Pity foreign analysts trying to make heads or tails of Venezuela’s energy policy. Or, well, trying to make sense of the mental illness that currently occupies the space where our energy policy should be, a place where different spokespeople make radically incompatible statements and present them all as official policy at the same time.

Last week, Hermann Escarrá made headlines around the energy world by endorsing a lunatic scheme to use the Constituyente to kick out all private capital from Venezuela’s oil industry. The Russians, the Chinese, the Indians, the Gringos, the Italians, the Spaniards, even the bolichicos who’ve wormed their way into the industry via Mixed Enterprises. Everyone.

Echoing calls made by some of the fringiest of the fringy marxist academics at such august institutions of higher learning as the Universidad Bolivariana de Venezuela, Escarrá wants to amend article 303 of the Constitution to cut off any space at all for players other than PDVSA.

Pretty much the only way fresh investment makes its way into the Venezuelan oil industry these days is via these foreign partners, because nobody is insane enough to lend money to PDVSA on its own.

This is deeply, deeply bonkers. For all the talk about Petroleum Sovereignty, the Venezuelan industry is more dependent on foreign capital today than it has been at any time since 1976.

Known as Mixed Enterprises, PDVSA’s joint ventures with outside companies from Rosneft and Chevron to the Chinese National Petroleum Company and Statoil are responsible for almost half of Venezuela’s oil output, and for absolutely all of its output growth.

As production declines quickly at PDVSA wholly-run operations, the only thing cushioning the blow has been the presence of foreign partners with the capital and know how to boost production even among crazy-adverse circumstances. Without them, Venezuela’s oil production would’ve collapsed calamitously these last few years.

It’s easy to dismiss Escarrá’s plan as some lunatic diversion, but it’s not so simple.

In fact, pretty much the only way fresh investment makes its way into the Venezuelan oil industry these days is via these foreign partners, because nobody is insane enough to lend money to PDVSA on its own. Vowing to expropriate them all amounts to vowing to end investment in oil production in Venezuela: an extinction level threat to PDVSA itself.

So fucking crazy is it to think PDVSA can do without foreign partners that the company is, bizarrely, vowing to increase foreign partners share of some Mixed Enterprises at the same time Escarrá vows to expropriate them. Indeed, PDVSA is so desperate for money it’s proposing a heretofore taboo arrangement where it would cede more than 40% of an oil field to a foreign company, pledging 49% of the San Cristóbal field to an Indian company.

Now, it’s easy to dismiss Escarrá’s plan as some lunatic diversion, and indeed PDVSA’s outgoing president, Eulogio del Pino, soon flew into damage control mode, denying there’s any plan to exclude private partners to Bloomberg. But it’s not so simple. Oil Minister and probable next PDVSA chief Nelson Martínez was actually at the event where Escarrá made his lunatic threat and seemed to endorse it, even while the chairman of the company whose sole shareholder he is vows to do exactly the opposite.

Look, for PDVSA to approve the plan Hermann Escarrá has proposed would be an act of such blatant self-harm, you’d think not even this bunch would go for it. Remember this isn’t like 2005, when they were expropriating such imperialist bugbears as ExxonMobil and ConocoPhillips. This time around, they’d be expropriating companies from key allies: Russia, India, China, countries whose diplomatic support Venezuela needs.

But just imagine the dynamics when you have 545 pro-Cuban Frente Francisco de Miranda crazies crowding around a legislative chamber. A zoo like that has its own dynamics, and chances are technocratic explanations about financing flows to the industry aren’t going to hold their attention very long.

And the really worrying thing is that we’re talking about the wholesale destruction of the Venezuelan oil industry, and that still probably isn’t in the top 10 of most dangerous things a Constituyente might do.


  1. Please post a link or a source to Escarra’s comment or even better, a video (if available). Also, wouldn’t take what that loony says very seriously, he is probably making those comments to move up the ranks within the loony communist faction of the government (as many of us know, there are between 3-4 different factions in the Govt., some of which are more radical than others).

