Recent discussions when in Caracas and Maracaibo have made clear that as soon as the late Venezuelan President Hugo Chávez died, the strategy of Petróleos de Venezuela S.A. (PDVSA) became “pragmatism” in the face of “necessity.”
My August 29 AQ Web Exclusive described PDVSA’s scramble for production by enlisting the private sector and by meeting the tough new constraints on loans imposed by Beijing and major foreign oil companies.
Several Venezuelans, on condition of not being quoted as they do business with PDVSA, related a consistent picture differing only in amount of detail: PDVSA has had to allow delivery of loans directly to large joint ventures (JVs) with major foreign oil companies, surrendering much operational management. To guarantee timely payment and repatriation of profits, PDVSA delivers oil produced to a third party for marketing abroad, with proceeds put in offshore accounts with JV partners. 
But for a near-term production boost, “re-invigorating” tens-of-thousands of mature fields is crucial. Venezuelan oil executives and analysts generally say investments must begin in a few months, yielding new production six to 12 months thereafter. And, most feel the state has dollar wiggle room to muddle on for another one to two years.
For example, the Central Bank was given the right to inspect the books of PDVSA, its subsidiariesand social funds—finding perhaps $24 billion in off-budget funds, while controlled prices and/or taxes could also be raised. But this assumes no big shocks such as natural disasters, mass demonstrations against food and medicine shortages, inflation, insecurity, or prolonged blackouts.
The devastated private sector is clearly anxious to provide goods and services as PDVSA proposes (to cut its dollars spent for imports) and to invest in the mature fields PDVSA is offering (which means finding foreign investors when PDVSA cannot).
Paraguay has just 6.5 million inhabitants who consume 27,000 barrels per day of refined petroleum products. To put that into perspective, Argentina consumes 698,000 barrels per day, Chile 347,000 and Bolivia 62,000. This makes Paraguay’s needs for hydrocarbons very small when compared to its neighbors.
Yet Paraguay is currently importing all of its oil, as it does not have any domestic production. In recent years, the country depended on Venezuela for a good portion of its energy needs, importing close to 8,500 barrels per day in 2011, through a preferential payment program called the Acuerdo de Cooperación Energética de Caracas (Caracas Energy Agreement—ACEC). The program was interrupted by Venezuelan President Hugo Chávez in 2012 after Paraguayan President Fernando Lugo was deposed, leaving Paraguay reeling and awash in $260 million in debt.
Oil in Paraguay has a complex history. The Chaco region is believed to have massive oil reserves, with estimates of some 4 billion barrels—just less than half of the estimated reserves of Brazil’s famed Libra pre-salt field. Because of these resources, Paraguay and Bolivia went to war in 1928 over claims to part of the region, where oil had been discovered by Standard Oil of New Jersey. The Chaco War, which raged until 1935, resulted in 100,000 casualties and, despite winning the war, Paraguay was never able to develop the region’s potential, while Bolivia went on to become a major producer.
Subsequent to the end of the war, numerous exploration and production companies came to Paraguay, but there were never any significant finds. Between 1947 and 2005, 49 wells were drilled without major production. A hydrocarbons law attractive to foreign investors was passed after the end of the Alfred Stroessner dictatorship (1954-1989), which provided favorable terms for companies wishing to develop projects in the country. Yet nothing to date has yielded tangible results.
Mexican President Enrique Peña Nieto’s plan to reform state-owned Petroléos Mexicanos (PEMEX) has attracted the attention of many analysts. Since President Lázaro Cárdenas nationalized the oil sector in 1938, no president has been able to push for reform to allow for foreign ownership of petroleum assets.
Peña Nieto sees allowing foreign investment to be critical to turning around PEMEX, which has suffered from declining production in recent years. PEMEX was producing 3.4 million barrels per day in 2003 and production slipped to 2.5 million barrels per day in 2012.
While the debate for energy reform continues, an oil auction for six blocks in the Chicontepec basin is set to take place on July 11, with multinational oil companies such as Repsol, Schlumberger and Halliburton set to make bids.
This is possible due to a 2008 reform that allows for limited private investment in the sector through incentive-based contracts. When it passed, then-President Felipé Calderón was quick to accompany the reform with a firm disclaimer: “I want to make clear that oil is and will continue to be exclusively Mexican property. PEMEX is not being privatized. Oil is a symbol of the nation’s sovereignty.”
Top stories this week are likely to include: impact of the Amuay refinery tragedy in Venezeula; aftermath in the Caribbean of Tropical Storm Isaac; YPF and Chevron move toward an alliance; fallout of a cabinet shift in Colombia; and Canada seeks to strengthen commercial ties with Southeast Asia.
Disaster at Amuay Refinery Continues: After Saturday’s deadly explosion at the Amuay oil refinery in Venezuela’s Falcón state, much remains up in the air. Flames were still burning as of this morning, and President Hugo Chávez has ordered an investigation and declared three days of mourning. However, as the death toll remains unpredictable—it already climbed to 41 from 39 overnight, with 20 of the dead belonging to Venezuela’s National Guard—pay attention to any developments in the aftermath of the worst accident in Venezuela in recent memory.
