PDVSA is more than a business entity because it is now widely acknowledged that it serves as the main financier for Venezuela’s President Hugo Chávez. It is estimated the PDVSA provides President Hugo Chávez’s government with almost 48 percent of its combined revenues (PDVSA, 2011) and supports many of its developmental activities. In fact, the company’s long-term business strategies are directly linked with the government’s vision for the future. The government relies on Petróleos de Venezuela for funding and implementing a largely interventionist policy that has a number of goals. The inflow of huge hydro carbon revenues has allowed the Venezuelan government to finance programs to initiate social programs, particularly for lower classes. Such revenues have also been used by the government to strengthen support networks and to take over economic entities that have the potential to threaten its existence.

The efficacy of these strategies is not certain because it depends on prevailing oil prices. In fact the present hydro carbon revenues have been maximized at the cost of investments in oil and government control on prices has hidden the apparent disparities within the economy. Consistent increase in spending on social welfare has resulted only in marginal social incentives and it is evident that if there is a crash in oil prices the government’s social efforts will be jeopardized. Petróleos de Venezuela is considerably different from what it was before President Chavez came to power. It was established in 1975 and by 2000 was transformed into a big global company with a strong technological base but till this time there was not much state intervention. Rivalry between President Chavez and PDVSA intensified after the election in 1998 that culminated in a massive strike against the state in 2002. Following the strike, almost 18000 workers were removed from their jobs that included many top engineers. After the strike the company surfaced as an entirely transformed organization; although the operational framework did not alter much, there was loss of institutional expertise and the company’s management became allied with the government. Government obligations on PDVSA increased considerably and the company gradually transformed from being commercially viable in 1975 to one that was increasingly amalgamated with government priorities.

Petróleos de Venezuela was established by the government to strengthen state control over the oil industry and the company’s management became the main motivating force of the nation’s oil policy. Nationalization was initiated in 1975 by President Carlos Andrés Pérez who introduced legislation that established Petróleos de Venezuela from the assets taken over from private oil companies in the country. However, Petróleos de Venezuela continued operating in a free market environment and its three subsidiaries, Corpoven, Lagoven and Maraven, competed against each other just as business normal business opponents (Mares and Altamirano 2007). The management continued to work independently without pressure from the government and began controlling stakes in countries such as Sweden, UK, Germany and the US. PDVSA also started targeting international customers and in 1986 bought CITGO, thus grabbing distribution channels for oil products in the US. By 1999, PDVSA controlled about 13000 CITGO gas outlets in the US, which accounted for almost 10 percent of the total American market (Economides, Martínez, and Puky, 2007). Additionally, PDVSA adopted a global strategy that allowed it to become autonomous by enhancing its share holdings that were free from government control.

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After nationalization, the company had started strengthening its relations with global oil companies. This practice was known as apertua and focused on three aspects:

  • Enhancing productivity in existing oilfields
  • Developing marginal oilfields
  • Increasing investments in non conventional oil

However, all these elements became reasons of strong arguments and debates with the administration of President Chavez. The government argued that contracts established by PDVSA with international oil companies (IOC) were depriving the country of considerable amount of revenues despite the fact that such contracts were necessary to enhance investments in the sector. The PDVSA management was of the belief that by outsourcing work to international oil companies the government would benefit on the premise that the oil sector would eventually lead to growth in other sectors of the economy. According to Tinker-Salas (2005), there were widespread beliefs in the government that the PDVSA had become a state within a state and was giving preference to international oil companies at the cost of tax revenues that could have accrued to the government. Chavez was elected on the strength of his allegations that the PDVSA had compromised with the interests of the lower classes that dependent on government assistance. After being elected, President Chavez started introducing policies that would eventually transform the PDVSA.

In Venezuela, a major difference between the national and multinational oil companies pertains to the difference in the structure of establishments. Multinational oil companies are characterized with high technology and willingness to make huge investments in the oil industry while national companies are mostly dependent upon the meager revenues they get from their low technology operations after they have met revenues mandates from the state. For national oil companies to be successful and viable they have to reinvest a major part of their revenue. It became known from the survey that some national oil companies have started to use better technology in order to increase revenues and productivity. Thus, it is true that although most national oil companies including PDVSA continue to be in the grip of state interference, they are taking initiatives to adopt better technology and to increase revenues. The international oil industry is characterized differently in the context of global operations as compared to national companies in developing nations although PDVSA is different in terms of technology use and revenues in view of its huge size and global operations. In being an emerging economy, the oil industry in Venezuela has not utilized the full potential of the oil sector in terms of using technology, investments and appropriate distribution of funds.

The high potential of the oil industry in Venezuela in serving the long-term interests of citizens is evident from the fact that it is one of the biggest oil companies in the world with potential for massive revenues that can be utilized for the welfare of the country and its people. Although it cannot be said that there are no barriers to adopting better measures in PDVSA, the present environment in terms of state role and availability of adequate funding are making it difficult to improve the situation.

The experience of Venezuela relative to the recent oil boom is suggestive of the presence of ineffective public institutions, weak macro economic management and unsatisfactory long term economic accomplishments. The major factor that explains the government’s selective management of the huge oil revenues is the country’s political framework. Given President Chavez’s high political rating, it appears the main issue relates to the electoral mechanism in terms of accountability as people in the country do not have complete information because of which elected politicians increase their benefits by following short sighted strategies. Because oil resources provide funding for such ineffective strategies, the abundance of natural resources assists in strengthening the position of the incumbents, thus rendering the mechanisms of democratic accountability to become ineffective. This hypothesis is also evident from the literature relating to the relationships amongst economic performance and political organizations in resource rich nations. Such characteristics provide reasons to conduct further research in the context of comparing performance of nations and regions.

The government in Venezuela has depended heavily on PDVSA to finance and implement several short-term goals. However, this strategy cannot succeed for long because the government has set its revenue collections goals on the higher side as compared to other mechanisms of revenue collection. Additionally, many of the government systems used in collecting this revenue, such as extra budgetary mandates, prove to be very uncertain for Petróleos de Venezuela to strategize efficiently. The long-term objectives of the government relative to PDVSA are not credible because more emphasis is placed on prices than on productivity. Moreover, this policy cannot succeed in the long term as the government does not have adequate negotiation strength in OPEC in restraining members from production. Another factor is that there are many things that are not within the control of OPEC such as demand for oil and supply alternatives that have a bearing on future oil prices.

The main objective of the oil sector in Venezuela is to provide for President Chavez’s immediate finance and implementation needs. Although the state proposes to reform the constitution so that Chavez can remain President for a longer period, its strategies for collecting revenue relates primarily to the short term. In 2007, PDVSA had to comply with state mandates to give huge sums of money, which amounted to almost 80 percent of its total revenues. This short-term strategy has perhaps been adopted to prioritize immediate goals in comparison with long term sustainability of revenues. This has become possible because President Chavez enjoys almost complete control over the process of revenue disbursement. Chavez believes that by spending currently on social objectives and on nationalization, will allow him to strengthen his rule through such social indicators and enhanced government authority over the economy.

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Venezuela has been presented with a large number of infrastructure challenges in the context of providing adequate motivation to PDVSA to expand its operations and improve its efficiency, albeit all benefits will go to the government under the present circumstances. Moreover, management in PDVSA is not completely ready to recognize and comply with global standards while handling global functions because of government mandates and interference. A major concern of PDVSA is to address issues pertaining to it global performance by using the latest technological options that are presently being used across the world. Global oil companies have established facilities in a number of oil producing countries so that economies of scale can be utilized in a competitive environment. Most respondents felt that PDVSA is not operating efficiently and measures should be taken to improve its performance and image within the country as well as internationally. Functions need to be handled with competence and by trained people as per norms established by global bodies and the standards set by the global practices. Respondents agreed that PDVSA performance had declined after President Chavez came to power. Good performance in the oil industry can be achieved only if quality management practices are adopted in keeping with the country’s circumstances relative to the international environment.

A major way in which the Venezuelan government forces Petróleos de Venezuela to share its funds with non government entities is to sell in the domestic market at highly discounted prices relative to global prices. Several governments in Venezuela have been subsidizing petrol in view of political aspirations. The government feels that such a policy provides delivery of oil benefits directly to citizens. The Chavez government has been collecting huge revenues from Petróleos de Venezuela but it has failed to increase revenues in the short term. Additional risks have been created that will harm PDVSA in the long term. Mechanisms of budgetary revenue collection have allowed the government to get enormous revenues but the uncertainty and huge size of these mechanisms have the potential to render the investments non viable.

The major factor that explains the government’s selective management of the huge oil revenues is the country’s political framework. Given President Chavez’s high political rating, it appears the main issue relates to the electoral mechanism in terms of accountability as people in the country do not have complete information because of which elected politicians increase their benefits by following short sighted strategies. Because oil resources provide funding for such ineffective strategies, the abundance of natural resources assists in strengthening the position of the incumbents, thus rendering the mechanisms of democratic accountability to become ineffective.

Transition to Stronger State Control

President Chavez’s government passed the Gas Hydrocarbons Law in 1999 that was considered to be investor friendly but in due course the government started withdrawing PDVSA’s apertura policies, obviously to the disappointment of the company’s management. Rather than agree with the PDVSA plans for increasing oil production, the government directed the company to limit its production as per OPEC quotas, obviously to increase oil prices. The Hydrocarbons Law was passed in 2001, which required that foreign investment will have to be made by way of joint ventures in which PDVSA will have majority stake. As a result, royalty rates for new partnerships in the sector shot up from 1 – 17 percent to 20 – 30 percent although a few tax rates were reduced. The government literally forced international oil companies to shift from the old apertura agreements so that they could be covered under the Hydrocarbons Law of 2001. Such developments did allow PDVSA to have more control in the oil industry but there was a lot of opposition from within the company because it was felt that government intervention will lessen investments in the sector and put the company’s long term profitability at risk.

The government was determined to alter PDVSA’s organizational culture and started introducing changes within its working systems. President Chavez appointed a new board of directors in 2002, which was considered illegal by the management because they alleged that political allies were given entry in the board and merits were not considered. This action angered the company’s employees and there were a series of strikes in 2002 and 2003 against the government. These strikes were aimed at starving the government of funds and to eventually remove it from power (Mares and Altamirano 2007). Following large scale violence and government excesses on protesters, the military revolted against President Chavez and took over control from him. However, after some tine, the military restored him back to power because pro Chavez supporters revolted against his removal. Very soon Chavez’s popularity increased and a second strike was launched in December the same year, following the Supreme Court’s verdict against holding referendum to test Chavez’s popularity. This strike too was a failure and people began blaming PDVSA for harming the economic interests of the country. In having survived the strikes, the government took up the task of further reshaping some areas of the company. Over 18000 engineers were fired but Chavez took steps in ensuring that the new PDVSA was loyal to him.