    The way to move forward is by giving more equity in each of the oil fields to foreign partners (there are 50+ out there) regardless of whether chavista crooks or the naive opposition do it. And the sale of this equity couldn’t be more capitalist in my opinion. Which is why it is also very concerning to see that the opposition strongly rejects this option. Many people believe that oil, especially heavy one, is going to become more and more difficult to extract due to the consequences of the appearance of renewable energies (I am skeptic of the pace at which this evolution will take place because I think it will be slower than what the majority of the pseudo-science and journalist groups describe it will be for the mere fact that it is extremely costly to replace current infrastructure, especially in poorer regions). Therefore, it is important to ramp up production asap in ANY scenario.

    In the end, both the government and opposition are interested in keeping the same populist scheme going on, where PDVSA acts like the rich father who has to constantly subsidise his useless son who is addicted to crack cocaine (Venezuela), and they take some money inbetween when pushing money from one end to the other.

    And with the sale of a few percentage points of participation in 15+ ventures (our of the 50+) and letting PDVSA remain with the majority participation in each project, there goes away PDVSA’s “debt issues”, which to me are just liquidity issues and not solvency issues. Monetisation of equity is the name of the game today (the same thing that Saudi Arabia is don’t with Aramco, by the way). Time for Guevara, Olivares and et al to go on a corporate finance crash course.

    • I agree with Venny’s skepticism of renewable energy, not only with regards to infrastructure but also to the fact that natural gas is so cheap. Today natgas is becoming increasingly just a waste product of oil production, to be disposed of as cheaply as possible. Throughout the hemisphere much of it is just flared off.

      With Donald Trump in the White House and Rick Perry heading up DOE, where are you going to put your money; windmills and solar panels, or pipelines and LNG terminals?

  2. I endorse Vennys view of this matter, the govt whether it wants to or not will have to give foreign investors a bigger stake in the countrys oil industry just to keep it going and to attempt to shore up its much eroded finances ………where I must raise a doubt is regarding the notions that selling such participation will be enough because to the extent Pdvsa is badly run or subject to the loonie decision making of it political principals it can operationally and economically sabotage the mixed companies operation.

  3. Known as Mixed Enterprises, PDVSA’s joint ventures with outside companies from Rosneft and Chevron to the Chinese National Petroleum Company and Statoil are responsible for almost half of Venezuela’s oil output, and for absolutely all of its output growth.

    Which is a rather pointed reply to the Chavista/PSF narrative that Chavez, by his nationalizations/confiscations, freed the oil industry from foreign domination. And what was the percentage of production from joint ventures when Chavez took office in 1999? Decidedly lower, I would imagine, as the joint ventures mostly began in the mid 1990s, so by 1998/99 the probably hadn’t gotten up to speed yet.

    Where can one get documentation on production from mixed enterprises?


    • Posted the math on what percentage of Venezuelas production of aprox 3.4M BPD in 1999 could be linked to mixed company foreign participation some years ago and it came to some 11% of the total production , Pdvsa retaining responsibility for 89% of the oil being produced then. To ensure prices of oil sold by Joint Venture to affiliates of foreign associates would not be manipulated Pdvsa retained right to purchase those volumes at a bit over the affiliates offered price.

    • From a search engine: Bloomberg: Venezuela Oil Ventures Questioned by Maduro’s Constitution Aide.

      Oil joint ventures that account for about 40 percent of Venezuela’s output are being thrown into question by the man advising President Nicolas Maduro in rewriting the constitution.

      There is a link at 40 percent which leads one to a “Columbia SIPA Center on Global Energy Policy, Venezuela’s Growing Risk to the Oil Market. (August 2016)

      From “Venezuela’s Growing Risk to the Oil Market:”
      Operations by joint-venture companies may partly offset declines in PDVSA output. While PDVSA’s own production is clearly seeing steeper declines this year, it is not obvious that Venezuela will suffer similar drops in its joint ventures, which today account for 40 percent of production (see Table 1). In an April press release about reducing its activities in Venezuela, Schlumberger said that it would “continue servicing those customers with available cash flow.”8

      In 2014, Joint Ventures accounted for 37% of Venezuelan production, which increased to 40% in 2015. That trajectory would have Joint Ventures accounting for nearly half of Venezuelan production within several years.

