Venezuela nationalized its oil industry in 1975-1976, creating PdVSA, the countrys state-run oil and natural gas company. Along with being Venezuelas largest employer, PdVSA accounts for about one-third of the countrys GDP, 50 percent of the governments revenue and 80 percent of Venezuelas exports earnings. In recent years, under the influence of President Chavez, the Venezuelan government has reduced PdVSAs previous autonomy and amended the rules regulating the countrys hydrocarbons sector. An example of this trend is the November 2004 appointment of Rafael Rodriguez, Chavezs energy minister, as chairman of PdVSA. Nearly one-half of PdVSAs employees walked off the job on December 2, 2002 in protest against the rule of President Chavez. The strike severely impacted PdVSA, practically bringing all the companys operations to a halt. Venezuelas national oil production dropped from 3.3 million bbl/d in November 2002 to 700,000 bbl/d in January 2003, almost all of which represented foreign operators in the country. Since the strike ended in early 2003, there has been substantive progress in restoring production. However, industry analysts speculate that the strike did permanent damage to PdVSAs production capacity. PdVSA fired 18,000 workers following the strike, draining the company of technical knowledge and expertise. Some analysts have pointed out that the governments hurried restoration of PdVSAs production may have caused reservoir damage, potentially accelerating the rate of decline in those fields in coming years.
PdVSA has stated that it will invest $26 billion in expanding hydrocarbon reserves and production between 2004-2009, with the goal of increasing national oil production to 5 million bbl/d by 2009. In August 2005, PdVSA announced that it would increase national oil production to 5.84 million bbl/d by 2012. Industry analysts estimate that PdVSA must spend some $3 billion each year just to maintain production levels at existing fields, as many of these fields suffer annual decline rates of 25 percent. PdVSA announced a $5 billion capital investment plan for 2004, with the company announcing that it had spent 75 percent of that amount by November. However, independent oil analysts speculated that total spending was closer to 20 percent of the annual budget, with oil services firms and observed rig activity in the country seeming to support this lower figure. Affecting PdVSAs ability to meet its investment goals are the increasing demands placed upon its finances by the Venezuelan government. In 2004, the Venezuelan government established a special development fund to finance infrastructure projects throughout the country; PdVSA will supply $2 billion a year directly to this fund, bypassing the Venezuelan Central Bank. Further, government plans have the company spending an additional $2-3 billion per year on social programs. In addition, PdVSA already pays billons of dollars each year to the Venezuelan government in the form of income taxes, royalties, and dividends. Finally, because of the aforementioned international agreements between Venezuela and its neighbors, PdVSA is selling significant amounts of oil below market value, further eroding its available cash flow. It is unclear how the company will be able to afford its ambitious investment plans, though PdVSA officials have mentioned that the company might increase its international borrowing.
In the 1990s, Venezuela opened its upstream oil sector to private investment. This collection of policies, called apertura, facilitated the creation of 32 operating service agreements (OSA) with 22 separate foreign oil companies, including international oil majors like Chevron, BP, Total, and Repsol-YPF. Under these contracts, companies operate oil fields, and PdVSA pays these companies a fee and purchases the produced crude at a price pegged to market rates. PdVSA also offered eight blocks under risk/profit sharing agreements (RPSA), under which the company has an option to purchase up to a 35 percent equity stake in the project, if the foreign operator discovers commercial quantities of oil in the exploration phase. Finally, PdVSA holds shares in four strategic associations that produce extra-heavy crude, for eventual upgrading to syncrude In 2001, Venezuela passed a new Hydrocarbons Law that superseded the previous 1943 Hydrocarbons Law and 1975 Nationalization Law. Under the 2001 law, royalties paid by private companies increased from 1-17 percent to 20-30 percent. Further, the law guarantees PdVSA a majority share of any new projects. Finally, the law stipulates that all future foreign investment would be in the form of joint ventures (JV) with PdVSA, rather than the aforementioned OSA, RPSA, or strategic associations. In August 2003, Venezuelas Ministry of Energy and Mines (MEM) transferred PdVSAs 33 operating contracts, the four strategic associations, and the risk exploration contracts to subsidiary Corporacion Venezolana de Petroleo (CVP). The move intends to allow PdVSA to concentrate on production from its own fields, while CVP will administer the agreements. Because of the doubts, discussed above, about PdVSAs ability to fund sufficient investment in expanding crude oil production capacity, Venezuela will likely need to depend heavily upon foreign operators to meet its production goals of 5.84 million bbl/d by 2012. However, recent events have begun to cloud the investment climate in Venezuelas oil sector. In November 2004, President Chavez announced that the royalty rate on the four strategic associations would increase from 1 percent to 16.6 percent, the highest rate allowable under the older hydrocarbons laws. MEM also announced in April 2005 that foreign operators must convert all OSA projects to new JV agreements under the terms of the 2001 Hydrocarbons Law by the end of 2005, including the higher royalty, tax rates, and level of PdVSA ownership stipulated by the 2001 law.