The main argument of this paper is that the Venezuelan government had used practices to strengthen the petro state whereby a single resource was used as the main pillar of revenue and as the major means to govern the country. Chavez put an end to the traditional independence of the oil industry that resulted in considerable loss of revenues to the company as well as the nation. Oil policies are known to strongly impact the socio-political balance in any country. Although the flow of money has created some changes in the Venezuelan economic environment, it has not impacted development substantially. Previously, oil was used by Venezuelan leaders to create alliances and impact global relations; President Chavez used oil intensively to set up anti-capitalist and anti-American alliances. These alliances have created energy arrangements that have led to the creation of regional blocs in Latin America, which are now known to be favoring alternative world orders.

In this context, it is meaningful to examine issues relative to the links between economic performance, mineral resources, the government’s competence levels and the process of democratization. It is also important to analyze the historical significance of oil in transforming Venezuela’s political systems prior to 1998. Venezuela is a typical example of a petro state whose major revenues come from abroad by way of oil sales that form at least 40 percent of combined exports and 10 percent of the Gross Domestic Product. Petro states are largely dependent upon resources that are dispensable, capital intensive, susceptible towards external factors and upon factors that offer high levels of monopolistic incomes. The economic performance of petro states is mostly considered to be poor and the oil wealth created in these states tends to have negative impacts on the processes of democratization and on maintaining democratic regimes.

PDVSA actual situation

All the foreign oil companies operating in Venezuela were nationalized in 1975 and a unique state oil company was created called Petróleos de Venezuela (PDVSA). 1998, PDVSA was the best State managed oil company in the world and the second private oil company worldwide, as measured by usual management practices. Actually, PDVSA is the fourth larges oil company in the business (PDVSA, 2010 p.22) and controls carries out its activities through a vertical integration process in upstream, midstream, and downstream areas.

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PDVSA has lost its reputation of being the best administered oil company worldwide and one of the most efficient oil firms in the world market because there has been considerable deterioration in its services and productivity. The company’s volume of oil produced has decreased from 3.5 million of barrels in 1999 (Espinasa, 2006) to the actual production volume of 2.8 million of barrel per day presently (OPEC 2010, p.28). The refining capacity in Paraguana Refining Center, which is the most important in the country, has been reduced from 720 thousand barrel per day (tbd) in 2006 to 678 tbd in 2010 (OPEC 2010, p.37). The gas importing process increased from 0 million cubic meter (mcm) in 2006 to 1.446 mcm in 2010 (OPEC 2010 p.60). The oil capacity tanker transportation fleet decreased from 1348 deadweight tonnage (dwt) in 2006 to 1091 dwt in 2010 (OPEC 2010, p.64). The operational cost per barrel has almost doubled from $4 per barrel to more than $8/barrel (Espinasa, 2007).

The number of completed wells has declined from 1508 in 2006 to 890 in 2010 (OPEC 2010, p.26). According to America Economía (2003), PDVSA in terms of efficiency is now ranked among the lowest of the fifty most efficient companies, far below any of its state owned competitors. Additionally, the numbers of workers have almost doubled with the incorporation of new activities under PDVSA objectives that have no relation with the medullar business of the corporation, which is producing, and processing oil in global markets. The company has moved from a workforce of 52,816 employees in 2006, to 99,867 workers in 2010 (PDVSA 2010 p.41). In addition, and according to the Financial Accounting Report issued by PDVSA in December 2010, the liabilities of the company are 76,451 million $, while the assets are 75,314 million $, with a total assets of $151,765 million (PDVSA, 2010 p.4). In other words the financial situation of PDVSA in 2010 shows that the company is not financially solvent.

These findings provide an initial idea of the delicate financial situation of the company, as there is evidence of the firm weak performance and the results are going bad by the day. Consequently, the roots and causes of such poor performance is the basis of this research work. It is known that Venezuela continues to be and will be an important player in the energy worldwide market in the fossil fuel area. Therefore, the author of this research aims at looking for answers to this situation. Some initial questions that need to be examined are: i) what kind of decisions have been taken in the company?, ii) what are the reasons/fundamentals behind such decisions, iii) who and why have been taking these decisions? and especially, iv) why has PDVSA’s performance been affected in such a way that its productivity, efficiency, and efficacy have deteriorated during the past years.

Research question

It is believed that the answers to the above questions, are somehow connected to the new socialist government that came into power in Venezuela in 1998. The government started implementing structural and organizational changes within PDVSA. During his 1997 political campaign president Chavez argued that PDVSA was a State within the State and according to Severo (2009), the new government changed 6 Presidents in five years with the firm intention to break the corporation’s organizational structure and drive it towards more direct state control from the Presidency of the Republic Such attempts have adversely impacted the performance of PDVSA in terms of oil production, overall productivity, and low revenues. All these issues are apparently created because of political factors in the context of a company that was state owned but administered with private optics before year 2000.

Therefore, the objective of the present dissertation is to analyze if there are links between the political decisions made by the Venezuelan Government since the year 1998 in relation to PDVSA and its performance. This objective becomes more pertinent in view of the poor financial and operative performance of PDVSA, which have damaged PDVSA’s global reputation as a financially solvent firm and a well administered corporation. The author has researched all these aspects and their causes, defined them and reached some concrete conclusions that help in gaining a better understanding of the factual circumstances that PDVSA has been going through in the last few years since President Chevez came into power. The research has also examined the major challenges for the future in PDVSA.

Therefore, the basic research question of the dissertation is:

Which were the decisions taken by the Venezuelan government that has affected the overall performance of PDVSA in the last 10 years. This main question will be supported by an analysis looking at the political, financial and organizational dimensions. Since its creation in 1976, PDVSA was a state company but was managed professionally as a private owned firm But the political interference by President Chavez’s government has caused a detrimental status in the company’s finances as also in the organizational structure of the corporation.

The topic for the present dissertation proposal is “to evaluate the link between political decisions in the conduction of PDVSA as a corporation and the consequences from such decisions” as clearly presented on the previous section. Thus, this research will focus in the firm performance using a triangulation approach to gather information that will be used to evaluate, analyze and generate a sound critical analysis on the proposed topic. The author then, will use three different strategies to collect the required information. First, the analysis will start with a case study, which is a qualitative method that focuses in specific topics, in this case PDVSA. There are important sources of information available about PDVSA and the oil industry in Venezuela, such as specialized magazines, reports from energy international agencies and financial and business reports from the corporation itself that can provide information related with the research topic. The second strategy to collect information is the use of questionnaires which is a quantitative method that will help to compile the opinion of experts and related specialists in the oil and gas area.

The third strategy to be followed is going to be based on a deep review of existing literature in the area, where academic, professional and any other relevant sources will be the basis of this research. The information to be collected will be based on the firm finances statements, income and revenues, organizational structure, operational performance, and infrastructure. The literature review is very useful for understanding such complex phenomena, especially in the context of the internationalization process of the management of multinational enterprises. When all this information is compiled, it will be used to prepare a critical and objective analysis of the PDVSA’s performance and its relationship with the government political decisions that lead to those negative results.

Feasibility

The author has compiled all the information related to Venezuela and PDVSA oil business and has prepared an analysis based on existing academic literature like the work developed by Espinasa (2006), Baena (1999), Giusti (1999), Monaldi (2010), OPEC (2010-2011), and PDVSA (2010), and others relevant sources. In addition, the author is quite familiar with the main research topic as he has worked in the oil and gas industry for over 24 years. Additionally, the author has already started contacting experts in the area that will be willing to share their oil and gas experiences that will be used as the basis for arriving at conclusions in this dissertation. It is important to notice that the initial receptivity among experts was high, and it did not take more than three months to complete the research, which is the estimated time frame for the research development and data collection.

How This Work Fits Existing Published Work

A number of authors have analyzed the situation in attempts to understand how the Venezuelan government has managed the oil industry and PDVSA during the last ten years. Many amongst them are against the political measures that affected the industry (see for example: Giusti, 1999; Monaldi, 2007; Espinasa, 2006; and Tinker–Salas, 2005). All these authors seem to agree that PDVSA was well managed before 1998, and their financial disclosures where transparent and clear, even though many critics referred to PDVSA as a black box. Additionally, the company’s operations were focused toward an increase in the production level and thus towards an increase in revenues.

Others researchers have written in favor of the political measures taken by the government (Parenti, 2006; Severo, 2009; Pirela, 2007), defending the position that drastic changes were necessary to clean the corporation from its internal enemies. Another line of research demonstrates a more neutral position, whereby authors such as Baena (1999) and Billig (2004) limited their work to just presenting their findings and facts. When the author of this research commenced with his research he found that the Venezuelan Government has changed the PDVSA President 6 times in the last 12 years. Each CEO came with new ideas, without following a consistent corporate strategy or strategic business plan This research has analyzed such ideas, programs, and actions taken by these functionaries and determined how their actions affected the corporation’s performance.

In 1998, there was a change in the Venezuelan government, whereby President Hugo Chávez became the country’s president and he started making changes in the Presidency of the corporation and the composition of PDVSA Board of Directors, with the intention to abort a possible privatization of PDVSA. Chávez’s intention was to change the mentality of the top executives that were running PDVSA, which at that time was the 2nd best managed oil company in the world. Chávez appointed a series of loyalists to run the company, and each one of them attempted a housecleaning, dismissing layer after layer of top executives( Parenti, 2006). In 1999, the government decided to considerably reduce the resources of PDVSA allocated for current expenditures because its priority was to finance government spending through oil revenues, even at the expense of PDVSA’s investment and production (Espinasa, 2006 p.56). This caused a lot of unhappiness within the industry. As a result, there was a national strike in 2002 that gripped the entire oil industry and created the worst energy situation in the country.

On the other side, Billig (2004) mentioned that the Venezuelan strike was also the first disruption not caused by a war, revolution, or embargo, but rather by a slow, debilitating political standoff. The Venezuelan government decided in 2002, after a three months strike to fire 18,000 professionals who openly supported the suspension of activities in the oil business nationwide. Tinker–Salas M (2005, p.52) mentions that “a legacy of squandered wealth and a managerial class and privileged Iabor elite whose experiences stood in sharp contrast to the lives of most common people”. As a first consequence of such measures taken by the government after the 2002 strike, millions of man/hour trained and well prepared professionals in the best universities worldwide were fired, causing a total disruption in the firm operations. This dissertation’s main objective is to analyze the development of the politically motivated changes within the oil industry in Venezuela and to look at their results from an objective and impartial point of view, based only on facts, opinions, and statistics from recognized international agencies and sources.

The author of this research would like to establish a difference between state owned and government owned companies, which are two completely different situations. Actually, the author thinks that a strong political influence from the actual Venezuelan socialist government has completely changed the efficient organizational structure of PDVSA in the last 10 years. It is evident that this vision is based on political interests and has adversely affected the performance of PDVSA significantly.

