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Venezuela: Economy and Oil Strategies

Minutes from the conference by Aleksander Boyd

The prestigious London Business School hosted a conference about Venezuela yesterday with the following panellists:

Dr. Peter West
Former Chief Economist at Banco Bilbao Vizcaya Argentaria (BBVA) for Emerging Markets in London. Senior Economist at Poalim Asset Management,

Dr Jonathan Di John
Senior Economist and Lecturer at the Development Studies Institute, London School of Economics (LSE).

Dr. Alirio Parra
Former Minister of Oil & Energy Venezuela. Former Board Member of Petroleos de Venezuela (PDVSA). Senior Advisor at CWC Group

Mr. Medhi Varzi
Former Managing Director and Head of Oil & Gas Equity Research at Dresdner Kleinwort Wasserstein (London).

Dr. Jose Medrano.
Recently a Senior Economic Advisor to the National Assembly (Congress) of Venezuela. Former Director at Bank of Boston and Merrill Lynch.

The discussion began with a discussion by Dr. West about Venezuela's economics. Dr. West elaborated on the potential risk of default in Venezuela and the use of forex controls. "Venezuela has had two forex controls implemented in the past, RECADI early 80's and the banking crisis mid 90's. None of them worked!" He mentioned that international reserves have increased to around 15Bn dollars and that Venezuelan bonds trading in international markets have a spread of about 300 basis points (sign of high risk and volatility), second only to those of Argentina. In emerging markets Venezuela is the second worst performer -after Turkey-, which goes in detriment of the government's ability to appeal international investors. Bond investors perceive the conditions in the country as far too risky. Furthermore, they believe that Hugo Chavez's focus on the economy has taken a second place to his obsession in political confrontation. Further, Dr West stressed that GDP dropped 9 % last year, and forecasted a further decline of 15 % this year. In fact, he said, Venezuela's economic collapse will be even worse than Argentina's without having defaulted. Dr. Medrano described the lack of coherent economic policies, and the government's tendency to change rules and measures every day. In sum, nothing gets implemented in Venezuela because politics has taken centre stage and due to the government's incompetence. All of the economists exposed the fragility of the country's economy; as an example, per capita income in 2003 will equal that of the early 50's. Therefore the risk of default this year is growing by the day. Foreign capital will not land in Venezuela until the government respects the rule of law and provides coherent investment conditions. The draconian hydrocarbons law, for instance, has scared away potential investors. Without a split in the political and economic discourse, no loans will come to Venezuelan shores.

Then it came the oil discussion. Dr Parra gave a brief description of PDVSA activities and the different stages it has gone through since its formation. "The company has passed from being a jewel, a role model among state owned companies in former times to a state of being a political arm of the government", he expressed. The lack of funding in exploration & production, sound marketing strategies, high skilled managers, researchers and technicians has converted PDVSA into a sorry image of her former self. The repercussions of the ignorant stance of the government towards the company will have long lasting damaging effects. Mr Varzi - as an expert in oil markets and research for the last 20 years - was questioned on the possibility of PDVSA of returning to normal levels of production to which he categorically said "no" under the present circumstances. He expressed deep concern about the general state of the company saying, "what the government of Venezuela is doing to PDVSA is an absolute shame. I do not see the point of sacking the best and brightest oil execs just for the sake of political revenge". He elaborated on the conflict in Iraq and its potential to stir things up in the international energy markets when it returns to "normal production levels". Iraqi reserves are second only to Saudi Arabia, the war surely is going to end, and whoever comes after Saddam certainly will do the utmost to increase production as fast as possible which will deter the already fragile situation of PDVSA among OPEC members. Worldwide oil demand will not rise dramatically and the Caspian production will come into the market soon; therefore PDVSA will most likely never regain its lost market share.

Mr Varzi contrasted PDVSA with NIOC (National Iranian Oil Company). He said that PDVSA seems to be going through the same process of self-destruction, which was imposed on NIOC about 25 years ago. The Iranian firm was producing 6 MBD and had a workforce of 70.000. Today's production is around 2.5 MBD and its workforce after the "restructuring process" is 140.000. "Bureaucrats have not the capacity nor the commitment to manage an oil company, they can not tell apart the wood from the tree" he said referring to the politicisation of PDVSA imposed by Hugo Chavez.

Hugo Chavez is solely responsible for the misery of an entire nation, including the destruction of its vital oil industry.

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