Venezuelan Oil Unifying Latin-America


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Venezuelan Oil Unifying

ENG-297. Ethics of Development in a Global Environment.

Stanford University

June 2, 2005.

Johannes Alvarez

James Fiorito

Table of Contents___________________________


Oil History of Venezuela …..…………………………………….3

Hugo Chavez……..………………………………………………8

Relations with others countries …………………………………18

Argentina and Venezuela………………………………….18

Brazil and Venezuela ……………………………………..20

Cuba and Venezuela ……………………………………....21

Meeting of Spain, Brazil, Colombia and Venezuela ……...23

U.S. and Venezuela ………………………………………..24

China and Latin America ………………………………….26

I Summit of South American and Arabic Countries ………29

PETROSUR ……………………………………………………..31

The South American Community of Nations. …………………..32

ALBA. The Bolivarian Alternative to the FTAA………………..34


Conclusion ………………………………………………………38

Hugo Chavez was named the fourth most influential person of 2005 in the world by Time magazine. Why is the leader of a relatively small country and economy like Venezuela such a powerful influence in the world? Oil has played a vital role in Chavez’s ability to execute his ideas, and is crucial to his countries identity. Chavez’s leftist idea of bringing greater economic and social equality to South America leveraged by oil has met strong opposition among strong industrialized nations such as the US. These forces have made numerous attempts of seizing his power. However, Chavez has been able to combat this opposition with the popular support of his people. Chavez has also labored diligently to build strong coalitions between world powers willing to go against historical imperialistic influences such as the US, the World Trade Organization, and the International Monetary Fund. This paper will explain the historical and current events influencing Chavez’s manifestation of a complete Bolivarian social and economic revolution.
Oil History in Venezuela

The presence of oil was known in Venezuela even before the Discovery of the Americas in 1492; back then, Indians were aware of the existence of hydrocarbons that appear on the surface of their lands. They used them for medicinal and illumination purposes. Also, they collected oil from small creeks near seepages by impregnating blankets and then wringing them out. They also found asphalt, and they used it for caulking their canoes and impregnating the sails of their boats.

In 1499 Spanish conquerors were impressed with the natural occurrences of hydrocarbons in Venezuela. They learned from Indians to use them for medicinal purposes. They also used it for caulking their ships, illumination and lubricating their weapons.

On September, 1535, Gonzalo Fernandez de Oviedo y Valdes for the first time mentioned Venezuelan oil seepages in his “General and Natural History of the Indies”. He called it “the nectar from Cubagua” describing this substance as very useful to treat gout and other diseases.

In September of 1536, the Queen of Spain, Joanna, ordered officials who were in charge of Nueva Cadiz in Cubagua Island, to bring to Spain as much as possible “oil petroleum”. So in 1539 the first documented shipment of petroleum was sent to Spain in the Santa Cruz ship. The main reason for the Queen’s request was to alleviate the gout of Emperor Charles V.

By 1783, King Charles III of Spain dictated the Mining Ordinances for New Spain where mines were declared property of the Royal Crown, although the King can grant mining concessions. This included “any other fossils, be they perfect or semi-minerals, bitumens, or juices of the earth”.

After the Independence of Venezuela in 1811, Simon Bolivar, the Liberator and President of the Great Colombia, dictated a decree in Quito where he reiterated the national ownership of mines of all kinds. Two years after Simon Bolivar’s death in 1830, Bolivar’s decree was ratified by the Venezuelan Congress.

Meanwhile around the world, James Miller Williams began producing oil from shallow holes at Oil Spring, Ontario, Canada in 1858. One year later, Colonel Drake completed the first oil well in United States.

Later in 1878 in Venezuela, the first oil company was founded called “Compania Nacional Petrolia del Tachira” by Antonio Pulido. He asked the government to explore a 100 hectare parcel in the Venezuelan Andes. At the beginning, the oil was collected in buckets, but in 1880 they began to drill wells with a drilling rig imported from Pennsylvania.