The author has a special interest in researching this topic with the aim of providing facts that demonstrate that there are links between political decisions and the performance of PDVSA that has resulted on a negative impact on the company performance and overall results in financial terms, operations effectiveness, and corporate structural organization.

Literature Review

It is most appropriate to begin the literature review on this topic by examining the research of Sachs and Warner (1995), which pertains to economic development during the period 1971 to 1989. They demonstrated that countries depending upon exports of high value natural resources tend to grow at slower rates as compared to countries that have scanty natural resources. Following the first oil boom during the 1970s and the over all increase in prices, researchers started doubting if incomes were being managed efficiently in creating a positive economic and social effect. Because of price fluctuations, many economists started reflecting on boom and bust patterns, and developed literature that investigated the concept of the Dutch disease, which deals with rise in revenue from using natural resources such as oil and minerals that further leads to reduction in production in agriculture and manufacturing.

Consequently, these sectors become less competitive because of overvalued currencies. Initially the theory held that the Dutch disease would lead to de-industrialization of the economy in the mid term but subsequent adaptations suggested that this does not occur always. What may happen is reduced importance of agriculture and increased role of the government sectors. In this context, Davis (1995) has held that it is not necessary for oil booms to definitely result in economic stagnation. Economists have also studied the resource curse concept that attempts at explaining the ways in which economies having plentiful natural resources cannot reap their full benefits and thus have economic growth that is lower than countries having lesser natural resources. This concept is also relevant from the political perspective because eventually the government makes policy decisions or has strong influence in matters relating to oil and revenues.

The state centric aspect gave birth to the rentier state, which relates to nations in the Middle East. These studies paved the way for more exhaustive studies that have added to understanding the paradox of abundance. Terry Karl (1997) analyzed the reasons for the oil booms of 1973 – 1974 and 1979 – 1980 and why they negatively impacted economic growth and the weakening of governments in Venezuela, Indonesia, Algeria, Nigeria and Iran. The researcher found a close association amongst exports and the political framework relative to government incentives. Because of the nation’s tax and revenue structures that taxed citizens meagerly, the government gave a boost to the oil industry but did not focus on developing a viable manufacturing sector. Terry Karl (1997) also held that periods of boom expanded the state’s jurisdiction and created concentration of power with the government. Therefore, the framework of benefits led interest groups to search for revenue sources and politicians became interested to enhance their share of power by gaining accessibility to natural resources. Such objectives resulted in negatively impacting the government’s efficiency and interventions. They also led to enhanced aspirations to get involved in corruption and thus damaged the accountability of rulers.

In the long term, such rentier style behaviors resulted in inefficient utilization of resources, there was fall in revenues and the state became less capable to alter behaviors of major players and to create long term policies relative to deregulation. Therefore, petro states were unable to create a strong institutional framework that supported economic growth that was not dependent upon sectors susceptible to external disturbances. Moreover, such states could not adapt to bust situations and prevent adversities thus leading to decline in the political regimes. Now, increasing interest is being shown in the political dimensions of petro states. There is strong evidence that amongst about twenty developing nations that are dependent upon oil exports, very few have democratic systems and most are consistently in the grip of tensions. It is because of such circumstances that researchers have concluded that oil leads to a lot of complexities in the democratic process. Firstly, the rentier effect allows governments to justify using oil revenue for reducing social conflicts and using a limited taxation framework. They promise jobs in exchange for votes and take actions in blocking the empowerment of social groups. Secondly, they use repressive practices by diverting oil revenues to fund internal security in order to suppress citizens politically. Thirdly, the modernizing effect establishes links amongst non democratic governments and oil revenues.

Despite these circumstances it is not implied that revenues from natural resources cannot contribute towards establishing democratic systems under specific conditions. This is true in the case of Venezuela, where external revenues from oil have been used to run a democracy. Leaders in the country have used oil revenues to keep themselves in power although a democratic culture does exist, which is evident from the power commanded by the people and trade unions. However, democracy in Venezuela is characterized with a democratic culture in which some agents command virtual veto power in restraining the actions of the vast majority of citizens (Tsebelis, 1995). The first law of petro-politics was put forth by Friedman (2006) whereby he made arguments that with increasing crude prices, the freedom of people will be consistently eroded and the framework of political and electoral jurisdictions will be weakened. He held that with increase in oil prices, more power is grabbed by leaders in petro states. They are invariably not much interested in catering to domestic requirements and are not concerned about what other nations feel about their actions. In view of these observations, Friedman (2006) had cautioned that such circumstances create immense risk for the global system. However, Arriagada (2006) holds that although control over oil has the potential to create asymmetrical relationships amongst states, using oil revenues for exerting influence on other nations is the same as practiced by other nations possessing other goods and raw materials.

Oil, Society, Modernization and Democracy

Venezuela is a typical example of a petro state because exploitation of oil resources had begun in 1919 in being closely associated with consolidating the national state. There was quick development of the oil industry in Venezuela because of massive global demand, which made oil the most important industry in the country in terms of political and socio economic development and modernization. Within a few decades the country was transformed from a primarily rural and agricultural economy to a society that urbanized and industrialized rapidly. The economy also expanded and by the 1970s, oil accounted for over 90 percent of the country’s export revenues. It also accounted for over 20 percent of the country’s gross domestic product and over 65 percent of tax revenues. By 2000, tax revenues from oil accounted for over 70 percent of the government’s revenues and about 80 percent of the total export revenues. The Venezuelan dependence on oil is evident from the fact that oil exports generated almost 90 percent of total exports revenues in 2006 and although such dependence has eased, oil will always occupy a prominent place in the country’s economy and no changes in this regard are expected in the coming years.

Venezuela’s economic development is solely dependent on oil exports that have been consistently contributing to the economic growth rate in the country between 1950 and 1978 (Escobar, 1988). Subsequently, the economy was characterized with boom and bust periods that had several effects on the economy and on the ways in which the state functioned. Obviously, the stability of citizens’ living standards and of other systems also suffered setbacks. After oil began being exploited in Venezuela, successive governments have been using it as a means to develop the nation and to strengthen the state’s role in social and economic development. Such interventions were further secured after democracy was established in 1958 and in keeping with practices of other governments; a system was established that did away with industrialization and imports. Such steps did not lead to economic diversification because the model was primarily dependent on oil revenues as the state did not want to tax people’s personal incomes. Some of the money generated from abroad was used in creating infrastructure and equipments for private business.

At the same time, the Venezuelan currency became favorable for imports, which had adverse impact on productivity in the country. This was apparently a consequence of the Dutch disease and eventually macro economic management was used in providing for fixed exchange rates and a protected trade policy, which helped in bringing high growth rates, lower inflation and balancing of external accounts. The susceptibility of the country to volatility in oil prices became evident in the following years because till then the issues were restricted to price stability that did not prevent the state from getting guaranteed revenues. These circumstances changed after 1973 when the price of oil per barrel increased from $2 in 1968 to $14 in 1974 and to $30 in 1981. There was massive increase in revenues and the state was unable to manage such huge inflows of revenue. It was at this time that dreams of progress were born and the impacts of the Dutch disease began to emerge. Carlos Andrés Pérez tried to create a Great Venezuela that implied more state interventions and propagation of government owned companies, which warranted huge investments. In order to avoid conflicts the government did not think of enhancing tax revenues but opted for getting funds through external debt. In view of enhanced need for public expenditure and the increasing demands of people, there was tremendous increase in foreign debt.

The Democracy Crisis

During the 1990s, issues developed relative to legitimacy of political parties in Venezuela. The crisis developed mainly because of the economic environment that had been created so far and because of the institutionalized systems that came to be strongly influenced by some political parties. Political decentralization was the most important reform that took place in several decades in the country and had a positive impact but it was not sufficient to enhance the strength of the main players. Many amongst the elites that favored the Punto Fijo model were unable to carry out changes required to renew models of economic growth (Kornblith, 2003). Voters opted for change in 1993 in view of the deteriorating socio economic circumstances and the inability of the state to improve the economy.

Hugo Chavez had gained additional popularity after a failed coup against him and he launched a plan of legal and political transformation that eventually led to the end of the Punto Fijo model. Chavez got the new constitution approved in 1999 and won the 2000 elections. But the citizens became aware of the truth behind the changes and a crisis was created, mainly amongst the middle and upper classes. The ways in which the reforms were implemented made people to believe that the country was headed towards the Cuba style communism. Confrontations arose because of Chavez’s separatist policies that created constant threats from the new political rulers who were not considered to be following democratic practices. Following a turbulent period, Chavez strengthened his hold over the country after he won a referendum in 2004. He made attempts to improve the governance by his government and oil revenues again began growing. He also demonstrated concern to improve living standards for broader sectors of the population. Chavez was able to consolidate his political position with these measures.

The Empowerment of the Petro State

The government in Venezuela has been following a policy to strengthen its hold on the country as a receiver, administrator and distributor of revenues. It is in this context that oil policy in the country has accentuated the concept of rentierism. Oil tax revenues are largely dependent upon the increasing dividend and royalties received from PDVSA and to a much lesser extent from income and other taxes. This is supported by Venezuela’s agreements with OPEC members to increase prices and reduce production. Such patterns have allowed OPEC countries to increase global demand for oil and to some extent in the recovery of oil prices. Another aspect in this regard is the set of legal and institutional changes introduced in PDVSA, whereby it did not take active initiatives globally as it did in the past. Amongst the laws introduced are Gaseous Hydrocarbons Law (1999) and the Liquid Hydrocarbons Law (2001). The following are the main features of the new legislation:

  • The Ministry of Energy and Mines was renamed as the Ministry of people’s Power for energy and Oil.
  • Minimum royalty of 20 percent was set for natural gas and 30 percent for liquid hydrocarbons
  • Tax was reduced from 67.5 percent to 50 percent for conventional petroleum and for extra heavy crude it remained the same at 34 percent
  • A protective fiscal wall was provided for up stream functions
  • The state became the major share holder in up stream functions and private investors were provided with higher stake relative to exploiting downstream functions. However, these were considered less profitable.
  • The government became open to encouraging investments by the private sector in the country

The Chavez government introduced a number of reforms in the Hydrocarbon law to increase tax revenues and increase royalty rates. The law required PDVSA to have maximum stake in all exploration, extraction and distribution functions. It is important to note in this context that there was a decline in production in 2006 by contractors with whom PDVSA had partnered in complying with the new law. This decline in production is cited by many as a direct result of politicizing the industry and reducing managerial capacities. It is known that PDVSA has not been able to revive its old production patterns prevailing during the 1990s. This is apparently a major weakness of a petro state. An important decision taken by Chavez was giving authority to the Ministry of Oil and Energy to act as the main decision taking body in the sector.

