Crystallex International

From the Editors of VenEconomy

The destruction of Venezuela’s oil industry in these past 12 years is not solely due to corruption and inefficiency, it has also been induced by a grave strategic error in Hugo Chávez’s political project.

During the 1990s in Venezuela, there was a policy of opening up the oil sector, which included PDVSA signing service contracts with private companies in order to recover exhausted oil fields (marginal fields) and strategic alliances for developing new technologies for upgrading the extra-heavy crude in the Orinoco Oil Belt.

These projects offered a win-win situation. Under the service contracts, the private investors put up everything -ingenuity, technology, and capital-, while the Venezuelan State kept 70% of the earnings. The arrangement with the strategic alliances was essentially the same.

However, the idea behind these plans for opening up the oil industry was not simply to produce more oil, as every dollar invested generated US$2 in nonoil activity.

If this Bolivarian Government had continued down that path, today, Venezuela would be producing around 7 million to 8 million b/d and this country would be a key factor in the world’s economic negotiations. What is more, Chávez would be considered a statesman with international influence. More important yet for the Venezuelan people, this would have given a boost to small and medium industries, the housing sector would be booming, and there would be abundant sources of jobs.

But this story does not have such a happy ending.

With a complete lack of vision, Hugo Chávez scrapped PDVSA’s Business Plan and got rid of the experienced companies participating in the strategic alliances and under the operating contracts. What is worse, those private companies were replaced by state-owned companies of countries considered “friends” of the revolution that know nothing of the oil business and have neither the capital nor the technology.

Here are the most tangible consequences of this destructive strategy:

1. Today, Venezuela only produces 2.5 million b/d, some 6 million b/d less than projected in 1999.
   
   
2. The industrial sector is seriously constrained and sources of productive jobs are in extinction.
   
   
3. The balance of payments is in crisis and the country is now in its third year of recession.
   
   
4. The government has put the Venezuela State in the position of going cap in hand to other countries to obtain the financial resources it has ceased to generate.
   
   
5. It has plunged the country into debt, strangling the future of upcoming generations. More than 10% of the 2.5 million b/d that are being produced is already committee to paying of the country’s debts; and that is not counting amounts that will have to be paid in connection with lawsuits currently before international arbitration courts.
   

More than a decade down the tube.