In the next thirty years concessions were granted to small entrepreneurs and foreign companies to explore asphalt in Zulia State and other small regions of the country. At that time, Venezuela was known more for its agricultural production than for its oil production. In fact, Venezuela was an underdeveloped country with several political problems.

In 1908 General Juan Vicente Gomez took power to become the strongest dictator of the 20th century with 27 years in office. He opened the gate to foreign oil investors. In 1909 he granted to John Allen Tregelles, a British company representative, the rights to explore twelve of the twenty states of Venezuela. John Allen Tregelles founded a company called “The Venezuelan Oilfield Exploration Company” which had a lease of approximate of 27 million hectares. However, in 1911, Gomez revoked the concession because it was not giving him enough revenues and royalties.

Later Gomez gave almost the same concession to Rafael Valladares who formed the Caribbean Petroleum Company. This company made several million dollars exploring oil and asphalt on the Lake of Maracaibo. In 1913 the concession was transferred to a British-Dutch operator, the Royal Dutch-Shell Oil Company. This was the beginning of the modern economic history of Venezuela.

World War I was the trigger introducing Venezuela into the world oil market. After 1919, the investment and the exportation of Venezuelan oil increased tremendously. By 1922, Venezuela became an important supplier of oil in the world, and biggest reserves of oil were discovered in the Lake of Maracaibo. During World War II Venezuela was the most secure provider of oil to the United States.

In September, 1960, The Organization of the Petroleum Exporting Countries (OPEC) was created in Baghdad, Iraq. The countries that formed the organization at that time were Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Then eight other members joined the organization: Qatar (1961); Indonesia (1962); Socialist Peoples Libyan Arab Jamahiriya (1962); United Arab Emirates (1967); Algeria (1969); Nigeria (1971); Ecuador (1973–1992) and Gabon (1975–1994). As it was mentioned in the OPEC declaration of 1960, “OPEC's objective is to co-ordinate and unify petroleum policies among member countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry”.

Although OPEC was created in 1960, it was not until 1973 when OPEC became powerful and started to set the oil’s price. Also, their members took control of their domestic petroleum industries, so the price of oil produced and exported was determined by the OPEC members. At the same time, in the 1960’s Venezuela implemented a policy of “no more concessions” which was the beginning of the nationalization of the oil industry.

In January 1, 1976, President Carlos Andres Perez signed the law that reserved the government the industry and the commerce of hydrocarbons in Venezuela. The same day “Petroleos de Venezuela S.A. (PDVSA)” (Oils of Venezuela) was born as the company in charge of planning, coordinating and supervising the oil industry.

Figure 1. Venezuelan Oil Field
During its first year, PDVSA began operation with its three affiliates called Lagoven, Maraven and Corpoven. That year PDVSA produced 2.3 million barrels per day of oil and the investments were multiplied by four.

In the 1980’s, PDVSA was considered as a reliable oil supplier, and it was consolidated as one of the most important oil companies around the world. In the middle 1980’s, PDVSA began to buy refineries in Europe, United States and the Caribbean. Specifically, it started operations in Ruhr Oel (Germany), Nynas (Sweden and Belgium) and Curacao Island.

Moreover, in September, 1986, PDVSA bought Citgo, in Tulsa, United States, which became be the most important way to sell hydrocarbons in the US. Currently, Citgo has more than a thousand gas stations and occupies more than 20% of gasoline market in the U.S.

In the 1990’s the company started a program of operation agreements that gave the opportunity to foreign companies to explore and produce oil in inoperative oil fields. At that time more than 20 companies around the world applied for these agreements. Between 1993 and 1996 PDVSA began the first three rounds of operation agreements. This brought an investment of more than 2 billion dollars and increased the oil production by 260,000 barrels per day.

In January, 1998, the three affiliates that formed PDVSA for more than 20 years, Lagoven, Maraven and Corpoven, merged. The main goal was to create company with a unified goal to generate the highest revenues. Consequently, three divisions were formed PDVSA Exploration and Production, PDVSA Manufacture and Marketing, and PDVSA Services.