This implied modifying legal structures and strengthening the Ministry’s role in controlling PDVSA. After the oil industry was nationalized, PDVSA was the main decision making body in the sector but now it could only take decisions relative to production and operations. Oil policy in Venezuela has become the main strength of the new political structure and abundant oil revenues have permitted politicians, who are not considered market friendly, to increase state interventions in the economic environment by juggling with prices, fees and regulations. Additionally, the government introduced currency exchange controls have led to decline in foreign exchange reserves and depreciation in the bolivar. The government has increased the network of government agencies and companies because of its control over oil revenues that account for over 50 percent of total tax revenues. The size of the administration has also increased while recent decisions of nationalization clearly indicate of increase in state capitalism. It is unfortunate that these systems are characterized with inefficiency and declining productivity.

At the same time, actions such as nationalizing telephone companies, linking private sector with the oil industry and expropriating land give a clear indication of Venezuela being a predator state. In the viewpoint of some researchers this is suggestive that the state does not create wealth but takes over from other sectors of society through the use of force and coercion in order to achieve its revolutionary objectives (Corrales, 2006). It is therefore evident that the petro state in Venezuela has been searching for income through state interventions that has impacted the control over its system of financing. A direct impact of such practices is the establishment of ambiguous networks that rely heavily on a government that appropriates resources and extends its control.

The Impact of Economic Performance

The economy of Venezuela has been substantially influenced by the combined impact of increasing oil revenues, positive evolvement of the global economy and betterment of the political situation following the referendum that strengthened the political position of President Chevez. The mediocre period that was characterized with imbalances, declining oil revenues and socio political rifts is now over. In the past, the economy was restrained because of high unemployment, high poverty levels and low investments and productivity. According to Parra Lazardo (2006), the Venezuelan economy was growing at about 10 percent in 2006 because macro economic achievement was influenced by oil revenues that helped in considerably increasing government spending. The economic policies are more based on liberal fiscal and monetary policies that favored internal credit sources and maintaining stability in interest rates. Improvement in the economy resulted in higher levels of public and private investments, increased productivity in the non oil industry and improvement in people’s purchasing power.

After 1998, the government of Venezuela posted a surplus for the first time in 2005 that became possible because of increased tax collections and improvement in fiscal management. There was increase in public saving and the domestic debt fell to 11 percent of gross domestic product. The social development initiatives taken by the Chavez government have positively impacted a number of sectors of society but authentic data is not available to substantiate this claim. However, revenues for middle class have not increased at the same pace as increase in inflation, which is the country’s biggest economic problem. Other than inflation, issues such as poverty and unemployment are also a cause of major concern in Venezuela.

Global petro-politics

A major policy initiative of President Chavez has been to use the nation’s oil and gas reserves to create alliances that aim at countering American strength. In particular, these arrangements seek integration of energy in the region by entering into varied alliances and commitments. Such amalgamation continues to be in the initial stage and some South American nations have been reluctant to enter these alliances in doubting the motives of the Bolivarian revolution. The Bolivarian Alternative for the Americas is an offshoot of the energy initiatives under Petroamerica and aims at encouraging socially inclusive growth and development. It also aims at countering the US backed Free Trade Agreements in North and South America.

However, the move has not drawn much interest as only four nations have become members; Nicaragua, Bolivia, Cuba and Venezuela. At the same time, in having initiated a multi polar strategy against the American domination and traditional global organizations, President Chavez has won the backing of nations, institutions and people that are opposed to neo liberal ideologies. Venezuela has also attempted to strengthen its relations with countries such as China, India, Russia and Iran through varied agreements. But it has to be seen if Chavez’s foreign policy that relies on his oil resources and deviates from the convention of promoting democracy and practices of repudiating war will succeed in the long term.

Socialism in Venezuela in the 21st century

Chavez had previously referred to the ongoing change process in the country as Boliviarian or revolutionary, he later characterized his policy and government as striving towards a new form of socialism that was different from the Cuba model. Chavez has been using the concept of socialism quite vaguely in sometimes referring to political practices and sometimes to the teachings of Jesus, Ezequiel Zamora, Che Guevara, Simon Rodriguez and Simon Bolivar in attempts to amalgamate the region in keeping with the process of socio economic transformation and the freedom of citizens. This kind of socialism is a new project to enhance people’s power and to develop a strong and participative democratic set up based on equality and citizens’ development. The system upholds the formation of non capitalist societies and social welfare. However Chavez has been criticized in this regard for envisaging a system that would eventually reintroduce the barter system or create an all embracing government (Guerra, 2006). Dieterich (2007) has held that this kind of socialism cannot be achieved by a government that seizes private properties. The only solution is to introduce a mixed economy in which a cooperative is formed amongst social property, private sector and the government. Only then can a social democracy aim at achieving a revolutionary stage that moves towards post capitalist civilizations.

Politics and Freedom in Venezuela

According to a report by Freedom House (2007), the political environment in countries such as Venezuela, Pakistan and Russia poses the biggest possibility of taking back people’s freedoms, especially after 1998. Venezuela was considered to be a free country one year before Chavez came to power, and was given the status of being partially free one year after he came to power and this perception continues to this day although there have been minor changes in civil liberties and political rights. At the same time, there has not been much change in the context of variation in rights and freedom relative to increase in oil prices. Formally, the country can be described as an electoral democracy that is characterized with authoritarian processes. Power has progressively increased in the hands of President Chavez, which has become possible by controlling institutions through people he trusts. The strongest expression of the practice is the Enabling Law and the independence of the armed forces and the increasing militarization of the nation. Mascareño (2005) has cited the example of the recentralization of power that has been introduced by President Chavez in order to hold several powers at any given time.

There is clear evidence of the deteriorating influence of law in the country, which is a direct result of the low prices offered for Venezuelan oil initially. When oil prices increased, the government delayed reforms and financing of political and legal changes. The price level that resulted after Chavez came to power was not used in initiating measures for improvement but hectic efforts were made to get support and to create loyalties. However, despite such developments it is very difficult to make a cause and effect link between oil and liberty, not to speak of the over all deterioration. On the one side, rights and liberties were drastically reduced during the Chavista regime because of the basic transformation in the political and legal structures. On the other side, the impact of oil revenues was linked with issues such as cultural differences, leadership and the agendas of the power groups. It is thus evident that in Venezuela, different institutions and power groups have experienced varied dynamics.

Methodology

The methodology for this research is based upon the research philosophy that is about finding answers for the following:

  • What kind of decisions have been taken by PDVSA
  • What are the reasons/fundamentals behind PDVSA decisions
  • Who are the people taking these decisions and what is the basis for such decision making
  • Why these decisions were taken
  • Why has PDVSA’s performance been affected in such a way that its productivity, efficiency, and efficiency have deteriorated during the past years.

The above questions have been answered examining the prevailing circumstances in the oil industry in the country and how efficiently they cater to the needs and expectations of industries in both public and private sectors. A critical evaluation thus becomes possible of the different circumstances that prevail in the country in comparison to other parts of the world in ascertaining the problems that are prevalent in the system. This will also allow the research to recommend to authorities about the possible solutions for improving performance of the oil industry in the country.

Research Design

This study employed a quantitative research design for purposes of structuring the research process. This type of research design will help the researcher to examine the issues at hand since the research is largely interested in evaluating the relationship between different variables. Quantitative studies are either descriptive or experimental, but this particular study will employ a descriptive approach since the subjects in this case are the representatives of the oil industry in Venezuela and of multinational oil companies in Venezuela and are only measured once.

Primary data was gathered by means of undertaking an online survey specifically designed to measure the respondents’ perceptions, values, satisfaction, and opinion towards performance of the oil industry in Venezuela. According to Sekaran (2006), a survey is effective when the researcher is particularly interested in descriptive assessment of a particular phenomenon as it is the case in this study. Secondary data was collected by means of undertaking a detailed review of related literature.

This research aimed at achieving the objectives of making adjustments about the current activities of the PDVSA, national oil companies, international oil companies and the Venezuelan government and identifying the barriers in this sector while making comparisons amongst them. On the basis of the literature review and the answers to questions that were forwarded to individual respondents via e-mail, it was proposed to ascertain the following:

  • Whether the Venezuelan government is interfering in the affairs of PDVSA
  • Whether there are any barriers in the oil industry in Venezuela
  • Whether national oil companies in other nations in the region are controlled entirely by the government
  • Whether PDVSA is performing as per plans and whether citizens are happy with its performance.

This research used different characteristics that were present in every chosen aspect for the purpose of this survey. Individuals were also chosen from diverse backgrounds in order to a have a wide cross section of respondents in enabling the study to have a broad perspective while concluding the findings. Respondent groups were chosen that belonged to private and public sectors as also from multinational companies that have been related with the oil industry in Venezuela. Different individuals were invited to respond and the sample population comprised of individuals that were professionals, managers who worked in the oil industry in Venezuela. There were 20 individual respondents chosen from the industry that represented five from international oil companies, 10 from PDVSA and 5 from the government departments dealing with different functions relative to PDVSA. All respondents were required to respond in the context of their individual perceptions.

Company representatives from multinational companies were required to respond in the context of their activities and their performance in relation to varied parameters that were outlined in the questionnaire. There were 20 questions asked in the questionnaire that focused upon extracting information pertaining to the circumstances in the oil industry in Venezuela, performance of PDVSA and the problems associated with its smooth functioning. The questionnaire was designed after conducting a mock pre-test by way of in-depth interviews amongst decision makers in PDVSA and government officials dealing with PDVSA. Attempts were made to represent the widest possible cross section of individuals and officials relative to Venezuela’s oil industry. The criteria used for selecting issues rested on the willingness of the respondent to be interviewed and of having been associated with the oil industry for at least three years. Individuals were selected amongst a wide base in attempts to include people that were aware of and directly involved with the oil industry and PDVSA. Some individuals that had been involved in the sector but had subsequently changed their functions subsequently were also included. The average age of respondents in the survey in terms of questionnaires and interviews was 34 years and 61 percent respondents were from the PDVSA while 39 percent represented multinational oil companies and government departments.

Target Population and Sample

The target population for this study comprised of people that were directly engaged in the oil industry and people from government departments dealing with the oil industry and PDVSA. To get responses from individual respondents the email option was considered most meaningful because it allows having specific information from the perspective of respondent’s confidentiality. Purposive and convenience sampling approaches were utilized for purposes of coming up with the desired sample. Purposive sampling was used to assist in the process of selecting a sample that has prior knowledge and understanding of working systems in the oil industry. Afterwards, the subjects were requested to respond to the questionnaire by virtue of being in the right location at the right time, otherwise known as convenience sampling.

Data Gathering Instruments

Primary data for the study in the case of individual respondents was collected by means of an online semi-structured questionnaire schedule. A questionnaire is desirable in a descriptive study basically because it is easy to administer the tool in an online setting. The tool has been designed to measure the respondents’ perceptions, attitudes, and values regarding working of the PDVSA and the oil industry in Venezuela by using a five-point Likert-type scale, and how these variables combine to enhance or lessen their opinion in the context of Venezuela’s oil industry. Apart from the ability to attain a high response rate, it is also easy to undertake a comparative analysis when using a questionnaire due to the fact that most items consist of closed-ended questions. The questionnaire used in this particular study was also subjected to thorough testing to ensure that issues of data validity and reliability are appropriately dealt with. Secondary data for this study was collected through a comprehensive review of literature, sourced from reliable sources, including textbooks and journals.

