PDVSA(Pictured: Venezuela’s national oil company PDVSA.)

We’re honored to have Michael Busch dissecting the latest WikiLeaks document dump for Focal Points. This is the thirty-eighth in the series.

A number of insights into the Venezuelan oil sector were revealed this week in a chain of embassy cables WikiLeaked by the Norwegian newspaper Aftenposten.

The cables focus predominantly on the dealings of the Norwegian oil company Statoil, which possesses a considerable share of control over Venezuela’s oil in the famed Orinoco belt, considered by experts to be home to the largest crude reserves in the world. The first cable, dating from early 2007, details conversations between US embassy officials and Statoil Venezuela President Thore Kristiansen, colorfully described as “an urbane man who looks like he just stepped out of a Brooks Brother catalogue.” Kristiansen describes his early negotiations with the Venezuelan government in the lead-up to what would be a dramatic nationalization of Venezuela’s oil fields by Hugo Chavez.

Kristiansen pooh-poohed American concerns that Chavez would seek as much as a 60 percent share in oil extraction projects in the country, noting that the Venezuelans would take care not to alienate private investment too dramatically in their take-back scheme. The oil executive “said he firmly believed that XXXXXXXXXXXXX realizes that [Venezuela] needs the private sector to run” the nation’s energy industry. Moreover,

although he did not specifically say it, he appeared to believe that the BRV [Venezuelan government] was willing to negotiate on the size of PDVSA’s [Venezuela’s national oil company] stake, based on discussions with [government] officials. Kristiansen later added that senior BRV and PDVSA officials do not really understand the oil and gas policies that they are supposed to be implementing.

The Americans shared the view that a mild chaos was rattling the internal workings of Venezuelan state decision-making, noting that

it is clear that at this point even senior officials within the MEP and PDVSA have no idea what the BRV’s policy is regarding the migration of the strategic associations to PDVSA controlled ventures.

Of course, Chavez did exactly as the Americans feared just months later, ordering that foreign firms hand over operational control of their holdings to PDVSA and accept a 60 percent share of revenue from any oil extraction on Venezuelan soil.

But Statoil was hardly unnerved. In a meeting with US embassy officials a few months after Chavez’s nationalization push, a smug Kristiansen told the Americans that his company “had received a good deal under the circumstances,” and that contrary to Venezuelan claims that foreign firms had lost their equity in their partnerships, Statoil had been handsomely compensated for their losses. “Although he would not state the amount of the compensation, he implied that it was well above book value” and that the company had the option to accept payment in cash or crude. Not only that, but the Americans also learned that while Venezuela proudly announced that foreign companies would experience reduced zones of operation, Statoil’s actually increased following the nationalization.

A cable early in 2008 returns to Staoil’s compensation following the nationalization. In a meeting that Febraury, Kristiansen again refused to disclose precise details of the agreement reached with the Chavez regime, but admitted that the monies received far exceeded the $130 million as had been reported in the Wall Street Journal. Interestingly, in view of recent revelations that Norway has exercised admirable business ethics in its foreign dealings, “Kristiansen also added the deal had caused some problems,” because although the company “had a policy of trying to be as transparent as possible with its shareholders…it did not believe that it could release details of it to the shareholders due to [Venezuelan government] sensitivities.”

Seeking to press its advantage further, Kristiansen boasted to American diplomats that Statoil’s operations in Venezuela looked as if they would expand still further in the near future. The Norwegians had recently won the right to expand their scouting missions in Venezuela’s Faja strip, an oil field that likely possesses upwards of a billion barrels of valuable crude, and secured the possibility of exploiting new finds following future negotiations. Kristiansen’s optimistic forecast was based on Venezuela’s seriousness “about raising oil production” and recognition that private actors were critical to this process. Kristiansen also highlighted a “final piece of evidence that justifies Statoil’s optimism”: the recent performance of Venezuelan oil executives at an industry conference.

Unlike other conferences, all of the scheduled PDVSA speakers showed up and gave presentations that actually contained details. Kristiansen stated it was clear that PDVSA’s senior management is clearly wrestling with the best way to develop the Faja. In addition, PDVSA speakers consistently stressed the need for private sector participation.

Still, Kristiansen did warn that his projections were not entirely secure against the volatility of Venezuelan politics—a system often rent by efforts at meeting the challenges of social revolution in an unforgiving reality. One such example was Chavez’s recent threat to apply windfall profit taxes to corporate earnings, a policy proposal Kristiansen labeled “ridiculous” but nevertheless troubling. “Since Chavez did not provide any specifics on his proposed tax, his comments raised the level of risk for companies operating in Venezuela.”

By 2010, the sheen of confidence had been largely rubbed away in Statoil’s private conversations with American diplomats. A cable from nearly a year ago related embassy meetings with representative from both British Petroleum and Statoil concerning ongoing efforts to land rights to development projects in Faja. The Chavez regime had still not clarified details of its proposed windfall profits tax, uncertainty that dissuaded both companies from submitting bids on the projects. The two companies apparently had wagered that none of their rival competitors would submit proposals either, which it was hoped would force Bolivarian government to moderate its stance. But it wasn’t to be: Chevron and the Spanish Repsol corporation seized the initiative and placed bids to the displeasure of Statoil in particular. The Norwegian representative “was specifically upset with the Chevron bid…as he believed it appeared to provide a degree of credibility to the [Venezuelan government] that is not warranted.” As for Repsol, the representative couldn’t care less, arguing that he doubted “the Repsol-led consortium has the technical expertise and experience to execute” a successful project.

Beyond relating the whining of disgruntled Norwegians at a deal gone bad, the cable discusses in detail the struggling Venezuelan oil sector. Citing an unnamed source, the embassy reported on the poverty of Venezuela’s industrial infrastructure.

XXXXXXXXXX provided several examples of the ongoing challenges confronted in the Venezuelan petroleum industry. He noted that PDVSA recently has removed gas compressor units from the PDVSA-BP mixed company-operated Boqueron oil field from use elsewhere in Eastern Venezuela, thus limiting the amount of natural gas that could be reinjected into the oil field. In October 2009, a BP proposal to install a 100MW electricity generating plant, a $150 million investment, to service Petromonagas Jose upgrader and its related oil fields was rejected by the PDVSA members of the Petromonagas board of directors. [Note: Venezuela is in the midst of an electricity crisis and many of its oil fields rely on the national electricity grid…] The PDVSA board members told BP that some oil fields would be shut-in as a result of the electricity crisis and thus, the timing of this proposal did not make sense.

The cable concludes that

as the energy crisis develops, any reduction of production of crude petroleum will reduce government revenues…accounts of events such as the cannibalizing of gas compressors from installations from elsewhere and procurement problems all indicate PDVSA will find it difficult to maintain current production levels.

As it happens, the cable’s author offered prescient analysis. The country suffered major production slowdowns in 2010 which lead Caracas to demand at the end of the year that foreign oil companies draw up new plans to boost production. Apparently tired of waiting for levels to rise, the government rattled their cages again last week. Energy Minister Rafael Ramirez announced to reporters that foreign firms failing to raise output would face the immediate possibility of being tossed from the country. Said Ramirez, “If they don’t comply with their plans, I would have good reason to review the rights they have.”

The government may be flexing its muscles after Chavez’s announcement last week that his country now possesses the largest proven oil reserves on earth, surpassing Saudi Arabia. But as Jorge Pinon at Florida International University points out, “You can be sitting on the world’s largest oil reserves but if you do not have … capital, technology, know-how, and most important, stewardship of the enterprise, they are worthless.”