The Production Crunch; Chavez-Style Oil Nationalism Is Endangering World Economic Growth

Article excerpt

Byline: J. Robinson West is chairman of PFC Energy, a Washington, D.C.-based adviser to governments and international energy companies.

Last week's announcement from Caracas that the operations of Western energy companies including BP, Chevron, Conoco, Exxon, Total and Statoil were being reduced due to continuing nationalization of oil reserves, and that the Chinese state oil giant CNPC would play a much bigger future role in exploration and production, poses a serious threat to the global oil market.

About 80 percent of the world's oil is controlled by national oil companies. Some of these state-owned enterprises operate at world-class standards, notably Petrobras of Brazil, Petronas of Malaysia and Aramco of Saudi Arabia. In those places, production is increasing.

But most of the large state firms (including CNPC) have much lower operating standards than multinationals, such as the ones leaving Venezuela. This is due largely to political interference. The inefficient bureaucracies of state-run firms are too slow and incompetent to reinvest record industry profits in the modernization of their aging oilfields. Both national oil-company executives and politicians may be corrupted by the surge in cash from high prices.

The result is a number of countries with huge oil reserves and falling production, including Iran, Iraq and Mexico. Russia and Kuwait will also stagnate unless practices change. These countries represent more than one third of the world's oil reserves.

In Venezuela, production has plummeted from a high of 3.3 million barrels per day in 1997 to 2.4 million barrels currently, more than 3 percent of global supply. If Venezuelan production is to be sustained, it must come from the complex projects in the massive Orinoco Heavy Oil Belt. Heavy-oil production is a complex challenge, requiring managers to organize huge investments and deploy cutting-edge technology. Unfortunately, the Venezuelan national oil company (NOC), Petroleos de Venezuela (PDVSA), no longer has any of these skills.

Since taking office, President Hugo ChAvez has decimated PDVSA. Roughly 20,000 staffers have been fired, including some experienced managers after a bitter strike. Mismanagement is coupled with politically driven spending of oil revenues on economic subsidies at home and attempts to purchase good will abroad. While some domestic payments meet the legitimate needs of the poor, the economy is now edging toward bankruptcy. …