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PdV: 'appendix of the revolution'

Former Petróleos de Venezuela (PdV) chairman and chief executive, Luis Giusti, on Venezuela's falling oil production, the threat to the apertura process, and Chávista politics. Interview by Ayesha Daya

IF YOU ARE a poor Venezuelan, and have been benefiting from the arrival of thousands of Cuban doctors, you will probably love Hugo Chávez. If you are a Latin American country receiving subsidised – in Bolivia's case, free – Venezuelan oil, you would no doubt count him as an ally. And if you live in a poor US neighbourhood that Venezuela has been supplying with cheap fuel, Chávez will not seem like such a bad guy.

Such oil-based altruism, however, is less beneficial for Venezuela's economy. Writing in Petroleum Economist in 1994, Luis Giusti, then chairman and CEO of PdV, blamed the exploitation of the national oil industry for Venezuela's dire economic state.

Over two decades later, oil is still being used as a cash cow to fund grand social schemes. "Money is flowing in a very disorderly way – in what is essentially a populist fashion – to the poor through misiones [state-funded social programmes]. This is not sustainable," says Giusti. Oil revenues surpassed $30bn last year, but if prices fell to $40/b, the Venezuelan sour basket would be $30/b – leaving the country some $10bn poorer and exposing once again the economy's underlying fragility. "This would be a mess for this man," says Giusti.

Chávez's rise to power followed Giusti's five years as head of PdV, during which he helped mastermind the opening of the oil sector to private investment through the apertura process and attempted to modernise PdV. "If you had a lot of companies inside, working as partners of PdV, you would create a much more competitive climate, making it easier to expose the company's inefficiencies and the need to reform the corporation," he says. Equally, foreign investment and technology enabled Venezuela to increase its production capacity to capitalise on growing oil demand. The policy succeeded – production capacity rose from 2.35m barrels a day (b/d), when apertura began in 1995, to 3.45m b/d in 1998.

Under Chávez, who has strengthened his grip on PdV, production has fallen to 2.6m b/d, although this is routinely denied by officials. "This is to tell everyone that the people they fired are not needed," says Giusti, referring to the 18,000 PdV employees – almost half the company – sacked in 2003 for participating in a national strike in protest of a Supreme Court ruling against holding a referendum on Chávez's rule. "All these people, for reasons that are absolutely political, were fired," fumes Giusti.

Although foreign companies are producing 1.1m b/d, of which 0.5m b/d come from the Orinoco Belt heavy-oil projects, "PdV production has been totally the opposite, falling to 1.5m b/d". As a result, Venezuela is about 0.8m b/d short of its Opec quota, losing opportunity-cost revenues of around $10bn (assuming an oil price of $40/b), says Giusti. "They have practically disarticulated PdV – it has been transformed into this appendix of the revolution."

Indeed, the country's energy policy is being overruled by ideology. "It is difficult to even call it a policy," says Giusti. "The way I see a policy, is that you have a resource, and you examine its future possibilities, how much you will develop, to which markets you will go, how to maximise [its potential], how to reform [the industry]. Here we have some strange random walk, whereby Chávez goes to various countries – Argentina, Brazil, Russia – and signs several MOUs."

Meanwhile, Caracas' threats to cut supplies to the US, which imports about 1.5m b/d of Venezuelan oil, in favour of China are unrealistic. "The Chinese refinery network is primitive and no long-term agreements have been signed between the two countries to develop it." The difficulty of simply redirecting production became evident when Hurricane Katrina crossed the Gulf of Mexico; Venezuelan crude had to be put in storage because it had nowhere else to go.

Certainly, if PdV can raise production significantly, China and India can be cultivated as new partners. But Venezuela must remain focused on the US "because it is the only possible market in the short term". And whatever ill feeling exists between Caracas and Washington, "commercial relations with the US are strong. At $40/b, Venezuela receives some $20bn a year from US exports alone". With some $6bn-8bn in equipment exported in the other direction, he adds, the two countries conduct almost $30bn of business together annually.

However, companies inside Venezuela are being pressured to pay back-taxes for eight years, after the government said oil companies had been paying the wrong tax – a 34% industrial income tax instead of the 50% hydrocarbons tax. "Those companies with operational agreements – where PdV did not have equity – are being accused of tax fraud, despite holding contracts saying the tax is 34%."

Despite the contract changes, Giusti believes companies will stay. "If they do not agree to paying more tax, they lose all their assets." Despite the bluster, Chávez is fonder of the international business class than of the home-grown version, regarding Venezuelan businessmen as oligarchs who have exploited the poor. And as long as PdV struggles to carry out its own operations, foreign companies will retain their role as operators.

Yet Giusti does not have high expectations for future Venezuelan production. "The best case scenario is that production will increase to 2.8m b/d in the next five years. Investment is not taking place, as funds are being diverted elsewhere."

Giusti remains convinced that his market reforms were the best way to take the oil industry forward. "Radical professors in universities who used to attack me are now attacking the government. They realise our process was transparent and on favourable terms for the country. This man is assigning areas just like that – now professors say it is Chávez who is giving away the resources of the country."

Luis Giusti, 61, began his career at Shell Venezuela as a petroleum engineer, before joining PdV's Maraven unit. He was appointed chairman and CEO of PdV in 1994, a post he held until 1999. He is now a non-executive director of Royal Dutch Shell, and an adviser at Washington's CSIS and London's CGES, and holds several other posts at academic institutions and energy-industry organisations.
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