Data Analysis

The study employed both quantitative and qualitative data assessment techniques for gathering primary and secondary data. Quantitative assessment involved coding the data contained in the questionnaires and entering them into a statistical package. Afterwards, cleaning and analysis of the data was performed using the same package to generate frequency distributions and descriptive statistics that were used to answer the study’s main objectives. Data was presented in different forms and the qualitative data generated by the open ended questions was analyzed by using a process known as qualitative content approach. This method involves cleaning, coding, and evaluating responses that were given in either verbal or written communication so as to permit them to be considered quantitatively.

Table I. Analysis of Oil Industry in Venezuela.

Themes No. of respondents
Lack of Transparency in Oil Industry Multinational Companies

5

PDVSA

10

Government officials

5

2 3 4
Adequate technology 2 1 2
Extent of efficiency 5 2 4
Quality of Service 5 5 4
Appropriate distribution of resources 5 4 2

The table show the number of respondents who asserted to or confirmed the providence of each theme in the context of their agreement with the prevailing circumstances in the oil industry in Venezuela.

The responses from 1 to 5 pertained to the following:

  1. Strongly Agree
  2. Tend to Agree
  3. Neither Agree nor Disagree
  4. Tend to Disagree
  5. Strongly Disagree

All the people surveyed, are based in Venezuela and have been involved in oil industry operations and affairs for at least three years. It is evident from the gathered data that reducing corruption and improving efficiency are the main motivating factors for most respondents although their responses vary in view of different perceptions. Next in importance for respondents is to increase the social role of PDVSA so that citizens get more benefits because the oil industry impacts several aspects of life. Thus, it appears that efficiency and better allocation of resources should be the main objective of firms in the oil industry in Venezuela. The main barrier in the oil industry is identified as government interference and inefficient technology in terms of inadequacy and availability, which are considered as the most crucial by respondents because they have been proving to hamper the normal functions of PDVSA and the utilization of its full capacity. The issue of funding was followed by organizational culture, lack of willingness to adopt latest technology, cost of technology and confidentiality. Therefore it appears that although lack of transparency is considered a major barrier, respondents are open about PDVSA conducting business by using higher levels of management efficiency and independence in performing its day to day functions. This is primarily because PDVSA has good infrastructure in terms of means of production and operations.

The high potential of the oil industry in Venezuela in serving the long term interests of citizens is evident from the fact that it is one of the biggest oil companies in the world with potential for massive revenues that can be utilized for the welfare of the country and its people. Although it cannot be said that there are no barriers to adopting better measures in PDVSA, the present environment in terms of state role and availability of adequate funding are making it difficult to improve the situation.

A major difference between the national and multinational oil companies pertains to the difference in the structure of establishments. Multinational oil companies are characterized with high technology and willingness to make huge investments in the oil industry while national companies are mostly dependent upon the meager revenues they get from their low technology operations after they have met revenues mandates from the state. For national oil companies to be successful and viable they have to reinvest a major part of their revenue. It became known from the survey that some national oil companies have started to use better technology in order to increase revenues and productivity. Thus it is true that although most national oil companies including PDVSA continue to be in the grip of state interference, they are taking initiatives to adopt better technology and to increase revenues. The international oil industry is characterized differently in the context of global operations as compared to national companies in developing nations although PDVSA is different in terms of technology use and revenues in view of its huge size and global operations. In being an emerging economy, the oil industry in Venezuela has not utilized the full potential of the oil sector in terms of using technology, investments and appropriate distribution of funds.

Given that Venezuela may the largest oil reserves in the world if more exploration is carried out, new operational networks have been put in place by the government and PDVSA has been strengthened by way of bigger stakes in foreign subsidiaries and global operations. In view of its strong hold over PDVSA, the government is looking at new ways to increase its profitability and productivity. This will result in enhancement of effectiveness and efficiency of PDVSA in terms of it’s over all functions. All respondents informed during interviews that this is a vital requirement for the government to comply with.

Venezuela has been presented with a large number of infrastructure challenges in the context of providing adequate motivation to PDVSA to expand its operations and improve its efficiency, albeit all benefits will go to the government under the present circumstances. Moreover, management in PDVSA is not completely ready to recognize and comply with global standards while handling global functions because of government mandates and interference. A major concern of PDVSA is to address issues pertaining to it global performance by using the latest technological options that are presently being used across the world. Global oil companies have established facilities in a number of oil producing countries so that economies of scale can be utilized in a competitive environment.

Most respondents felt that PDVSA is not operating efficiently and measures should be taken to improve its performance and image within the country as well as internationally. Functions need to be handled with competence and by trained people as per norms established by global bodies and the standards set by the global practices. Respondents agreed that PDVSA performance had declined after President Chavez came to power. Good performance in the oil industry can be achieved only if quality management practices are adopted in keeping with the country’s circumstances relative to the international environment. With the increasing number of international oil companies that are adopting modern management systems to motivate employees, improve economies of scale and economy measures to reduce costs, it is imperative for PDVSA to take remedial measures on top priority.

Findings and Analysis

While examining the issues prevailing in Venezuela relative to PDVSA, it is important to mention that most of the company’s functions not longer remain efficient as compared to what they were prior to 1999. The PDVSA’s technical capacity has been reduced because it took over many international oil companies; it led to the country’s reduction in capacity to generate hydro carbon resources. Respondents cited that after the 2002-2003 strike PDVSA’s technical capability was reduced a great deal and the company has not yet recovered from the set back as yet. Productivity in the company has declined and its efficiency has been drastically reduced. The government forced PDVSA to have majority stake in privately controlled production companies that increased the load on a management that was already reeling under immense pressure from the government. There has been constant erosion of PDVSA technical capabilities because of which it is unable to cope with the technical demands of dealing effectively with the heavy projects in regions such as Orinoco.

Respondents agree that the government has made PDVSA weak because it suffers from shortcomings in being associated with international oil companies that will not generate any revenue for it. International oil companies no longer have a majority stake in the country because of which they will not cooperate fully with PDVSA not will they pass on their technology in fear of creating another competitor. It is thus very crucial for the government to recognize the importance of giving PDVSA a free hand in carrying out its functions and activities. Respondents felt that in having laid pipelines across borders of neighboring countries the government was only appeasing its friendly nations and not working towards the ultimate welfare of its citizens.

A lot of capital is needed to be reinvested from PDVSA’s revenues to make the company viable in the long term but the government has other objectives and is requiring the company to fund several of its projects. Only if the government adopts long term perspectives can PDVSA’s performance and financial position be improved. Most of the time the required technology and equipments are readily available but PDVSA is unable to afford the huge investment and does not have the technical expertise to enjoy economies of scale. Indeed, it is a major challenge for PDVSA to influence the government to adopt a softer stand in its functioning. Respondents asserted that the Venezuelan government can start conducting training and workshops in educating and informing managers in PDVSA about the impending challenges and how they can be overcome. It is now widely accepted that efficiency in PDVSA is a crucial element so that it becomes a stronger global entity in the oil industry. A necessary condition for improving PDVSA’s performance and to strengthen its financial position is for the government to reduce its interference in the company. Therefore, Venezuela needs to respond to such problems by reducing its pressures on PDVDSA and provide end to end freedom in functioning and in carrying out production and distribution functions.

For this research, the triangulation approach has been used because of the wide scope of the study It has involved the use of three methods namely; interviews, surveys and document search. The choice of interviews has been informed by the adaptability they offer. For example, the body language of the respondent can help in obtaining more information. The use of surveys is justified by the fact that they can be completed at the convenience of the respondent and can also reach many people. Document search will be helpful in finding information on previous work on the topic. The use of several methods will help in ensuring accuracy of the findings. The study has been conducted in Venezuela by inviting respondents representing PDVSA, government officials and representatives from international oil companies.

The respondents were chosen at random because this practice reduces bias by giving every individual an equal chance of being selected. Document search was used to collect secondary data. The data can be obtained from journals, text books, libraries and internet sources. The sources will be vetted for accuracy and relevance before being reviewed.

Interviews were used to collect primary data and were conducted via video interviews. The interviews involved structured questions that guided the study as well as questions that transpired during the course of the interview. The questions aimed at capturing facts about the topic instead of personal opinion. The respondents were informed prior to the interviews about the purpose of the research and that their responses will be treated in the strictest confidence. They were categorically assured that their names or other details will not be shared with any third party and if at all there is any need to do so, prior permission will be taken from them. The following questions were asked from respondents that were chosen at random from amongst bank managers, business owners and government authorities:

Questions

  1. What is your name?
  2. What is your age?
  3. Where do you work?
  4. What is your qualification?
  5. What do you feel about present condition of the oil industry in Venezuela?
  6. Do you feel that the PDVSA has been adversely impacted by government interference?
  7. What according to you is the biggest problem created by government interference?
  8. How good was the state of PDVSA before the President Chavez came to power?
  9. What according to you is the main cause of government interference?
  10. Have you personally suffered any personal hardships because of these problems?
  11. What do you feel about the present status of PDVSA in terms of efficiency and performance?
  12. What is the status of PDVSA in comparison with other international oil companies?
  13. What according to you are the main political pressures on PDVSA that hamper its competitiveness?
  14. What do you feel about the impact of government fiscal policies on PDVSA?
  15. What are the requirements for PDVSA to perform as well as it did before 1999?
  16. Given that there has been political pressure on PDVSA for several years, what according to you is the biggest fiscal issue created in the company because of this policy?
  17. According to you what are the areas in PDVSA where fiscal policies should be changed?
  18. What policy measures should the government do away with in respect of PDVSA
  19. How long do think the problems in PDVSA will continue?
  20. According to you what are the shortcomings that PDVSA should remove?

Surveys

Surveys were also used to collect primary data. It involved administering anonymous questionnaires to the respondents. The questionnaires were mailed to the respondents who were chosen mainly from amongst citizens of Venezuela after they were informed about the purpose of the research and that their responses will be treated in the strictest confidence. They were categorically assured that their names or other details will not be shared with any third party and if at all there is any need to do so, prior permission will be taken from them. A letter explaining the purpose of the study and how the questionnaires are to be completed were also mailed to the respondents. They were asked the following questions:

Questions

  1. What is your name?
  2. What is your age?
  3. Where do you work?
  4. What is your qualification?
  5. What do you feel about present condition of the oil industry in Venezuela?
  6. Do you feel that the PDVSA has been adversely impacted by government interference?
  7. What according to you is the biggest problem created by government interference?
  8. How good was the state of PDVSA before the President Chavez came to power?
  9. What according to you is the main cause of government interference?
  10. Have you personally suffered any personal hardships because of these problems?
  11. What do you feel about the present status of PDVSA in terms of efficiency and performance?
  12. What is the status of PDVSA in comparison with other international oil companies?
  13. What according to you are the main political pressures on PDVSA that hamper its competitiveness?
  14. What do you feel about the impact of government fiscal policies on PDVSA?
  15. What are the requirements for PDVSA to perform as well as it did before 1999?
  16. Given that there has been political pressure on PDVSA for several years, what according to you is the biggest fiscal issue created in the company because of this policy?
  17. According to you what are the areas in PDVSA where fiscal policies should be changed?
  18. What policy measures should the government do away with in respect of PDVSA 19. How long do think the problems in PDVSA will continue?
  19. According to you what are the shortcomings that PDVSA should remove?