      • Pdvsa produces three basic income streams for the govt: a royalty payment expressed as a fixed percentage of the value of the oil Volume being produced to remmunerate it for allowing Pdvsa the exploitation of its oil fields, an income tax which it owes the govt same as any other business on the net profits it makes , and dividends which it pays the govt as shareholder of Pdvsa the corporation . There are other non monetary benefits which it allows the govt by obeying its orders to for example sell gasoline at a lower than market price …….selling oil to caricom and central american countries and cuba……….etc.

        • So the “sale” of an interest in oil is the prepayment of a lease giving the right to drill. Somehow the use of the word “sale” sounded like a purchase, as one would purchase a car, bicycle, or bottle of scotch, a cash payment for unqualified ownership and use.

          Seems like a lot of the oil business is about making an accurate estimate of the costs of extraction, so that a good deal can be made on the lease payment, and a good rate of return earned on the costs of the equipment required (drilling rigs, etc.). E.g If you get a high pressure well then it costs less to extract the oil and you book more profit on the sale of the oil.

          So the whole idea of nationalization probably came about because the foreign company doing the drilling and extraction negotiated a favorable lease and royalty agreement for itself, and managed to lower extraction costs for itself. The royalty is based on market price, not cost of extraction. The taxes are based on profit, so the government participates in the payer’s success in lower costs.

          I’d never bothered to define all the various terms and think it all through. I couldn’t figure out, given the apparently loss of efficiency through direct government operations of a nationalized company, why any government would want to nationalize. My guess is that it eliminates the variability on negotiating the lease, and the margin on extraction costs below estimates goes entirely to the government. Even with a degree of autonomy granted the nationalized company, the politicians are now the boss.

          The politics and government PR confuses things. Easy to sell the idea “nationalize” in just one word, without going into the actual business and the economics of the whole thing. But in the end, the government benefits only if the operation is efficient, only if the incremental cash flow to itself exceeds any incremental costs of running its own extraction.

          In short form: the foreign oil men probably negotiated really good lease for exploration and lease for drilling terms, good royalty agreements, all favorable to themselves based on their experience with the same, then were diligent in maintaining efficiency of operations, and the government saw all the money, and felt they had been out-negotiated, so decided to renegotiate by nationalizing the operations. Then they found out that they were not so good at running the extraction and all the management of the operations, and that maintaining the infrastructure of equipment was expensive, and in short, they’re back to leasing and collecting royalties, concluding that maybe that isn’t all such a bad deal after all. (All of this leaves out the possibility for “internal expropriations” of money, aka corruption.)

          (Disclaimer: I’m just guessing.)

          • All pretty good analysis. The foreigners were efficient, deserved their profits, had little corruption, even educated Venezuelans abroad to replace foreigners in key management/technical positions, helping immensely to develop Venezuela’s fledgling middle class. Nationalization provided a short-term Venezuelan windfall, and operations continued fairly efficient under U.S.-trained management, as corruption increased somewhat. Then, Chavez post-2002 fired the efficient management, replaced it largely with political hacks, increased the payroll from 30m to 140m, used PDVSA to bankroll his social program giveaways, heavily indebted the industry, investment/production/maintenance fell, and corruption increased exponentially

          • NET. – Thanks. I totally missed the parts about Chavez (wasn’t there, wasn’t paying attention). The thing you said about Venezuela’s fledgling middle class is exactly what I had observed, but I was already on my way out, so I didn’t have much time or attention to confirm what I saw on the surface. I saw just exactly that, that in those times, Venezuela was beginning to develop its own middle class. Urbanization and high-rise apartment buildings were being put up, not for the traditional upper-class people with boats in Puerto Azul and Caraballeda and vacation houses in Higuerote, or for foreigners, but for Venezuelans in their twenties who had good jobs and were getting married to raise families. I thought it was amazing to see! Why anyone would want to stomp that out is the dark side of Mankind we cannot ignore, and must deal with, person-to-person, every day, to correct warped thought and prevent individuals from going in that direction at all.

