A POLITICAL SETBACK IN VENEZUELA

A rift between Venezuela's Ministry of Energy and Mines and the state oil company could cause trouble beyond the country's borders. The oil industry should watch this squabble closely. It seems the ministry has decided to cut Pdvsa down to obedient size. A recent order, unprecedented in the state company's history, requires Pdvsa to submit for ministry approval all decisions in a range of operating matters. The effect is a major shift of power from technocrats to politicians.

Sept. 2, 1991

3 min read

A rift between Venezuela's Ministry of Energy and Mines and the state oil company could cause trouble beyond the country's borders. The oil industry should watch this squabble closely.

It seems the ministry has decided to cut Pdvsa down to obedient size. A recent order, unprecedented in the state company's history, requires Pdvsa to submit for ministry approval all decisions in a range of operating matters. The effect is a major shift of power from technocrats to politicians.

In economic terms, the move makes little sense. As state oil companies go, Pdvsa ranks among the best. By maintaining a strict commercial perspective, it has managed Venezuela's petroleum industry, nationalized in 1976, very well. Among other accomplishments, Pdvsa has bought downstream interests abroad to secure markets for its oil; developed technologies for production, transportation, and use of heavy and extra-heavy Venezuelan crudes; expanded and modernized the refining and petrochemical industries; and found giant light oil fields in eastern states and Lake Maracaibo.

VENEZUELA PROFITS

Venezuela has profited from Pdvsa's success. The government funds much of its operations through the company's income, which, except for comparatively small joint venture earnings, it taxes at rates exceeding 80%. And it uses control of the industry to keep oil product prices well below market levels. To tamper with so vital an element of the Venezuelan economy seems foolish.

From a political perspective, though, the move is somewhat easier to understand. The government recently has responded to Pdvsa's need for relief from the deadly squeeze of high taxes and low domestic product prices. It lowered taxes on the company's joint venture income and eased up product prices, which nevertheless remain among the world's lowest. The clamp-down on Pdvsa may represent political recompense for these minor concessions as election season approaches.

At any other time, the episode might be dismissed as routine politics in a developing country where, for populist reasons, the well-heeled technocracy must occasionally take its bumps. But Venezuela has arrived at a turning point. The country has a chance to use its rich petroleum endowment and unique location-outside the Middle East, a short tanker trip away from the world's largest oil market-to enhance its influence within the Organization of Petroleum Exporting Countries, to gain regional and hemispheric trade stature, and to further advance domestic economic development. Haven't those been the government's goals all along?

A SETBACK

Whatever the reasons for it, the energy ministry's subjugation of Pdvsa represents a setback. Central to Venezuela's economic future are the state company's ambitious plans to expand oil production capacity to 5 million b/d by 2000. Acknowledging its economic and technical limitations, Pdvsa recently has sought non-Venezuelan contractors for selected oil and gas development projects. The energy ministry's move won't help the effort. At the very least, it sours the business climate by placing operating and financial decisions in the hands of politicians for whom economics may not be a priority.

The ministry may have wanted to discourage international companies from working in Venezuela. If so, it has made a mistake that can only hurt the country. Maybe, however, the ministry joins Pdvsa in welcoming international companies but thinks its power play should have no effect on the allure of Venezuelan projects. If that's the case, it is just as mistaken. To companies, politics is risk; Venezuela is now a riskier place in which to conduct business than it was before.