David R. Mares University of California, San Diego

dmares@ucsd.edu &

Nelson Altamirano University of California, San Diego

naltamir@ucsd.edu

Lessons Learned: Social Welfare Priorities and the NOC

Venezuela’s PDVSA

Efficient PDVSA & Venezuela Efficient PDVSA & Venezuela GDP average annual growth rate of 1% 1985– 2003 1998 real wages were less than 40% of 1980 level Purchasing power of the minimum wage 1994 is 1/3 that of 1978 Percentage of the population below poverty line: 1984 36%, 1995 66% Percentage of the population in extreme poverty: 1984 11%, 1995 36% Per capita social spending in 1993 is 60% of 1980

Revenue source Revenue source Vulnerable Target Vulnerable Target – – Diverse political interests can coalesce Diverse political interests can coalesce around promise of large infusion of money around promise of large infusion of money into government’s budget into government’s budget

Symbolism Symbolism – – National Patrimony National Patrimony – – National Security National Security

The Temptation to Tap the NOC The Temptation to Tap the NOC for Social Welfare/Infrastructure for Social Welfare/Infrastructure

Two Transferring Channels Two Transferring Channels

PDVSA

Treasury

Government Agencies

National Assembly

People ­­­­­­­­ Poor

Direct Access

“ “Advantages” of Direct Access Advantages” of Direct Access Inefficiencies/Corruption of Government’s Social Inefficiencies/Corruption of Government’s Social Welfare/Infrastructure Agencies Welfare/Infrastructure Agencies

Educated/Skilled Personnel Assigned New Educated/Skilled Personnel Assigned New Tasks Tasks

Targeted Recipients Targeted Recipients – – Political & Financial Payoffs Political & Financial Payoffs

Executive dominates political competition for Executive dominates political competition for resources resources

PDVSA Contributions 2005 PDVSA Contributions 2005

$ 8.3 b $ 8.3 b $ 17.7 b $ 17.7 b

Employment Employment 1.7 m jobs by 2010 1.7 m jobs by 2010

$ 0.1 b $ 0.1 b

Dividends Dividends $ 1.3 b $ 1.3 b

Social Expenditure Social Expenditure $6.9 b $6.9 b

Production Tax Production Tax $11.3 b $11.3 b

Domestic Domestic Consumption Consumption

$ 1.3 b $ 1.3 b

Income Tax Income Tax $ 5.1 b $ 5.1 b

$ 26 b 68 % 32 %

Investment: $5.8 b programmed!

Indirect Direct

Social Missions Social Missions Robinson Mission Robinson Mission – – Literacy Literacy Robinson Mission II Robinson Mission II ­­ ­­ Education; primary school Education; primary school Ribas Ribas Mission Mission – – Education; high school Education; high school Sucre Mission Sucre Mission – – Education: college; UBV in former Education: college; UBV in former PDVSA building PDVSA building Barrio Barrio Adentro Adentro Mission Mission – – Health; low cost medical Health; low cost medical services services Mercal Mercal Mission Mission – – Food; low cost purchases and Food; low cost purchases and production stimuli production stimuli Identity Mission Identity Mission – – Citizenship; identity cards Citizenship; identity cards Vuelvan Caras Vuelvan Caras Mission Mission – – Employment; youth job Employment; youth job training training Guaicaipuro Guaicaipuro Mission Mission – – Indigenous rights Indigenous rights

Firm Strategies and Social Role Firm Strategies and Social Role

Economic Objective: Economic Objective: Maximize value of Maximize value of oil&gas resources oil&gas resources Instrument: OPEC Instrument: OPEC ‘quotas and reduced ‘quotas and reduced quantities ensure max quantities ensure max value (R.Ramirez)’ value (R.Ramirez)’ PDVSA ?? PDVSA ??

Political Role: Firm’s Political Role: Firm’s strategy must be strategy must be aligned with aligned with government’s government’s development plan development plan è èDe facto strategy: De facto strategy: Max transfers to Max transfers to social programs social programs

Trend of Indirect Contribution PDVSA Trend of Indirect Contribution PDVSA with Respect to Revenue with Respect to Revenue

Total Payment Government/Revenue, 1996­2005 (%)

0.0

10.0

20.0

30.0

40.0

Percentage 32.9 31.7 24.3 20.1 21.7 26.2 22.2 20.6 22.6 20.7

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

+ Direct

Production down, costs up and Production down, costs up and … …

Figure A12: Prices, Costs and Production Rations, 1996­2005

0.00

0.50

1.00

1.50

2.00

2.50

3.00

1996 1998 2000 2002 2004

Ratio Real Average Prices (1996=1) Ratio Total Production Level (1996=1) Ratio Real Direct Cost (1996=1)

Ratio Real Prod Cost BOE (1996=1)

Source: Elaborated from PDVSA’s Form 20­F, US and Exchange Commission, 2000, 2001, 2002, and 2003; PDVSA Gestión y Resultados 2005. Securities

No real interest on increasing No real interest on increasing production level production level

Objective: 5.8 MMBD by 2012, including 1.2 Objective: 5.8 MMBD by 2012, including 1.2 MMBD from the Orinoco Belt MMBD from the Orinoco Belt BUT BUT Reality: 13,500 operating wells in 2005 Reality: 13,500 operating wells in 2005 compared to 19,583 in 2001; 25% natural field compared to 19,583 in 2001; 25% natural field decline rate decline rate Investment plan 2006 Investment plan 2006­ ­12: similar or lower to old 12: similar or lower to old PDVSA’s 2002 PDVSA’s 2002­ ­07. 07. Association contracts ==> nationalization Association contracts ==> nationalization (2/27/07) (2/27/07)

No real interest in reducing cost No real interest in reducing cost inefficiency inefficiency

Figure A13: Ratios of Real Prices, Cost per Barrel and Cost per Worker, 1998­2005

0.5

1

1.5

2

2.5

3

3.5

4

1996 1998 2000 2002 2004

Ratio Real Total Cost per BOE (1998=1) Ratio Real Prices (1998=1) Ratio Real Total Cost per worker (1998=1)

Source: Elaborated from PDVSA’s Form 20­F, US Securities and Exchange Commission, 2000, 2001, 2002, and 2003; PDVSA Gestión y Resultados 2005.

The key variable is price The key variable is price

Source: http://www.oilnergy.com/1opost.htm#since78 accessed 2­15­07

The Down The Down­ ­Side of the Cycle Side of the Cycle

1 ST SC ENAR IO 2 ND SC ENAR IO 3 RD SC ENAR IO New Level ofWTI PricesperGa lon

$53­ $50 $46­ $43 $40­ $33

Price D roprespec t to 2006

20 %­ 25 % 30 %­ 35 % 40 %­50%

Nec essaryIncr ease inVenezue lan Produ ction (MMBD )

0.52–0.65 0.78–0.91 1.04–1.3

New Vene zuelan Produ ctionLevel (MMBD )

3.12–3.25 3.38–3.51 3.64–3.9