  4. I forgot to add that just keeping production going doesnt do any good, the terms of the deal are as important , if for example the oil must go to the investors trading branch and the pricing mechanism or target markets are not aligned with venezuelas interests then it might do more harm than good , if Pdvsa is so desperate for inmediate cash or managerially incompetent that it lacks the capacity to make a decent deal then Venezuela will not benefit from the foreign investment even while its oil resources are spent….

    Its very easy for an international company to buy cheap in order to benefit the offshore affiliates which ultimately recieve the oil , or to keep its production volume down becase there more profitable deals elsewhere ……….it goes way above the raising of more money , its a long term optimizing exercise…..

    • Bill – Can you (or anyone) explain about the oil industry money flows, or the difference between a “lease”, “royalties”, and “equity in joint ventures”? It seems to me the rational thing to do, from Venezuela’s point of view, would be to charge royalties. The thing about “selling” sounds too final, to me, as if any company could “purchase” an oil field and own all the oil it could carry.

      On a different subject, can someone explain the Venezuelan / Latin American populist aversion to the USofA? And free market capitalism? The article says, for example, “This time around, they’d be expropriating companies from key allies: Russia, India, China, countries whose diplomatic support Venezuela needs.” Did I misread the biting sarcasm?

      Not getting too flustered, but when Goldman bought second-hand bonds on the open market, not flowing any of its cash to the regime, it was accused of “funding the regime”. Yet when Russia and China and maybe others directly lend money to Maduro … they are considered, by some, to be “key allies”? Russia supports Cuba. And I doubt they’re as good a business partner as a U.S. company would be. To my knowledge, neither of them, nor India, have frozen huge bank accounts or prosecuted money-launderers, bribe makers and takers, cocaine traffickers, and so on. Why would the U.S. not be considered a key ally very badly needed?

      (Too many complex question, lol! Just on my mind.)

  5. Chavismo is going full taliban now, consequences be damned, “Dios proveera!”. Take a look in Aporrea, they are in a hissy fit about Leopoldo, he is the totem of their hatred (which makes sense, with his superstar charisma).

    At this point they know their godgiven duty to impose the communist Ummah must be done at ALL cost. It’s now or never! So between rascals and true believers they are rallying the talibs with the harshest communist slogans.

    They promise blood, the question for me is how much will be split.

  6. I believe that PDVSA is urged to obtain funds, but being honest they first sell or indebt even more to PDVSA before letting it break, doing it that way by selling assets and not issuing more debt since they could not do it without prior authorization from the national assembly , Would get the resources to pay the debt in the remainder of the year and to maintain this narco government financially speaking.

  7. I believe that PDVSA is urged to obtain funds, but being honest they first sell or indebt even more to PDVSA before letting it break, doing it that way by selling assets and not issuing more debt since they could not do it without prior authorization from the national assembly , Would get the resources to pay the debt in the remainder of the year and to mantain this narco government financially speaking.

  8. I guess pre-fontal lobotomy still allowed in Universidad Bolivariana de Venezuela. I guess it makes sense all thing considerer

  9. Sad to see so many democratic countries in Europe and elsewhere still being partners in crime, ahem, ‘doing business’ with Diosdado and company. Norway, Spain, France, Italy, GB…

    That output growth doesn’t represent anything to the common Venezuelan, who is starving to death, but to people like Daniella Cabello. Next time you see her living large on instagram, thanks Rajoy and Repsol! Next time you see the next cargo of weapons arriving for GNB, thanks Chevron and, yes, Trump!

    I doubt that Chavistas will expropriate anything, they need money to keep their families abroad living fancy lifestyles. Even the fringiest of the fringy marxist academics know that the fringiest of the fringy marxist politicians need $$$!!! To threaten with expropriating their own enablers, the people that lubricate the gears of the repressive state apparatus, is just empty rethoric for internal consumption only, Chevron’s council board laugh about it.

  10. I guess pre-frontal lobotomies are still preformed at the Universidad Bolivariana de Venezuela based on your article. Are we sure that the Professor had that procedure and just was overloaded with coca and smack.

    Can you please confirm.

