Turbulence in the South American Energy Industry
AO reports on the region’s political instability and how it is affecting their energy industry
That is exactly how Hugo Chavez came to power in 1998. For 25 years, governments in Venezuela consistently mismanaged the economy and were marred by corruption. Although the country was a founding member of OPEC, and benefited from substantial revenues during both the 1974 and 1979 oil shocks, 40 per cent of the population lived in extreme poverty and income inequality higher than was experienced in the ’60s. The management of the country’s finances was so dismal that by 1983 the public debt was a startling $32 billion (USD).2 By 1992, there had been two unsuccessful coup attempts—one of which was led by Chavez. A year later, President Andres Perez was impeached on corruption charges.
Interestingly, the first few years of Chavez’s government were marked by an increase in absolute poverty and income inequality. However, he did maintain support among the poorest of the population by delivering social programs that had previously been unavailable to the populace of that nation.
Since then he has been methodically extending his control of the country’s institutions, particularly, Petroleos de Venezuela S.A. (PdVSA), the state oil company. He dealt with dissent that led to strikes in 2002/2003 by firing tens of thousands of workers; the company’s production declined drastically and hasn’t recovered. Although official production numbers are 3.1 million barrels a day (bbl/d) most informed analysts peg the figure at approximately 2.5 to 2.6 million bbl/d. He is counting on increasing production by systematically renegotiating contracts and forcing private oil companies to become partners with PdVSA. Record-high oil prices have allowed him to spend freely. He is using this newfound wealth to promote his vision of development among other Latin American countries.
But even Chavez is under increasing pressure to pay more attention to the home front. Violence is on the rise and the country’s infrastructure is crumbling. In the long term, if he doesn’t deliver, he risks having his days numbered.
This is precisely what happened to Ecuadorian Lucio Gutierrez, who was removed from office a year ago, amidst popular protest over his attempts to entrench his control of that state’s institutions. Since then, President Alfredo Palacio has had to face two major indigenous protests. In August, militant native groups shut down part of Ecuador’s 540,000 bbl/d production (2004) for two weeks, and this February, they blocked the country’s only two pipelines, forcing the government to declare an official state of emergency. Ecuador, the U.S.’ second largest source of oil imports from South America, had to borrow oil from Venezuela to honour its contracts.
In a move to appease the populace, this month the Ecuadorian government enacted legislation raising taxes on oil profits from 20 to 50 per cent. The oil companies reacted with dismay. Occidental, the country’s largest private oil producer, has had a number of contentious disputes with the government, including its refusal to make good on a VAT refund of $75 million (USD) ordered by an arbitration court. Encana, having had enough of the country’s instability, decided to leave and sold its 75,000 bbl/d crude production and 36-per-cent stake in the OCP pipeline to Andes Petroleum, a consortium headed by the Chinese National Petroleum Corporation.