Isaac Causes Damage: Over the weekend, Tropical Storm Isaac slammed Hispaniola, killing 10 total—eight in Haiti and two in the Dominican Republic—and displacing thousands. Haiti’s Civil Protection Office reported 14,000 had fled their homes and another 13,500 were living in temporary shelters. How will the island rebound? And what lies in store for Isaac? It is picking up speed in the Gulf of Mexico and will likely turn into a hurricane early this week, with projected landfall near New Orleans, Louisiana, on Wednesday—six years to the day after Hurricane Katrina ravaged the coastal city. (Donate to the American Red Cross.)
YPF, Chevron in Advanced Talks for Alliance: YPF, Argentina’s state-controlled energy company, is mulling a strategic accord with Chevron, Latin America’s leading private energy investor. YPF CEO Miguel Galuccio held a meeting on Friday with Ali Moshiri, Chevron’s Latin America chief, and noted that YPF needs more experienced partners to help develop Argentina’s massive shale reserves, which are the world’s third largest. Of particular interest is the Vaca Muerta field in the Nequén province, and Chevron is already involved in three wells in Vaca Muerta. Galuccio will present a five-year plan this Thursday.
Cabinet Shakeup in Colombia: Having recently crossed the halfway threshold into his four-year term, Colombian President Juan Manuel Santos decided to reshuffle his cabinet last Thursday when he asked all 16 of his ministers to resign. Some posts have been reassigned; former mines minister Mauricio Cardenas has assumed the finance portfolio. However, Cardenas’ replacement, as well as other vacant posts, has not yet been named. This week will likely see movement in Santos’ cabinet.
Canada Seeks Increased Trade Ties in Asia: Canadian Trade Minister Ed Fast begins a trade mission today to Southeast Asia, where he will conduct official visits to Vietnam, Thailand and Cambodia followed by the first Canada-ASEAN Economic Ministers Meeting in Cambodia. Fast will then continue to Burma, marking the first time a Canadian trade minister has ever done so. In a statement, Fast said, “This year, as we celebrate the 35th anniversary of relations between Canada and the Association of Southeast Asian Nations, we are committed to moving our trade and investment relationship with ASEAN forward.”
The author also wrote “Dilma’s Education Dilemma” in the Fall 2011 issue of AQ.
When Dilma Rousseff assumed the Brazilian presidency in January 2011, she inherited perhaps Brazil’s most challenging socioeconomic issue to date: improving its education system. In recent years, Brazil has registered low rankings in international standardized assessments of topics like writing, reading comprehension and math. When coupled with other longstanding issues like inadequate federal funding as well as insufficient human and infrastructural resources, Brazil’s system is simply not able to keep up with the economy’s growing demands—especially in the high-tech sector.
Nevertheless, my article in the Fall 2011 issue of Americas Quarterly explains the delicacy of improving system: while increasing federal spending for education, Dilma must find ways to prune the budget, reduce fiscal deficits and keep foreign investors happy. By following in the footsteps of her predecessor, Luiz Inácio Lula da Silva (Lula), Dilma will turn to state-owned resources like oil to fund education policies—and maintain or increase the level of foreign investment.
Federal efforts to address the decline in educational performance began under Lula. While education reform was also important under the Cardoso administration (1994-2002), the Lula administration sought to expand and use its oil resources in order to fund education policy rather Cardoso’s approach which had been to pursue privatization and decentralization. In response to the discovery of new Pré-Sal (pre-salt) oil reserves off of the coast of Rio de Janeiro in 2007, before two years had passed Lula created a new federal agency for the national reserves and a “social fund” within the agency. This social fund uses approximately half of Pré-Sal’s earnings to fund education policy, signaling a clear break from Cardoso’s anti-statist approach to education policy—that is, to strategically expand and use state-owned resources in order to enhance the quality of education.
In 2008, in the midst of the debate over oil reform, Mexican President Felipe Calderón promised to build a new refinery. Now, one year down the road, the refinery’s location and a $9 billion investment have finally been chosen in a process that was the victim of a slow-moving bureaucratic machine.
Whenever it had seemed that the final decision will at last be announced, some other delay appeared. The process to pick a spot, secure land and actually begin the construction has revealed many of the inefficiencies of the Mexican state, including the lack of a trustworthy land registry and the inability of both federal and state governments to move forward with their decisions.
Calderon's choice—or failure to make one—surprised quite a few. Instead of keeping the old Mexican tradition of vertical orders, he started a contest for the refinery. States who felt they could manage the facility were to send proposals and studies to Pemex (the state oil company), and technicians in the company would then decide for the president. After months of bitter debate in the media between governors and pundits, oil experts announced the winner, or rather a winner and a half, on April 14. The state of