  11. Isn’t it true that Maduro and pals are sustained (now) only by the oil revenues coming in? And maybe by hawking by stealth the little reserves that are left. Escarilla must have thought that if they no longer honored their partnership deals, they could pocket ALL the proceeds and stop shipping “for free” the oceans of oil promised China and Russia which they pledged to do in order to get cash money they already spent of pilfered. As though they can stiff China and Russia without consequences. After Citicorp refused to handling their banking any longer, isn’t Russia doing this for them? As though Russia wouldn’t garnish any monies owed them if Maduro went “full Taliban,” as renacuajo67 suggested.

    With over 3 billion coming due in a few months, where is Maduro going to get the capitol to pay down the looming bond nut? From the point of view of an economic amateur (me), what does the financial future actually look like for Maduro in the coming months? Political intrigues and social epics aside, isn’t Maduro facing almost immediate bankruptcy?

  12. “…to kick out all private capital from Venezuela’s oil industry.”

    Since they don’t have capital to pay for this, we can assume that they are not talking about expropriation, but about outright stealing. That is about the worst message you could possibly be sending the people who are responsible for keeping what little cash flow you have going. Cooler heads in the government know this, of course, but right now, the most radical of the fascists are calling the shots.

  13. This is bullshit. Even escarra needs oil money to keep his size which is unsustainable with the venezuelan average diet.

  14. Say the “radical fascists” believe they can simply keep all the oil profits for themselves and welch on the deals and promises they made, including paying down, in a few short months, several of the billions owed creditors. Isn’t that a little (or a lot) like stiffing a loan shark? Since when did a loan shark (Wall Street, China, Russia, and all the others who bought oil futures for pennies on the dollar) just roll over and write off their losses? Right now it looks as though Maduro and friends are facing down the load sharks, and what capitol they have, or will have through oil income, is by prior agreement, the rightful property of the sharks.

    So far the immediate pressure on the gov. has largely come from the streets. Once those owed billions start getting stiffed through defaults, or when they “kick out all private capital from Venezuela’s oil industry,” won’t the walls cave in on Maduro? And even if they continue to honor private capital and private business pumping most of the oil they export, how much longer can they possibly stay solvent?

    What am I missing here?

  15. Consider the following:

    Increasingly, the PRICE of oil will be controlled by non-OPEC producers, namely the USA and Brazil.


    The Saudis, a close US ally and well aware of the new reality, will quietly cooperate with the US to maintain oil prices about where they are, in exchange for US continued involvement in the Middle East, a region losing strategic importance for the US (my own opinion, fwiw).

    Venezuela, being an OPEC member, is not in control of its own VOLUME of oil production.

    If Venezuela cannot control either the PRICE, or the VOLUME, of its production, then the only way to increase income is to increase EFFICIENCY, i.e.; the profit margin on every barrel of oil lifted. This will require massive amounts of capital, and cutting edge, state-of-the art technology. This amount of capital and technology can ONLY be obtained from the USA.

    You can make all the deals with China, Russia, and India you like, but until someone is brave enough to cut through the Marxist bull-shit and admit this, PDVSA and Venezuela will continue their death spiral to oblivion.

  16. I think that Venezuela’s incompetence is going to be leveraged by OPEC. OPEC is under tremendous pressure for cash right now. And they don’t want PDVSA selling oil to OPEC’s customers. Both KSA and Russia are spending more than they make.

    As long as Venezuela can’t get its act together and start producing cheap oil, then it strengthens OPEC’s position by reducing supply. A strong oil industry in a revenue hungry country is the last thing OPEC wants. Or more specifically, what Saudi Arabia and Russia want.

    My point is, OPEC has every interest to make sure that this current PDVSA joke of an oil industry continues. I don’t thing it is beneath OPEC to make payments/threats to key people in Venezuela to assure that nothing improves.

    So all they have to do is get useful idiots like Hermann Escarrá to make stupid proposals like this and *voila*, Investment money and expertise runs away from the Venezuela, assuring another year of market monopoly for KSA and Russia.

  17. Any foreign country stupid enough to invest in Venezuela right now deserves to get its property seized and lose its money. The Chinese and Russians are just vultures circling a carcass.

  18. BTW, has anybody shown this to the IPISA guys? Because that would be a laugh. Probably one that sounds like you are a patient at a mental institution having a breakdown, but a laugh.

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