The Multinational Monitor

April 30 1986 - VOLUME 7 - NUMBER 8


Mingling in the Markets

by William Steif

CARACAS, Venezuela-The national oil company here, Petroleos de Venezuela (PDVSA), is being restructured to resemble the north's big multinational oil companies-and it has plunged into the industrial world's consumer markets.

The watchword at PDVSA is "internationalization." The company is buying into retail outlets in the United States and Western Europe in order to ensure that Venezuela, the size of Texas and Oklahoma combined, will be able to pump at least 1.5 million barrels of crude oil daily from its vast reserves.

On the surface, the 1986 plunge in oil prices doesn't seem to worry this resource-rich nation. The elevated expressways in the narrow, east-west valley that is Caracas (pop. 3.2 million) are jammed with cars and trucks. Work continues on branches of the gleaming, French-designed subway that opened two years ago and 40- and 50-story steel and glass structures continue to rise.

Boom-time normalcy seems the order of the day, but many of the 17.5 million Venezuelans are well aware that their nation is in trouble.

"Down underneath," a veteran Venezuelan oilman says, "there's tension." The front cover of the weekly newsmagazine, Zeta, sums up the situation with a headline which (in translation) says: "The Real Truth: THE DOLLARS ARE FINISHED: Venezuela Produces or Drowns."

The untaxed "informal" economy is growing. So is unemployment, officially around 13 percent of the workforce but actually closer to 17 percent. Some banks are in trouble, others have been taken over by the government. Mortgage banks and savings and loans are in the worst shape.

Inflation is up, especially for the people who live in shanties called "ranchitos" on the steep hillsides running up the 9,000-foot peaks hemming in Caracas. The central bank reported "general" inflation was 9.1 percent in 1985, but for those who earned under 3,000 bolivars ($160) a month, it was 13 percent, up almost two percent alone last January.

The price of gasoline rose 50 percent by government decree at the start of 1986. In U.S. dollars, that still makes gas in Venezuela cheaper than anywhere else in the world, at under 30 cents a gallon, but it was a sharp increase for Venezuelans.

Despite the tall buildings, construction was down 17.4 percent in 1985 compared to 1984. The shipping industry has slumped, too.

Venezuela, a founding member of the 13-member Organization of Petroleum Exporting Countries (OPEC), stopped being self-sufficient in food in the early 1970s. But Venezuelans, four out of five of them urban residents, must continue to eat. So food imports, mainly from the United States, continue.

"The crunch is coming," says Dr. Antonio Casas Gonzalez, an economist and the finance director of PDVSA. "We already have a jobless problem. Factories and small businesses are laying off people. Young professionals are having trouble finding jobs. When architects start driving cabs you know there's going to be social unrest."

In the 1970s oil floated Venezuela out of the poverty stricken Third World to the brink of the industrial First World. Today this country is more like South Korea or Singapore-a fast developing economy with a growing middle class-than it is like its Latin American neighbors. In 1982 per capita income in Venezuela was around $4,700; even last year, despite a shrinkage of the economy's oil base, per capita income was around $4,000, twice that of Portugal.

No one here wants to slip back into the Third World. Yet, says Casas, "the price [of oil] is almost out of control."

Almost everything here revolves around oil. In 1976 under President Carlos Andres Perez the oil industry was nationalized into PDVSA.

"We reached our production height in 1979," says Casas, when a total of 2.4 million 42-gallon barrels were produced daily. Of that, exports amounted to 2.1 million barrels daily. Last year just over 1.7 million barrels a day were produced and exports averaged 1.3 million barrels a day.

In 1976, says Casas, the average price of a barrel of crude was $11.15. Three years later it had jumped to $17.69 and by 1981 it was $29.71. In 1984, however, the average price dropped three dollars a barrel, and in 1985 it stood at $25.89. In late February, 1986, the price was $17 and falling.

Oil export earnings amounted to $8.8 billion in 1976, $13.9 billion in 1979 and $20.3 billion in 1981. Slippage began in 1982, and by 1985 export earnings dropped to $13.1 billion. Last fall, Venezuelan President Jaime Lusinchi, midway through his five-year term, projected 1986 oil earnings of only $12.5 billion.

"But if things go as they've been going," says Casas, "the figure probably will be below $10 billion this year."

That would still be around the 1977 "boom year" level, but it doesn't take into account inflation's corrosive effect or a 96 percent Catholic population that increases 2.9 percent annually.

"Our main concern is when oil will stabilize around a certain price," Casas says. "We can't plan without that. It's exasperating."