Currently, Venezuela has proven reserves of 78 billion barrels of Crude and 148 trillion cubic feet of Gas. This puts it as the country with the largest hydrocarbon reserves in the Western Hemisphere, and positions it as the 5th country in the world in proven reserves. With the Orinoco Belt reserves, the country possesses the largest accumulation of liquid fuel on the planet.

PDVSA has a production capacity of 4 million barrels per day (BPD); actually its production exceeds 3 million BPD and 8.81 billion standard cubic feet/day of gas. Also, PDVSA is among the leading corporations in the refining business, with a petroleum processing capacity of 3,285,000 BPD (1,285,000 BPD in Venezuela and 2 million BPD outside the country) through 24 refineries: six complexes in Venezuela, one in the Caribbean, eight in the United States and nine in Europe.

Moreover, PDVSA generally exports 93% of its total hydrocarbon production. Approximately 54 % of these hydrocarbon exports go to the U.S. and Canada. Just to the U.S. PDVSA exports 1.5 million BPD. In 2010, PDVSA is planning produce 5 million barrels per day of oil with an investment of more that 43 billion dollars from private and public sectors.

President Hugo Chavez

Hugo Rafael Chavez Frias was born on July 28, 1954, in Sabaneta, Barinas, Venezuela. When he was only a teenager, he chose the military career. In 1975 he got a M.S. in military sciences and engineering at the Venezuelan Academy of Military Sciences. Then he began a graduate studies in political sciences at the Simón Bolívar University, but he never finished the program.

In 1989, Carlos Andres Perez was the president of Venezuela for the second time, and he implemented a set of unpopular measures suggested by the International Monetary Fund (IMF). These measures provoked a series of protest that were brutally repressed by the police and military forces and several hundred of civilians were killed.

On February 4, 1992, Lieutenant-Colonel Hugo Chavez lead a military coup against President Perez. The military coup failed, and Chavez appeared on national T.V. asking for the surrender of his bother of arms that were still in control of military bases across the country. He said on T.V. that he and his co-conspirators had not achieved their goals “for now”. That courageous “for now” was the beginning of an amazing political career.

Figure 2. Chavez appeared on T.V. after the coup.

Chavez was sentenced to several years in prison, but after spending two years he and his companions were pardoned by President Rafael Caldera in March, 1994. Immediately after he was released, he formed a new political party called the Movement for the Fifth Republic and began his political career.

In 1997, he ran for president against the traditional political parties. His program offered an anti-poverty and anti-corruption exit to four decades of scandals and money malversations. Moreover, he offered a participative and pacific democracy where the welfare of the people would be the main focus of his presidential agenda. On December 6, 1998 Hugo Chavez won the elections by 56.2 percent, the largest percent of voters in four decades.

Before Chavez took office on February, 1999, he went to visit the presidents of the OPEC countries. Knowing that the main objective of industrialized countries was to substitute oil as a source of energy and the main economic support of the OPEC countries is oil exportation, he convoked a high level meting among the OPEC country leaders. Consequently, in September 2000, it was held in Caracas, Venezuela, the Second Summit of OPEC Sovereigns and Heads of State. The first one was held in Algiers in March 1975.

Chavez purposed this meeting with very specific objectives which were:

  • Reestablished the dialoged among OPEC country leaders noticing that the last meeting was held 25 years ago.

  • Recover the credibility of Venezuela in the Organization.

  • Fortify the OPEC in the world.

  • Recover oil prices.

  • Regain the leadership of the OPEC in the oil market.

  • Consolidate the relations among Venezuela and the Arabic Countries.

The Second Summit of OPEC Sovereigns and Heads of State ended with the Declaration of Caracas, on September 28, 2000. In this declaration, they ratified the unity of the organization. They also committed to maintain price policies that “are lucrative, stables and competitive with other sources of energy”. They also invited to the consumer countries to participate in debates and negotiations in oil subjects.

Figure 3. II Summit of OPEC Sovereigns and Heads of State.
Finally, they discussed the influence of taxes in the final oil price, so they solicited that consumers studied their tax policies. They also asked to the consumer countries not to discriminate oil in environmental, energetic and commercial policies.