Data Analysis

The collected data was analyzed using statistical tools and the determinants to be measured included economic performance by way of profits of PDVSA, funds diverted to the government and other agencies, percentage of non-performing loans, credit creation and level of deposits. The responses from interviews and surveys were compiled in arriving at the given conclusions that are discussed in the analysis and discussion chapter of this research paper. The oil productivity of Venezuela was examined from different perspectives. Its oil consumption and productivity from 1990 to 2010 are depicted as under:

Venezuela's Oil Production and Consumption

It is evident from the above data that Venezuela’s oil production has been 4-5 times its consumption from 1990 to 2010. This is a positive sign because there is excess supply even after providing for home consumption. This clearly indicates that Venezuela is surplus in oil and can exploit this blessing in enhancing its revenues through global sales. At the same time, majority oil is sold through PDVSA, which is under the direct control of the state. The state in turn is not exploiting the advantages for long term benefits, which means the country has already foregone what it could have reaped from past efforts. It is required of the government to allow PDVSA to function independently in a competitive market environment instead of following the policy of appeasing friendly nations and winning over citizens in the short term through social benefit policies. Revenues need to be reinvested so as to improve production capacity and economies of scale, which will prove to be more beneficial in the long term. As per latest data, Venezuela has the biggest oil reserves in the Western hemisphere and if more exploration activities are initiated there is likelihood that more reserves will be found. It is also evident from the following graph that although countries such as Canada, Mexico, Brazil and the US are having lesser reserves they produce more oil per day than Venezuela. This indicates the potential that is waiting for the country to be tapped.

Western Hemisphere Proven Oil Reserves and Production

Discussion

The large oil revenues received by Venezuela in recent years have created heated debates about the source of this income and the ways in which it is being utilized. When Hugo Chavez became the President of Venezuela in 1999, the price per barrel of oil was about $10 and in 2006 it increased to $57. Such increases in oil revenues raise the obvious question as to how these revenues were used for developmental purposes and how they influenced the relationship between the government and citizens. There is a strong need to examine the impact of these revenues on the ways in which the political regime evolved and the role that petro dollars played in the foreign policy of President Chavez. Venezuelan citizens are not new to such issues because they faced similar situations during the previous oil booms. But this increase in revenues appeared to be structural in nature because the ruling elite class comprising of military and civil leaders pushed for political agendas that were in contrast with what was targeted during the last few decades.

The Chavez government did not encourage private investments and this policy is viewed as the weakest link in the economic performance of the country during the period of the oil boom. Sachs (2007) has correctly argued in this context that “development depends on a mixed economy, in which both public and private investments contribute to economic growth. Public investment spending should be seen as a complement rather than substitute for private investment spending, focusing on public goods and merit goods, and leaving the private sector free to build a private-owned economy alongside the public investments” (Sachs, 2007, p.178). Another impact of the investment policy is the pattern of flexibility n expenditure, which is measured in terms of the investment expenditure/primary spending ratio. It was found to be at the lowest level in 2009 and made the country helpless in being unable to deal with external shocks.

Consumption Levels

It is evident from the research conducted by Collier et al (2009) that private consumption was a major driver of economic revival during the period 2004 to 2008. Increasing consumption levels amongst the poor was a good strategy whereby revenue resources could be directed towards this objective but it is harmful to postpone consumption benefits in the distant future. After Chavez came to power, consumption patterns have not changed much and real consumption has not varied significantly in real terms as a percentage of the gross domestic product. However, private consumption patterns have been different and have been relatively constant during the period 1998 to 2003. But they increased sharply during the period 2004 to 2008 and contracted by 3.3 percent in 2009. Economists believe that decline in consumption proves to be very costly for the country in both economic and political terms. Such behaviors clearly give the indication of the intense problems Venezuela is facing in trying to bring back the economy on the track towards achieving sustainable economic growth.

The experience of Venezuela relative to the recent oil boom is suggestive of the presence of ineffective public institutions, weak macro economic management and unsatisfactory long term economic accomplishments. The major factor that explains the government’s selective management of the huge oil revenues is the country’s political framework. Given President Chavez’s high political rating, it appears the main issue relates to the electoral mechanism in terms of accountability as people in the country do not have complete information because of which elected politicians increase their benefits by following short sighted strategies. Because oil resources provide funding for such ineffective strategies, the abundance of natural resources assists in strengthening the position of the incumbents, thus rendering the mechanisms of democratic accountability to become ineffective. This hypothesis is also evident from the literature relating to the relationships amongst economic performance and political organizations in resource rich nations. Such characteristics provide reasons to conduct further research in the context of comparing performance of nations and regions.

A cherished value amongst PDVSA workers is the accomplishment of restoring to Venezuelan citizens their natural right over hydro-carbons that they were deprived of for several years. Attempts to consolidate the position in this regard still continues, which is perhaps why the government continues to work towards removing the oil sector’s contractual obligations that presently endanger the country’s sovereignty. Steps have been taken in this regard such as reversing the extent of royalty payments by companies operating in the Orinoco region to 16.67 percent and revising the several operational agreements signed during the period 1992 to 1997 between PDVSA and global oil companies. The Ministry of Energy in Venezuela conducted a technical and legal study in reviewing the accounts of such agreements in view of the fact that the payable fees was dependent upon the prices and amount of hydro carbons being produced in the operating regions. This arrangement was agreed to amongst the parties functioning in these areas. This analysis provides a basis to conclude that the given agreements were not congruous with the prevailing Organic Law on Hydrocarbons. The present status of the Orinoco project is as under:

Existing and Planned Orinoco Belt Projects

It is evident from the above information that there is immense potential for PDVSA to tap the Orinoco resources and thus to increase revenues substantially. In 2007, the last of the privately operated oil fields was nationalized and in contrast with doing away with the combined operating arrangements with international oil organizations such as BP, Conoco Philips, Statoil, Chevron Texaco and Exxon Mobil, the new policy altered agreement conditions whereby the PDVSA was given a minimum of 60 percent stake.

PDVSA Production Policies

The PDVSA reduced its technical capacity and taking over a number of international oil companies led to the country’s reduction in capacity to generate hydro carbon resources. The large number of technical personnel that were fired following the strike reduced the once excellent technical expertise of PGDVSA and the company has been suffering on this account till this day. As per data collected by the American EIA, productivity of Petróleos de Venezuela declined by almost 30 percent following the strike (EIA, 2007). The company’s efficiency in production was further reduced by the government decision to provide majority stake in privately controlled production establishments.

Weitzman (2007) writes that in May 2007, Venezuela transferred ownership of many companies and took control over four large Orinoco facilities. Analysts such as Ellsworth (2007) are not convinced that PDVSA has the technical ability to manage the complicated and extra heavy Orinoco projects. Despite recognizing that PDVSA suffers from shortcomings, the government pressed for retaining participation of international oil companies with some stake. This suggests that a large number of international oil companies will continue to be involved but it is also evident that in view of their restricted stake they will not invest and produce with full interest in view of the risks associated with uncertainty of regulatory change and additional nationalization.

The Chavez government has been collecting huge revenues from Petróleos de Venezuela but it has failed to increase revenues in the short term. Additional risks have been created that will harm PDVSA in the long term. Mechanisms of budgetary revenue collection have allowed the government to get enormous revenues but the uncertainty and huge size of these mechanisms have the potential to render the investments non viable. External analysts believe that Petróleos de Venezuela should make investments of at least $8 billion every year to consistently enhance productivity (Ecónanalitica 2007).

Productivity in PDVSA has been foundering because only $3.9 billion and $5.8 billion worth of investments were made in 2006 and 2007 respectively (PDVSA, 2010). After the strike, the company lost considerably in terms of technical expertise and the new workers have not been able to keep up with past production patterns. In all probability, in the long term, there will be lower level of productivity and reduced efficiencies in hydro carbon revenues in PDVSA because of the massive size and uncertainty of government’s revenue collection mechanism. This is also because of the company’s declining technical expertise and increasing control over oil production. Consequently, the government will have to reduce the much needed investments and Petróleos de Venezuela will not be able to administer its newly attained status as efficiently as international oil companies.

The impacts of the Venezuelan government’s policies on Petróleos de Venezuela have begun to accumulate. It was observed by the International Energy Agency in March 2007 that Petróleos de Venezuela is now straddled with several extra duties of social spending and other obligations, in terms of buy outs and acquiring shares in international companies, because of which it has become financially tight (IEA 2007). Analysts are of the belief that the Venezuelan government is resorting to practices of collecting excessive resources for PDVSA in order to provide for the required investments. Econanalítica (2007) has held that Petróleos de Venezuela is heading the same way as the Mexican company PEMEX, whereby it became a company that had to provide revenues to the government during the 1980s and 1990s at the cost of expansion in production capacities and efficient management. Apprehensions have increased about the consistent flow of revenues to the government, especially after the public bond offer announced by PDVSA in 2007. PDVSA had announced a public bond offer of $8 billion in 2007 and although the company’s cash flows were improving during the period 2004 to 2006, the bonds eventually served in diverting funds for meeting government obligations.

Diversion of Resources

A major way in which the Venezuelan government forces Petróleos de Venezuela to share its funds with non government entities is to sell in the domestic market at highly discounted prices relative to global prices. Several governments in Venezuela have been subsidizing petrol in view of political aspirations. The government feels that such a policy provides delivery of oil benefits directly to citizens. The present government has been maintaining the practice of subsidizing oil, which comes at considerable cost to Petróleos de Venezuela. For instance, in 2007, the country’s population consumed 548,000 barrels of oil per day (b/d) that represented about 21 percent of the company’s production. According to Romero and Krauss (2007), the company has been selling gasoline in Venezuela at $0.20 per gallon and the cost of this subsidy relative to opportunity cost in the market is a minimum of $9 billion every year.

