1. Venezuela and other cases Francisco Monaldi, Ph.D. Visiting Professor, Harvard Kennedy School Non-Resident Fellow for the Latin America Initiative, Baker Institute, Rice University Research and Faculty Associate, Tecnologico de Monterrey, Mexico Director, Center on Energy and Environment, IESA, Venezuela Baker Institute, Rice University, October 2014

2. ◦ High rents, but variable and volatile.  Can be captured by the state, but not that easy (asymmetry of information). ◦ High sunk costs and long maturity of investments.  Generates powerful incentives for expropriation, including the NOC.  Note the difference in shale oil and gas extraction. ◦ Variable and evolving risks.  The state’s appetite for risk and the obsolescing bargain.

3. The Oil Industry in Latin America In 2002 Latin America produced 10.34 mbd, in 2012, 10.27 mbd. Stagnation during the largest oil boom in history? All other regions increased their production. The region’s production share went down from 13% to 12%, even though it has 20% of the proved oil reserves (the largest outside the Middle East). In which countries production declined? México (-700 tbd from 2002 and - 900 from peak in 2004), Venezuela (-250 tbd, -600 from peak in 1997), and Argentina (-230). Ecuador (and Bolivia in natural gas), stagnated. In which went up? Brazil (+650 tbd), Colombia (+400), and Peru. Why? Political economy of resource nationalism and NOCs are the main culprits. Geology and ideology also relevant, but less so.

4. Oil Production: The Big Three Source: BP Statistical Review of Energy

5. The rest: net oil exports Source: BP Statistical Review of Energy

6. Proved reserves (billion barrels) 199220022012% Argentina 2.02.82.5>1% Brasil 5.09.815.34.5% Colombia 3.21.62.2>1% Ecuador 3.25.18.22% Mexico 51.217.211.43% Peru 0.81.01.20% Venezuela 63.377.3297.688% Total 128.7114.8338.4100% Source: BP Statistical Review of Energy, 2013

7. Source: EIA

8. Political economy of resource nationalism: key drivers Characteristics of the oil industry in a context of: a) a cycle of high prices, b) the end of an investment cycle, and c) regressive taxation systems; tend to generate resource nationalism (a cycle of expropriation), particularly in net exporters with increased reserves and production. In contrast, net importers or countries with declining reserves and production tend to be eager to attract investments and strengthen property rights. Other factors that tend to increase resource nationalism are: easy geology, weak political institutions, political shocks, and oil fiscal dependency. Ideology can sometimes be a relevant factor, but generally it is not the driving force. In fact, sometimes the very existence of large rents is a factor promoting a populist ideology.

9. Political Economy of Resource Nationalism in the Latin American Oil Industry: 2000-2014 Argentina, Bolivia, Ecuador and Venezuela. After an investment cycle that led to increases in production and investment in the 1990s and 2000s, and during the high price cycle; expropriated and nationalized. The effects of the expropriations are now noticeable and they have recently been eager to attract new investment. The determinants: high oil prices, high sunken investments, regressive tax systems, and weak institutions. Colombia, Brazil, and Peru, who needed to attract more investment went in the opposite direction. After large discoveries, Brazil became more resource nationalist. Mexico, with declining production and reserves, tried to move towards opening, but until this year it was not able to do it. The recent Mexican oil reform is a major event.

10.  Texas 5  Qatar 33  United Arab Emirates 39  Colombia 48  Alberta 51  Trinidad and Tobago 58  Brazil 66  Alaska 83  Angola 118  Nigeria 124  Algeria 126  Russia 127  Libya 128  Iraq 129  Kazakhstan 131  Iran 132  Bolivia 133  Ecuador 134  Venezuela 135 10 The Reputational Legacy

11. Venezuela is the worst performer

13.  In 2005-2013 Venezuela had the lowest level of FDI per capita and as share of GDP in Latin America, despite having had the largest windfall in the region.

14. Source: own elaboration with data from Unctad. US Dollars at current prices and exchange rates in millions

15. Source: own elaboration with data from Unctad and Eclac.

16. A wasted opportunity

17. When the government’s fiscal situation is critical. (Yes). When the local NOC is in bad shape. (Yes) When production is declining. (Yes) When they need to initiate large and risky investments in exploration and new frontier developments. (True in Orinoco, off-shore, and exploration) When they need technology that only some IOCs control. (To some extent, to increase recovery rate).  When the price of oil is low. (Not the case now).  This driver is not in place, but prices are not increasing. 17

18. 18

19. 19 Not paid (MBD) Cuba 100 Others 80 Domestic market 700-750 China funds loans 500 ($50) Total ~ 1.2 MMBD Cash flow geerating production 1.5 MMBD Source: PDVSA

20. PDVSA’s Debt (US$ Millions) Source: PDVSA 20 PDVSA’s current external debt at ~US$45 billion ~ US$10-14 billion in accounts payable ~ US$5-7 billion in probable arbitration settlements. ~ VEB Bs.400 billion (about US$40 billion) debt with Central Bank.

21. Source: Oil and Mining Ministry (PODE 2007-2008); PDVSA Annual Reports, 2009, 2010, 2011 & 2013. Note 1: Since 2006 the conventional crude operative agreements transformed into Joint Ventures Note 2: Since 2007, the heavy oil strategic agreements transformed into Joint Ventures. Note 3: Production data does not include Natural Gas Liquids Source: PDVSA

22. Oil Production Source: PDVSA Foreign partners have invested an average of about $1 to 1.3 billion since 2007, after the expropiation. 15-20% of total E&P. They could have been investing 4 to 6 times that amount, under the right conditions.

23. Petroboscán Petroindependencia Petroindependiente Petropiar NG: Rafael Urdaneta- Cardón III Chevron Petrourica Sinovensa Intercampo Petrozumano Caracoles CNPC Petromonagas Petrovictoria Rosneft Petrochiriquire Petrocarabobo NG: Rafael Urdaneta- Cardón IV Repsol Petrosucre Petroleras Paria & Guiria Petrojunín NG: Rafael Urdaneta- Cardón IV ENI Petrokariña PetroVen-Bras Petrowayú Petroriputano Petrobras Petrocedeño NG: Barbacoas NG. Rafael Urdaneta, Moruy Bloque II Statoil & Total Source Informe de Gestión Anual, PDVSA, 2013; Energy Map of Venezuela, 2013- 2014.

24. More pragmatism or is it desperation? Windfall tax reduction in 2013 and waiver in Orinoco Belt (before investment recovery). Promise of more operational and project execution control for partners. Loans guaranteed by export revenues (Chevron loan to Petroboscan and others followed). The exchange rate adjustment. Reduction in Petrocaribe subsidies? Domestic subsidies? But still difficult to get the necessary investments. PDVSA’s problems: cash flow, infrastructure, and operational issues. Macroeconomic and political instability. Credibility and sunk investments. 24

25. Financing Agreements for $12 billion have been signed between PDVSA and JV partners during 2013-14

26.  The Venezuelan government obtained foreign investment, during the 1990s and early 2000s for about $30 billion, which allowed increasing production by 1 million bd.  After investments were sunk and the price boom began, investors were expropiated. Some type of contract renegotiation was appropiate, but the way it was conducted had high reputational costs for the country.  The opportunity cost in lost investments and revenues is huge. As high as $25 billion in lost fiscal revenues per year.

27. Thanks for you attention! francisco.monaldi@gmail.com Twitter: @fmonaldi