Hugo Chavez moved to rebuild and revive the OPEC; as a result, Venezuela received a better price for its oil. In fact, the price of oil doubled to over $20 and Ali Rodriguez Araque, a Venezuelan, became the secretary of the organization.

Chavez took office on February 2, 1999, and the same day he signed a decree that called for a referendum where the people would decide if they support Chavez idea of the creation a new constitution. In the referendum, Chavez got more that 71% of the votes. So the idea of a new constitution was fully approved by the Venezuelan people.

Figure 4. President Chavez

Next, Chavez organized a second election where the delegates of the assembly would be elected. Those delegates would be in charge of creating the new constitution. This assembly was called the Constitutional National Assembly. After a successful political campaign, Chavez won 120 of the 131 assembly seats.

The project for a new constitution was submitted to the Venezuelan people on December, 1999, and it was approved by 72% of the voters. Consequently, on December 30, 1999, the Constitution of the Bolivarian Republic of Venezuela was published. The new constitution designed a new roll of the State in the society creating new and more balanced public powers. Also, it incorporated several mechanisms of citizen participation such as a new procedure to recall any elected figure like mayors, governors, congress representatives and the President. Moreover, it also increased the presidential term of office to six years and added provisions for presidents to serve two terms, and it changed the congress to a unicameral assembly. Finally, it changed the name of the country to Bolivarian Republic of Venezuela after Simon Bolivar, the independence hero that liberated Colombia, Ecuador, Peru, Panama, and Venezuela, and founded Bolivia in the 19th century.

In July 2000, a new election was held to elect the new congress representatives. Chavez won 2/3 of the majority of the congress members. This same congress allowed him to govern by decree for one year, so he passed a set of 49 laws by decree in 2001 which included the new Hydrocarbons Law.

In the new Hydrocarbons Law the taxes that the companies pay for oil exploitation in Venezuela were increased. On December 1, 2001, after he signed the decree Chavez said to the media: “this new law will permit using our oil and the refinery activities as an instrument of the national development and the diversification of the production of the country”.

Ten days after the law was signed, the Venezuelan opposition launched a general strike. Contradictory, the organizers of this strike were the employers and not the employees. The strike was not successful, but it was the first step to a coup attempt against Chavez on April 2002. Actually, there has been three attempts to throw Chavez out of office.

The first coup attempt occured on April 11, 2002. It started with a two day general strike was called by the Venezuela’s largest union and business federation on April 9, 2002. The private media openly covered and encouraged the strike. In fact, Venezuela's four largest private television stations, Venevision, Radio Caracas Television, Globovision, and Televen aligned with nine of the ten most important national newspapers to promote destabilization and justify a coup against Chavez.

To explain this phenomenon is important to point whose controls the media in Venezuela. “The most important and widely-watched television network - Venevision - is part of a media empire owned by multimillionaire Gustavo Cisneros. The Organization Diego Cisneros has over 70 outlets in 39 countries. These include: Univision, which accounts for 80 percent of Spanish language broadcasts in the US; Canal 13, Chilevision, DirectTV Latin America, Galavision, Playboy TV Latin America, Playboy TV International, Uniseries, Vale, TV, Via Digital, AOL Latin America. In addition to its joint ventures with Playboy and US media giant, AOL, the Cisneros group also enjoys profitable partnerships with Coca Cola and Pizza Hut. Not surprisingly, Cisneros is a strong advocate of the neo-liberal economic model tirelessly promoted by bodies such as the International Monetary Fund (IMF) and the World Bank” (Maurice Lemoine, Le Monde Diplomatique, Sept 2002).

On April 11, 2002, the opposition organized a march that would end at the PDVSA building located in Chuao, Caracas. But the march was relocated to the Miraflores Presidential Palace. The media strongly supported the protest leaders’ idea. Not only the media owners, but also the leaders of the protest knew that thousands of Chavez supporters were around the Miraflores Palace. They also knew that mixed these two groups would bring disturbance to the public order, an excellent environment for a coup.

