Oil industry counts cost of Chávez inheritance
Chávez left behind a mixed legacy for Venezuela, now the country must move forward
In late 1998, Venezuela was mired in an economic crisis. Oil prices had fallen to less than $10 a barrel, eviscerating the country’s finances, plunging Venezuela into a deep recession and further exposing social and economic divisions in a country in which oil wealth had long flowed only to the elite few. With elections looming, the two most prominent political parties, which had dominated Venezuelan politics for 40 years, were thoroughly discredited.
Into this breach stepped Hugo Chávez, a 44-year-old former army paratrooper who grew up poor in rural Venezuela and was best known for leading a failed coup attempt in 1992. The political class were blindsided by Chávez’s 1998 presidential campaign, which they saw as quixotic and misguided. Although a neophyte, Chávez showed keen political acumen and an immense talent for tapping into the deep well of resentment felt by a growing number of Venezuelans who felt locked out of the country’s oil boom.
Chávez won 57% of the vote in 1998, and moved into the presidential palace, Miraflores, that he had failed to take by force six years earlier. Chávez enjoyed broad support, but few knew quite what to expect from Chávez and his “Bolivarian Revolution”. His ideology would only fully take shape later. “If you are attempting to determine whether Chávez is of the left, right or centre, if he is a socialist, communist or capitalist, well, I am none of those, but I have a bit of all of those,” he said at the time.
One of Chávez’s first orders of business was to consolidate control over the oil industry, the engine of the country’s economy. He sacked Luis Giusti, the head of state-run oil company PdV, and he denounced Giusti’s Apertura Petrolera programme, which had re-opened the country’s oil patch to foreign investment. He also announced that Venezuela would take a more hawkish stance within Opec, pushing for higher oil prices. Shortly after his election, the Asian financial crisis ended, energy demand in both Asia and the West accelerated and oil prices quickly recovered. By 2000, oil prices had more than tripled to more than $30/b. In real terms, oil prices rose more than five times while Chávez was in office.
Chávez’s path to power was paved in black gold. Flush with petrodollars, Chávez set about following through on his promise to reshape Venezuela and its role in the world. He pushed through a new constitution, reformed the country’s institutions and won over the country’s poor with lavish spending on social programmes for the poor. He also used the country’s oil wealth to build a coalition of like-minded populist and anti-US leaders across Latin America, the Caribbean and beyond.
But Chávez soon faced a backlash from his domestic enemies. In April 2002, an anti-Chávez wing of the military used widespread protests against the government as cover to launch a coup. Chávez was briefly ousted. Pedro Carmona, a well-connected businessman, was installed as president, but Chávez triumphantly returned to power just three days later after a backlash against the coup leaders.
After the failed coup attempt, management at PdV led a general strike in the oil industry aimed at forcing Chávez to step down. The strike, which lasted from December 2002 into early 2003, brought the oil industry to its knees. Oil production collapsed from around 3.3 million barrels a day (b/d) in November to just 680,000 b/d in January.
Chávez, though, would again face down his opposition. After the strike, Chávez purged the oil company of his political opponents. He sacked around 19,000 people, half the company’s workforce. PdV lost much of its technical and managerial knowledge in the process. Chávez also tightened his grip on the company after the strike, moving the company’s finances under central government control. That gave Chávez the ability to spend PdV’s revenue as he pleased with little oversight or accountability. PdV was over time transformed from a company one renowned as a world-class operator into a political tool.
Chávez became increasingly radical after the attempts to oust him. And in 2005, after a failed 2004 referendum election, he launched his signature policy: “Socialism for the 21st century”. The call to socialism was embraced by many Venezuelans, especially among the poor who were keen to share in the country’s vast oil wealth. “Socialismo del Siglo XXI” was suddenly everywhere; on television, the radio, on billboards and spray painted on buildings across the country. Chávez told New Yorker journalist John Lee Anderson that he embraced socialism after reading Victor Hugo’s Les Miserables.
In 2006, Chávez announced that he was nationalising the Orinoco belt heavy-oil projects. Even in his most extreme moments, though, Chávez held on to a pragmatic streak. He realised that PdV could not shoulder development of the Orinoco belt on its own. It needed foreign cash and technical expertise. So the state oil company was handed 60% of each project and foreign companies were invited to stay, but only on Chávez’s terms. ExxonMobil and ConocoPhillips declined, but most companies saw the Orinoco belt as too big an opportunity to walk away from and accepted reduced roles in their projects. Most, though, kept their purse strings pulled tight, waiting for a friendlier investment terms.
Chávez claimed the nationalisations as a victory. But it was a major setback for development of the Orinoco belt. The US Geological Survey has estimated the area holds 513 billion barrels of technically recoverable oil, representing a staggering $513 trillion of potential wealth for the country at today’s oil prices. Seven years later, though, only a trickle of oil has started flowing from the PdV-led projects, and none of them are anywhere near being full production. PdV lacks both the financial and human resources needed to push its projects forward. Nearly all the production in the Orinoco belt comes from projects that were started in the 1990s during the Apertura phase.
Chávez leaves behind a mixed legacy for Venezuela. He used an influx of petrodollars to deliver genuine benefits to the country’s poor and gave a long-neglected segment of the population a voice in the country’s future. At the same time, he has left behind mounting social and economic problems for which there are no easy answers and the man tipped as successor, Nicolás Maduro, is ill-equipped to deal with.
For the oil industry, Chávez was a disaster. Production in Venezuela’s mature oil patch in the west of the country is declining fast, new Orinoco belt heavy-oil projects have made little progress, and the country has seen electricity shortages in spite of having some of the region’s largest gas reserves. A series of accidents and oil spills are evidence of the dire state of the country’s oil refining and transport infrastructure.
A decade ago, a major leadership crisis in Venezuela would have sent waves of panic through oil markets. But Chávez’s death has been met with collective indifference. That is partly because there is little immediate threat to output. It is also evidence of Venezuela’s diminished standing in the global energy order.