El Taladro Azul Published originally in Spanish in LA GRAN ALDEA
With few exceptions, most Venezuelan politicians have never been interested in trying to understand the operational, commercial, and geopolitical complexities of the oil industry; a curious behavior given the critical dependence of the national economy and its governments on the ups and downs of that industry. They have mostly thought of it as an activity akin to the opening and closing of a tap of an underground stream of black gold.
This oversimplification, a product of the lack of real interest beyond the income they enjoyed from oil, has resulted throughout our history in decisions aimed more at adding to the political interests of the governments in power than at the development of a modern industry, that could compete in the difficult international market whilst being interwoven with the national productive apparatus, like Norway or Texas, just to name the best-known examples. Perhaps the closest that the political establishment has come to designing an oil industrial policy, in the post-nationalization era, was when they decided not to oppose (rather than support) the Oil Opening in the nineties, pressured as they were by the current economic and fiscal crisis of the time.
Nothing that happened in the 20th century compares to the ignorant recklessness of the oil policy of the government of President Hugo Chávez Frías, who made a concerted effort to make the oil industry, and in particular PDVSA, a partisan instrument. To control and subjugate the state company, PDVSA, Chávez created a continuous crisis since his access to Miraflores, which ended with the dismissal of more than eighteen thousand employees, including managers, technicians, and administrative staff in 2002-2003 – we are sure that the crisis had other solutions. Little did Chávez understand, or care, that with his actions he was compromising the future, not only of the company but of the country.
Later, now under partisan control of PDVSA, and for the same reasons, Chávez expropriated contracts, assets, and operating companies. The repercussions are still being felt in the precipitous drop in crude oil production and products, the financial crisis, and the destruction of PDVSA's moral and operational fabric: “It killed the goose that laid the golden eggs,” as the saying goes. None of his advisors understood the complexities of the hydrocarbon industry or in the worst case they did, but they cared little, again politics above national well-being.
In this same order of ideas, currently, there is a belief in Venezuela, shared by some businessmen, analysts, politicians of the regime, and a significant number of members of the political opposition, that a random political decision, in this case, the temporary liberalization of OFAC economic sanctions, constitutes a kind of magic wand, which in combination with the appropriate incantation, will result in an increase in oil and gas production to levels that only the imagination of believers can limit.
But let's not believe that this new version of “El petróleo sale solo” is limited to our latitudes. Judging by certain statements from Washington, there are also those in the north who subscribe to this chimera and sell it as a real possibility to the tenant of the White House.
In part, this belief is based on the recent history of Chevron's activities in Venezuela. Since OFAC granted General License 41 at the end of November 2022, to allow Chevron to resume its operations in Venezuela, it seems they found a way to contradict those who do not believe in magic.
General License 41, coupled with a contract that has not been made public between the North American operator and PDVSA, allows Chevron to operate the joint ventures in which it participates (PetroBoscán, PetroIndependencia, PetroPiar and PetroIndependiente), and also allows for the crude oil produced in them to be sold in the USA market; what Professor José Ignacio Hernández has called a de facto privatization of PDVSA.
When it was evident that license 41 was in the process of being issued, Chevron closed production at the Boscán Field, citing market and storage limitations. It was a legitimate strategy to enhance the results of the activities authorized under the new license, and thus show an almost doubling of production from 70 MBPD in October 2022 to 130 in March 2023, although the bulk of the difference corresponded to the simple reopening of the Boscán field. The rest of the growth came from the reconditioning and maintenance of the fields with the efficiency of Chevron and not the inefficient bureaucracy of the JV managed by PDVSA. From that date until today, only about 12 new MBPD have been added to the production of Chevron's JV in Venezuela.
This “success” of license 41 has underpinned the belief that OFAC licenses can, like a “magic wand,” make the oil industry revive. Without entering into the discussion about the effect of the sanctions on the Venezuelan oil industry – a sterile discussion – the truth of the matter is that something more than a lifting of sanctions is needed to return to some form of healthy growth. The destruction of the oil industry is a consequence of many other things. Let us remember that crude oil production has been in decline since long before the sanctions and the factors that caused this disaster are still present.
The boundary conditions that determine the oil operation, which have nothing to do with OFAC sanctions, such as reliable electrical supplies, presence of armed gangs and guerrillas in the national territory, vandalism, corruption, and legal uncertainty, stand today, as before, as an insurmountable obstacle in the path to recovery. Furthermore, the present institutional and fiscal oil arrangement makes Venezuela one of the least attractive oil provinces for investment by international operators. Without substantive changes in those boundary conditions, which will take time and real political change, which today is still only a hope, the magic is unlikely to work, despite the easing of sanctions.
If we analyze the different combinations of political/economic events and overlap the different directions that the liberalization of sanctions may take, we can outline four well-defined scenarios, that should illustrate the difficulty facing the attempts to recover the oil industry.
The most pessimistic scenario, called “Mas de lo Mismo,” (More of the Same) is characterized by continued political instability, resulting from the actions of an unpopular and inefficient regime trying to cling to power, which precipitates the cancellation of OFAC licenses, with production of oil continuing to slip. The “Crisis Recurrente” (Recurrent Crisis) Scenario corresponds to a negotiated and slow transition, to avoid the licenses from being revoked, but the effect is muted because those who can invest in the recovery continue to perceive a very high country risk. Crude oil production has a slight rebound.
The “Gatopardo” (Leopard) scenario, in which a political transition materializes, but without the political consensus that is required to break with dogmas about state control. Some sectors insist on not modifying the current institutional framework and cling to the statist idea of recovering the industry via PDVSA, today financially and operationally bankrupt. This will tend to empty the State coffers and limit the growth of hydrocarbon production well below its real potential.
Finally, the scenario called “Nuevo Horizonte” (New Horizon), where the political, institutional, and fiscal changes are made, and the industry is energized by the participation of national and foreign private capital. In this scenario, in a reasonable period (say 8 years), production returns to the levels it had twenty years ago – after an investment of around 100 billion US dollars - which will be large-scale sorcery.
As an illustration, we show in the graph that follows the crude oil production levels corresponding to each of these scenarios. In the curves, we can see that the licenses alone have a short-term effect if it is not coupled with the changes that we already mentioned.
These scenarios, rather than predictions, are educated guesses to communicate that for “magic” to work, conditions are needed that do not exist today.
The combination of the lack of institutions, governance, and transparency, coupled with the widespread idea that recovering the oil industry is a matter of granting a few licenses, is a true disgrace for Venezuela, as it creates a mirage that will disappoint. Suppose we add the belief of certain international actors that Venezuela can, without structural political change, become a crucial piece in the international oil chessboard. In that case, we lose one of the greatest levers that exist today for the recovery of democracy.
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