At the same time the Metropolitan Police directed by the mayor of Caracas, who was in favor of the coup, began to open fire against Chavez supporters located in Yaguno Bridge. The supporters fired back and after some minutes of confusion and aggressive confrontations 17 people were killed and hundreds were injured. Suspiciously, almost all of the people were killed by long range weapons and many of them appeared to have been shot from above in a sniper-like fashion. Those presumed snipers were never found.

The shooting was covered by the media, and they repeated these images again and again saying that Hugo Chavez ordered hi supporters to kill the opposition marchers. When in actuallity they were defending themselves against the Metropolitan Police. On screen, the media repeatedly broadcasted selectively edited TV footage that appeared to show Chavez supporters shooting into a crowd of unarmed opposition marchers. Consequently, high-ranking military officers asked President Chavez for his resignation. On the early morning of April 12, 2002, Chavez was arrested and taken to the Tiuna Fort.

Pedro Carmona Estanga was appointed by the military as interim president. With the support of the media, a big show was held in the Miraflores Palace where he announced his first decree. In that decree Carmona dissolved every constituted power such as the Congress, the Supreme Court, and the Attorney General among others. He also changed back the name of the country to Venezuela. This decree was signed by him and also by several “representatives” of national life like the Catholic Church, political parties, the media owners, military, etc. It is important to mention that the U.S. government accepted and encouraged Carmona’s Government and decree. The U.S. was the first country that openly recognized the “legitimacy” of the new President while the rest of the world was more conservative in its comments about the Venezuelan situation.

But the people were not happy with the new president and the “de facto” government. They began to concentrate at the Miraflores Palace where they asked for the reinstitution of President Chavez. On April 13, 2002, the people and the middle to low ranking military took control of some military bases and later took control of the Miraflores Palace. They took control of the state T.V. station “Venezolana de Television” also where they broadcasted that Chavez had not resigned, but he instead was held as a prisoner in an unknown location. At the same time, the private media refused to acknowledge the reality of the situation the country was in. Instead of broadcasting the events of the military take over, they aired cartoons, cooking programs and action films.

The same day around 10:00 pm, Ministerial officials made a TV broadcast from Miraflores Palace and Vice-President Diosdado Cabello assumed the presidency temporally. Minutes after, Carmona announced his resignation and recognized Cabello as interim president. Later, on Sunday April 14, 2002, the deposed president Chavez returned to Miraflores Palace to reassume his post. This was the first time in the history of the democracy that a President is restored by the people in less than 36 hours.

Figure 5. Chavez arrived back to Miraflores Palace on April 14, 2002.
The U.S. government created an agency called the National Endowment for Democracy (NED) to oppose Chavez. This organization has given money to fund Venezuelan anti-Chavez groups and opposition political parties. In fact, the NED quadrupled its funding in the year leading up to the coup. NED funding of the opposition totaled $877,000 in 2004.

The second attempt to throw Chavez out of office was the PDVSA strike which began on December 2, 2002 and lasted for 2 month. The strike began as a part of general strike called by the Venezuela’s largest union federation and business federation similar to the April 2002 coup. However, this time the opposition leaders wanted to include the oil workers. The oil strike was led by a coalition of labor unions, industry captains and oil workers. As a result, many high-and mid-level technicians and skilled workers walked off the job bringing oil drilling, processing and transporting to a standstill.

The PDVSA strike began when the captains of the oil ships declared that they had joined the strike and their ships will stay anchored in the Venezuelan ports. Those ships are the only way that PDVSA can export its hydrocarbons. Hence, the production inland had to stop in order to avoid splits and control inventory. Fifteen days after the beginning of the strike, PDVSA decreased its production from 3.1 million barrels per day to approximately 100,000 barrels per day. This low production was only to maintain the pressure in the systems and plants.

Figure 6. Strikers at the PDVSA building in Caracas.

The strategy was simple; cutting the income would force President Chavez to resign. However, this strategy caused one of the most profound damages to the Venezuelan economy and its most important company. As a consequence of the strike, Venezuela began to import of gasoline from Brazil for internal use. In fact, President Lula Da Silva and the Brazilian government helped Venezuela tremendously. They sent several ships of gasoline to reactivate the Venezuelan public transport inside the country. The gasoline was distributed in some gas stations and the lines to pump gas were incredibly long. Some Venezuelans spent more than 36 hours in line to pump the tank.