In keeping with geopolitical perspectives, the government has required PDVSA to assist countries such as Uruguay, Argentina, Bolivia and Cuba with oil donations, discount on oil sales and other benefits. In 2007, the total cost of these concessions worked out to about $1.8 billion. In order to have a positive image in the US and to influence the Bush administration, Chevez directed PDVSA to sell over 42 million gallons of heating oil at subsidized prices in the North east regions of America during the period 2006 to 2007 (PDVSA 2010). But these programs are different from PDVSA’s business strategies. Moreover diverting revenues encourages smuggling and creates adverse environmental impacts. Because of such practices PDVSA ends up with lesser petrol to sell in the open market and thus generates lesser revenues. The following diagram throws light on the extent of exports to countries such as the US, China and the Caribbean region. Exports to the US are the maximum in keeping with past commitments. Almost 34 percent exports are to friendly countries in the Caribbean that are offered discounted prices, obviously at the cost of PDVSA.

Venezuelan Crude Oil Exports by Destination

Interference in Business Decision Making

The Venezuelan government has been forcing PDVSA to take business decisions because of geo-political reasons. Although such requirements are apparently less costly as compared to financially supported oil programs, they adversely impact Petróleos de Venezuela in the long term in view of risks associated with restricting the company’s future business potential. For instance, the Magna Reserve project was devised to acknowledge the company’s large Orinico oil reserves and was to function by way of partnership amongst foreign companies and PDVSA. But these partnerships were imposed by the Chavez government relative to countries that were friendly with Venezuela. But in this context PDVSA is known to have voiced concerns about the geopolitical implications of the project because it would create a multi-polar world with stake holders in China, Brazil, Belarus, Argentina, Uruguay, Vietnam, Spain, Russia, Iran and India. From the business perspective the project makes little sense because most of the involved companies have very little exposure to heavy oil. The project does have the potential to enhance Venezuela’s hold within OPEC by strengthening Petróleos de Venezuela’s bargaining power with buyers. It can also enhance Venezuela’s strength in the global community but there are heavy costs associated with foregoing technically sound international oil companies.

The government in Venezuela has required PDVSA to execute internal as well as global projects mainly because of political reasons. For example, a large amount of PDVSA funds have been used by the government to take over big Venezuelan companies. PDVSA was forced to pay $740 million to American company AES and had to buy Compañía Anónima Nacional Teléfonos de Venezuela, which is a communications company (Compañía Anónima Nacional Teléfonos de Venezuela, 2007). According to Bradley (2007), attempts are being made to nationalize many companies in the banking, healthcare and steel sectors. The government asked the PDVSA to assist in constructing the South American gas pipeline despite the fact that the project’s viability was doubtful.

The Venezuelan government has required PDVSA to spend huge sums of money to support government projects. Such actions deprived the company of at least $12 billion in possible annual revenues, which is approximately 20 percent of its national revenue (PDVSA, 2010). The most costly venture for PDVSA at the instance of the government has been the national subsidized gas program that has been costing over $10 billion annually (Romero and Krauss 2007). PDVSA has to also dish out another $1.8 billion every year in providing for foreign oil assistance projects while non-recurring state actions such as financing electricity and communications have cost the PDVSA about $300,000 annually. A major outcome of government initiated PDVSA action has been to provide the state with bigger roles in the country’s economy. For instance, Electricidad de Caracas was considered to be the biggest private sector company in Venezuela but after being taken over by PDVSA is involved in working towards socialist functions, obviously under state control.

The takeover of the electricity and telecommunications sectors is indicative of the state’s transformation of PDVSA. Rather than allow the company structures to remain the same, the state redesigned them to espouse its revolutionary concepts. The takeover of private companies by the Venezuelan government will enhance its internal influences but will adversely influence PDVSA’s performance. In all probability the influence of the government on PDVSA will keep increasing. Former private companies can be used for projecting government objectives amongst the public. These companies can be conveniently used by the government in activities such as procurement and contracting. But the increasing state influence on the country’s economy comes at considerable cost. Because of being required by the government to increase spending on social projects, PDVSA has lesser resources available for investments. From the perspective of the entire economy, the transfer of ownership from private to government results in over all reduction in efficiency of these companies. In having opted to control former private companies directly, the government has foregone the opportunity to reap the benefits of regulation and market competition. Most of the nationalized industries will eventually become less competitive and will have reduced investments.

The massive reliance of the government on PDVSA has led to overlapping of government objectives. The PDVSA and the government have been combining efforts to increase oil prices in the global market for which they have been working together. The government has opened an oil intelligence office at the OPEC head office in Vienna to influence global markets and to increase prices. But this strategy will not work in the long term because OPEC nations will not compromise on their bargaining power. Moreover, creating cartels has never succeeded in the oil industry. But the integral association between PDVSA and the Venezuelan government in attempts to increase oil prices clearly demonstrates how government goals influence the objectives of national oil companies in Venezuela.

Identity of PDVSA

Other than its role of a government funder and implementer, PDVSA works in a business system that represents the Venezuelan government’s goals and strategies. The company’s Plan Siembra Petrolera or oil sowing plan represents its long term business objectives from 2005 to 2030 (PDVSA 2010). For the period 2005 to 2012 the plan relates to six primary field of operation:

  • The Magna Reserve certification project
  • the Orinoco oil development project
  • the Delta Caribbean gas development project
  • Increasing refining capacity
  • Development of infrastructure such as pipelines
  • Integrating energy networks across the Western Hemisphere

Most of the above areas are also part of the Venezuelan government’s objectives because the Magna Carta Reserve program is supportive of agreements with friendly countries. The Orinoco oil development project deals with developing a framework whereby the Venezuelan coast becomes free of overcrowding. The energy integration program enforces Venezuelan influence in the Western Hemisphere. PDVSA has planned to invest heavily in carrying out its plan for the period 2005 to 2012 although the plan considerably depends upon unrealistic projections and on private sector participation. It appears the company is not making adequate investments to achieve the targets provided in the plan and critics have held that the objectives of the plan are not sufficiently ambitious.

If PDVSA’s plans are to succeed it needs to increase its oil production substantially from the present 3.3 million b/d to 5.9 million b/d by 2012 (PDVSA 2010). It is also evident that the company presently falls short of the required production levels and does not have the capacity to increase production immediately. According to Mares and Altamirano (2007), investments continue to be inadequate in expanding production to the required levels. It appears the Venezuelan government has been focusing more on certification rather than on exploration activities. As per the 2005-2012 programs, the Magna reserve project relates more to certification as a top priority of PDVSA.

PDVSA has also been keen to increase its refining activities in the short and long terms. As per the 2005-2012 plans, refining activity will be enhanced from the present 3 million barrels per day to 4 million barrels per day by the year 2012. PDVSA will establish three refineries within the country at Cabruta, Caripito and Santa Ines. The company will also establish oil refineries in other countries such as Cuba and Brazil in order enhance its heavy crude refining capabilities. The present status of PDVSA refining activities is as under:

The present status of PDVSA refining activities

It is evident that other than Venezuela, PDVSA has refining facilities in the US, Europe and the Caribbean region. The refining activities of PDVSA are supportive of both the government’s as well as its own objectives and if there is increase in productivity, refining capacities have to be also increased in order to keep up with an integrated organization framework. Venezuela benefits with additional refining facilities because it then becomes less dependent on the US for refining its oil. PDVSA also plans to expand its natural gas infrastructure and productivity networks. The business model adopted by PDVSA relates to building its capabilities as a vertical energy supplier but the country’s government has been shaping its activities in view of its demands, which have hampered the company’s developmental activities.

There is a strong need for increasing productivity, which is not possible because high amounts of PDVSA revenues are diverted to the government. It is mainly in keeping with government objectives that PDVSA has to focus on politically motivated activities instead of development activities such as exploration. The business model in oil is not entirely dependent upon prices but PDVSA is not making adequate investments even when prices are high because of increasing demands from the government for its revenue. It is thus becoming difficult for PDVSA to implement its plans because of the present pattern of government mandates and expectations. An immediate impact of nationalization was the massive increase in the country’s foreign exchange reserves that were more than $35 billion in 2008. This allowed the country to have extra liquidity and one of the highest per capita in the region, which assisted it in combating the global financial crisis and in reducing its dependency on other countries.

It is not implied that revenues from natural resources cannot contribute towards establishing democratic systems under specific conditions. This is true in the case of Venezuela, where external revenues from oil have been used to run a democracy. Leaders in the country have used oil revenues to keep themselves in power although a democratic culture does exist, which is evident from the power commanded by the people and trade unions. However, democracy in Venezuela is characterized with a democratic culture in which some agents command virtual veto power in restraining the actions of the vast majority of citizens.

The law of petro-politics holds that with increasing crude prices, the freedom of people will be consistently eroded and the framework of political and electoral jurisdictions will be weakened. With increase in oil prices, more power is grabbed by leaders in petro states. They are invariably not much interested in catering to domestic requirements and are not concerned about what other nations feel about their actions. In view of these observations, researchers have cautioned that such circumstances create immense risk for the global system. However, although control over oil has the potential to create asymmetrical relationships amongst states, using oil revenues for exerting influence on other nations is the same as practiced by other nations possessing other goods and raw materials.

PDVSA has lost its reputation of being the best administered oil company worldwide and one of the most efficient oil firms in the world market because there has been considerable deterioration in its services and productivity. All the foreign oil companies operating in Venezuela were nationalized in 1975 and a unique state oil company was created called Petróleos de Venezuela (PDVSA). 1998, PDVSA was the best State managed oil company in the world and the second private oil company worldwide, as measured by usual management practices. Actually, PDVSA is the fourth larges oil company in the business (PDVSA, 2010 p.22) and controls carries out its activities through a vertical integration process in upstream, midstream, and downstream areas.

The literature has demonstrated that countries depending upon exports of high value natural resources tend to grow at slower rates as compared to countries that have scanty natural resources. Following the first oil boom during the 1970s and the over all increase in prices, researchers started doubting if incomes were being managed efficiently in creating a positive economic and social effect. Because of price fluctuations, many economists started reflecting on boom and bust patterns, and developed literature that investigated the concept of the Dutch disease, which deals with rise in revenue from using natural resources such as oil and minerals that further leads to reduction in production in agriculture and manufacturing.

Consequently, these sectors become less competitive because of overvalued currencies. Initially the theory held that the Dutch disease would lead to de-industrialization of the economy in the mid term but subsequent adaptations suggested that this does not occur always. What may happen is reduced importance of agriculture and increased role of the government sectors Economists have also studied the resource curse concept that attempts at explaining the ways in which economies having plentiful natural resources cannot reap their full benefits and thus have economic growth that is lower than countries having lesser natural resources. This concept is also relevant from the political perspective because eventually the government makes policy decisions or has strong influence in matters relating to oil and revenues.

Nationalization and Poverty Reduction

Chavez had come to power at a time when the nation was suffering from financial difficulties resulting from the domination of foreign companies that exploited its natural resources. Chavez introduced the nationalization of oil fields in 2001 after passing the Hydrocarbons Law that did not allow foreign companies to have more than 40 percent ownership in oil production. The stupendous increase in poverty levels before Chavez came to power was attributed to the large amounts of revenues that were being taken out of the country by multinational oil companies. In having elected Chavez as President in 1999, the Venezuelan people had unintentionally begun the process of combating the prevailing financial crisis. Majority of the oil profits were redirected back into the economy, which was a major cause of criticism by multinational oil companies in Venezuela. But nationalization was directly responsible for making PDVSA the majority stake holder of oil production in the country. Thereafter, the country attained stability and poverty reduced by 28 percent in the first two years. Oil exploration and production was reverted back to the people who were now direct stake holders in the industry.