No one in government will acknowledge officially that OPEC's "price push" went too far in the 1970s. Venezuela has been a loyal ally of the major Arab oil nations. Unlike other members, it abided by OPEC production quotas until late January, when the game became every country for itself. Indeed, Venezuela's energy minister, Arturo Hernandez Grisanti, was voted OPEC president last December and presided over the latest OPEC meetings.

But unofficially Venezuelan authorities agree that OPEC pushed too hard, creating an industrial world backlash that has resulted in new, more efficient technology and alternate energy sources. Back in the 1970s world oil demand for 1990 was projected at 100 million barrels daily; now the 1990 projection is half that.

"A whole new group of (non-OPEC) producers has come on line," says Casas. He reels off names: Britain and Norway in the North Sea, Mexico, Egypt, Malaysia, even neighboring Colombia, "which becomes an exporter this year with Occidental's development of a 200,000 barrels-aday field across the border from us."

Venezuela is in better shape than Mexico, which has a $100 billion foreign debt. Venezuela has more than $13 billion in foreign reserves and in February signed a pact restructuring $21 billion of its $26 billion foreign debt with nearly 500 foreign banks. The agreement takes effect in late summer after Venezuela makes a $750 million down-payment.

More than a dozen oil companies held concessions around the country when Venezuela nationalized its oil in 1976. The biggest concession holders at the time were Exxon, Shell, Gulf and Mobil. Nationalization created four companies, all part of PDVSA. They were, in a sense, modeled on Exxon, Shell, Gulf, and the existing national company. The holdings of the other concessionaires were "attached" to one of these four, says Casas. In this way, the four maintained "traditional markets, technological ties and different cultures"-and also stimulated competition within Venezuela's internal market.

Last year PDVSA President Brigido R. Natera and his 10-member board of directors formed another subsidiary to run the big Shell refinery PDVSA leased for five years on the nearby Dutch island of Curacao.

The Curacao lease is part of PDVSA's new "internationalization" strategy, designed to guarantee consumer markets for its oil in the same way that multinationals franchise gas stations to make sure they have access to consumer markets.

So far, PDVSA has assured itself a daily market of 607,000 barrels of Venezuelan crude and refined products in the United States and Western Europe. Its first contract was with the German firm, Veba. Then came the Curacao deal. At the end of January, as the price of crude went into its free fall, PDVSA signed up Southland Corp., which owns Citgo and its 8,000 U.S. gas stations, for 130,000 barrels of oil a day. Steuart, a Washington-based independent, was also signed on for 42,000 barrels daily. PDVSA then signed up Nynas, a large Swedish firm, augmented its agreement with Veba and acquired more refinery capacity. In each case PDVSA is not only buying into a going business but is also guaranteeing markets for Venezuelan oil. All of this, of course, has had a price. PDVSA is paying about $300 million for a 50 percent interest in Citgo, the ninth largest U.S. refiner. PDVSA is investing $55 million to expand its Veba partnership in Ruhr oil, $25 million for a half-interest in the Swedish firm, which is one of Europe's largest producers of asphalts and naphthenic lubricants, and $11 million for a half-interest in Steuart.

PDVSA has "talked to everyone" in the industrial world, says a U.S. economist. In its attempt to push "internationalization" or "vertical integration," it has approached such companies as Chevron USA, Tenneco, American Petrofina, Kerr-McGee, Champlain Oil and Asfaltos Espanoles, according to reports here.

"Venezuela always bent backward to see that OPEC was a viable organization," adds the U.S. economist. "But with the market totally disorganized, Venezuela realizes that to preserve its market share, it's got to fight."

That's what Natera is doing and he has a fairly free hand. PDVSA is run like a multinational, except that the major stockholder is Venezuela's government, a two-party democracy since 1958. The company's emphasis is on profit, even as PDVSA spends billions on exploration and maintenance of non-producing assets.

The bulk of Venezuela's oil output is to the west, in and around Lake Maracaibo, but the country also has enormous reserves of heavy crude in the eastern Orinoco River Basin. The area, known as the Faja, produces about 80,000 barrels daily and could produce much more if oil demand exceeds available supplies.

"People are concerned" about the oil price drop, the U.S. economist says. "The Venezuelans are trying to substitute for imports, trying to produce more efficiently. But purchasing power's down; the overall problem is weakness in demand. That won't pick up until the price of oil stabilizes"-or PDVSA buys enough demand in the industrial world.

William Steif is a freelance writer currently based in the Virgin Islands.

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