In the mean time, the army took the oil ships by force sequestered by the PDVSA captains and the system started to move. Also, PDVSA had some workers who did not like the idea of the strike and supported President Chavez. Those loyal to Chavez, with the help of the Venezuelan Army, retook PDVSA facilities and began to produce hydrocarbons again. However, it took more that two months to reach the normal levels of production.

When PDVSA began to produce again, some of the workers who were in strike came back to work. At the same time, the government began to lay off the workers who still decided to strike. Later, every worker who stayed on strike was fired from the company. At the end approximately 18,000 out of 40,000 employees were laid off.

This second attempt to throw Chavez out of office cost the nation more than 13.5 billion dollars in direct losses. The damage made to the other sectors of the national economy is calculated in 6.5 billon dollars. Hence, the total accumulative damage of the PDVSA strike of 2004 was 20 billion dollars. In PDVSA several experienced workers and manager were fired, so the technological damage is almost impossible to calculate. Venezuela is still trying to recuperate from the production losses.

Currently, PDVSA is under the control of the Venezuelan Government, and it is more involved in the development of social programs. Oil Secretary and PDVSA President Rafael Ramirez said on May 18, 2005 in the First Latin-American Meting of Oil Workers that “PDVSA now has distinct relationship with the society. It is not only a company oriented to obtain its own commercial goals, but it is also centered in the social battle for the advance of Venezuela. PDVSA is now a blessing to our people”.

In addition, he informed that last year PDVSA spent 4 million dollars in social plans such as education missions where the poorest are taught how to read and write and young people receive scholarships to go to college.

PDVSA also has been the most important mechanism used by Chavez to unify South America and to support programs like Telesur (a TV station of South America), Petrosur (an oil company of South America), (Petroamerica an oil company of South America and the Caribbean), and the South American Development Bank.

The last and third attempt to throw Chavez out of office was a recall vote held on August 15, 2004. In the new constitution, proposed by Chavez and approved by the Venezuelan people, there is a mechanism that any elected official can be recalled. The opposition launched a multi-million dollar campaign against Chavez with the support of the U.S. government agency National Endowment for Democracy. In fact, $54,000 of those funds went to the group that gathered the 20% of the voters needed to sign the recall.

Millions of voters headed to the polls and waited more that 8 hours in line to cast their vote. The election had the presence of several international observers such as Jimmy Carter of the Carter Center and César Gaviria as Secretary General of the Organization of American States. One of the claims of the opposition was that they would only accept the results if international organizations acting as observers approve them. At the end of the day the Electoral National Council said that President Chavez won the recall by 59.25 percent of the votes. Moreover, the international observers endorsed the results of Venezuela's recall referendum.

The latest polls show that President Chavez increased his popularity from 59 to 70 percent in the February and March, 2005. Those numbers were taken from a private company called Datanalisis. This company also pointed that the key factor that Chavez had this increment in his popularity were the social plans that he and his Bolivarian Revolution have undertaken.

Chavez is revolutionizing the oil industry in Venezuela and the entire world. He frequently and unexpectedly declares new changes in foreign oil policy within Venezuela, and has also been an influential member of OPEC to increase the price of oil. Recently he has announced that OPEC will be fixing the price of oil as a move to eradicate cheap oil prices. He consistently threatens the United States, Venezuela’s major customer, to sell their share of Venezuela’s oil production to other nations. Chavez has also become stricter with the foreign oil companies producing in Venezuela to increase taxes and royalties from 34% to 50%. Chavez believes the rising demand and price of oil in the world will allow these changes to occur economically. Chavez wants to increase the Venezuela’s share in the oil revenue and use it to develop the country and to help lower poverty in Latin America. The overall increase in Venezuela’s share of oil production within the country has risen from 1% to 13%, because of Chavez’s changes in oil policies. The increased priced and revenues should result in approximately $300 billion within the nest seven years.

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