Analysis

It is true that President Chavez has transformed Petróleos de Venezuela from a company that was commercially successful to one that is now a government agent. The organization’s structure can now be said to form three parts:

  • Revenue collection company for the government
  • A company that implements for the government
  • A company that continues to have a viable business

The structure of the PDVSA can be examined from three perspectives:

  • Objectives of the state, its capabilities and relations with the oil industry
  • Management
  • Technology and hydro carbon resources

These three perspectives can be treated as three independent variables that explain the strategies and performance of the government relative to the PDVSA. The state’s relationship with the oil industry is very significant in underlining the performance levels and strategies of PDVSA. In fact, the PDVSA management has been functioning as a facilitator for implementing government strategies and working towards the state’s objectives. In view of Venezuela’s large natural resources PDVSA has been able to produce huge quantities of oil in spite of interference by the government but it is also evident that such strategies will not hold the company for long and its viability will not be tenable in the long term.

Government’s Capability and Relationship with the Oil Industry

The main objective of the oil sector in Venezuela is to provide for President Chavez’s immediate finance and implementation needs. Although the state proposes to reform the constitution so that Chavez can remain President for a longer period, its strategies for collecting revenue relates primarily to the short term. In 2007, PDVSA had to comply with state mandates to give huge sums of money, which amounted to almost 80 percent of its total revenues. This short term strategy has perhaps been adopted to prioritize immediate goals in comparison with long term sustainability of revenues. This has become possible because President Chavez enjoys almost complete control over the process of revenue disbursement. Chavez believes that by spending currently on social objectives and on nationalization, will allow him to strengthen his rule through such social indicators and enhanced government authority over the economy.

The government in Venezuela has tremendous potential to achieve its objectives in terms of spending by collecting revenues from the oil sector through its systems of strict rent collection. The government has been imposing heavy budgetary mandates as well as increasing extra budgetary mandates on PDVSA. Budgetary mandates comprise of a royalty rate of 33.33 percent, dividends and post tax rate of 50 percent. These are calculated after the government has accounted for all taxes, royalties and extra budgetary mandates. The extra budgetary mandates in this regard relate to:

  • The Fund for National Development (FONDEN)
  • The misiones
  • Other social supports, such as the fideicomiso

Such extra budgetary mandates are small and totaled $13.8 in 2007 but they are not predictable. PDVSA was not required to make contributions to the state in respect to extra budgetary mandates prior to 2003. Because these mandates are highly unpredictable they tend to discourage investments. The International Energy Agency (2007) has held that government mandates on PDVSA have considerably reduced the company’s cash flows (IEA, 2007). In view of its close relationship with the PDVSA management, the government has the ability to significantly control the company’s actions. It is also evident now that the PDVSA has several members in the management that are in favor of President Chavez. Therefore, a marked pattern has emerged whereby objectives of the government and the PDVSA have started coinciding.

PDVSA management was once characterized with displaying professionalism and efficient strategies but currently it serves as a facilitator to realize the government’s objectives. Prior to the 2002-2003 strike in PDVSA, its management was considered to be technically sound and professional in performing their functions. It is evident from the aperture plans of the 1990s that the company increased revenues considerably and cemented partnerships with international companies. The company’s professional system had helped it in insulating itself from any kind of interference. PDVSA promoted itself as a strong power that matched the might of government institutions. At a time when PDVSA was very influential and powerful, the management had entered into agreements with the International Monetary Fund (Tinker-Salas 2005). However, now the government has complete control over the company and its management. The country’s Minister of Energy and Petroleum is de-facto President of the company while the country’s deputy minister of Hydrocarbons is the company’s external director. After the strike of 2002-2003, most of the opposition members in the company were removed and those that remained are forced to remain loyal to the government.

Elimination of the former management in PDVSA has greatly reduced PDVSA’s ability to continue smoothly with its functions. About 18000 employees were fired from PDVSA after the 2002-2003 strike, which also included senior managers. It is perhaps for this reason that PDVSA has not yet returned to its pre strike production levels. Many in the government also agree that the strike harmed the company a great deal in terms of productivity and lost morale.

Petróleos de Venezuela has considerable hydro carbon resources in spite of the technical challenges it has faced in creating them. There are large untapped reserves of oil in the Orinoco belt because of which there is tremendous potential for PDVSA’s growth. However, most of these untapped resources are difficult to work on. It is known that the oil reserves in the country exceed 90 billion barrels, which makes Venezuela the sixth biggest reservoir of oil. If more exploration is carried there is every possibility that the country could turn out to be the biggest in the world in terms of oil reserves. But the main resource in the Orinoco region is bituminous, which is very heavy. It requires up-gradation and heating in order to make it commercially viable. Additionally, the potential for Venezuela’s natural gas is also good.

PDVSA Performance

The performance levels of PDVSA have declined considerably under President Chavez’s government, particularly in terms of productive capacity. After the 2002-2003 strike the company’s productivity declined by about 30 percent and there has been no recovery since then. In 2004 the company was earning $31.3 per barrel, which was considerably less than other international oil companies. The company’s technical capability is still considered better that many national oil companies in other countries but is not up to the mark in comparison with international oil companies (Romero et al. 2007). The government’s policy to remain dependent upon PDVSA through funding and implementation has reduced the company’s investments and adversely impacted its profits over the years. Prolonged periods of diminishing investments lead to inhibiting productivity and reduction in production efficiency. Frequent changes in PDVSA management have reduced the company’s performance because most managers give priority to personal objectives instead of commercial priorities. Additionally, most of the new members of the management as well as technical workers have not harnessed the company’s production patterns as effectively as their predecessors. The only buoyant factor that has maintained productivity to present levels, which creates a ray of hope for the future, is the availability of geological and technical resources.

Petróleos de Venezuela’s strategy has emphasized on reducing the partnerships that it enters into with international oil companies and increasing them with national oil companies, specifically with friendly nations. The Magna Reserve certification project introduced by PDVSA aims at achieving the geo-political objectives of the government. The company’s strategy is dependent upon accessing technical expertise from international oil companies and filling the gaps with national oil companies of other nations. Even after the government aggressively expropriated oil facilities in Orinoco belonging to international oil companies, many of such companies have continued to work in cooperation with the government to keep their stake in future programs of hydro carbons development. A major objective of the Chavez government in using the oil sector is to gain favor with friendly countries. In continuing with its partnerships with national oil companies, PDVSA has greatly contributed in fulfilling these objectives, partly because of its ideological link with the Chavez government. However, the geological circumstances in Venezuela have worked against PDVSA’s strategies because most national oil companies are not experienced in dealing with heavy oil fields.

Final Observations

The government in Venezuela has depended heavily on PDVSA to finance and implement several short term goals. However, this strategy cannot succeed for long because the government has set its revenue collections goals on the higher side as compared to other mechanisms of revenue collection. Additionally, many of the government systems used in collecting this revenue, such as extra budgetary mandates, prove to be very uncertain for Petróleos de Venezuela to strategize efficiently. The long term objectives of the government relative to PDVSA are not credible because more emphasis is placed on prices than on productivity. Moreover, this policy cannot succeed in the long term as the government does not have adequate negotiation strength in OPEC in restraining members from production. Another factor is that there are many things that are not within the control of OPEC such as demand for oil and supply alternatives that have a bearing on future oil prices.

The company’s global diversification plans will prove to be partly successful because its agreements with China to sell oil will entail high transportation and refining costs. The deviation in plans to divert sales from countries such as the US to other developing nations cannot succeed because of the extra conditions imposed by these countries and the lower prices agreed to with them. It is also true that PDVSA has not yet been able to find a viable long term model to operate efficiently within the country. Venezuelan people are unlikely to feel contented with PDVSA till the time it reaches consensus on its future strategies that directly them.

Conclusion

Since the early twentieth century, Venezuela’s future has been associated with its oil industry and the country’s relation with this resource has been rather uncertain because it has been consistently contributing to socio economic development as well as economic stagnation and declining standards. However, oil has also contributed in underpinning a large range of political regimes. If the relationship between the state and oil is examined in detail, specifically during times of plenty, it becomes evident that the tax revenues from this vital resource has not been transformed into a constant source of growth and social welfare in terms of a structure that favors stability in the democratic system. It can be said that the petro state has not been able to efficiently manage the boom and bust cycles. This phenomenon is characterized with a framework of institutional inducements and policy measures that are inherently present in terms of appropriating external revenue sources. As a country, Venezuela has transformed after it was belatedly institutionalized during the 1930s although it continues to be characterized with perceptions that stem from the ways in which it makes its living; in terms of having assumed the role of collecting and distributing income instead of creating growth opportunities in other economic sectors. Venezuela’s economy has demonstrated such patterns during times of boom and a major difference between the present boom and that of three decades back is relative to the enhancement of the negative impacts of the petro state.

Upon comparing the two periods it becomes possible to understand some common characteristics such as centralization of power, bureaucracy and constancy. Both periods were characterized with inefficiency, corruption and the failure to alter conditions that were the causes of poverty. A major difference pertained to the fact that while the 1970s were characterized with a liberal democratic set up, the present government is of a mixed nature and considerably focused on authority with total lack of institutional or social remedies. In comparison with the past administration, the new government has increased the practices of rentierism and increased the strength of the petro state by enhancing the impact of the Dutch disease. Another disparity amongst the Chavez government and the Punto Fijo government is the willingness to share increased incomes with the poorer strata of society. The present government’s foreign policies are considered more forceful in the global environment in view of its initiatives to form partnerships and alliances to counter American strength and domination in terms of globalization. The Chavez government has used energy to develop partnerships and alliances but they have not led to positive results.

The models pushed forth by the Chavez government appear to be unsuccessful in view of the high cost and limited production capacities. The main strength of the present government is oil as it can provide with options to experiment and to provide people with what they need. However, the oil industry in Venezuela is much dependent upon external factors and is constrained with issues relative to maintaining constant increase in productivity in the long term. There is historical evidence that petro states have inefficient management of external sources of revenue and are characterized with the prevalence of corruption. They cannot generate economic growth in the long term to improve living standards of citizens. There are other factors also that play an important role in impacting the course of economic and political events that have the potential to influence the country’s future.

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StudyCorgi. (2021, April 5). PDVSA Company and the Influence of Political Decisions. Retrieved from https://studycorgi.com/pdvsa-company-and-the-influence-of-political-decisions/

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StudyCorgi. (2021) 'PDVSA Company and the Influence of Political Decisions'. 5 April.

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