Venezuela: Awash in Oil, But Riddled With Corruption, Inefficiency

President Hugo Chavez, who has run Venezuela since 1999, is facing another medical scare that may jeopardize his re-election chances in polls due for October.

A lightning rod for controversy, the Socialist Chavez is generally loved by the poor and working class of Venezuela, but widely despised by the country’s middle class and elite. Chavez has also repeatedly earned the enmity of the United States by, among other offenses, embracing such foreign leaders as Iran’s Mahmoud Ahmadinejad, Syria’s Bashar al-Assad and even the former brutal dictator of Libya, Moammar Gadhafi.

Venezuela is a key country largely owing to its huge oil industry which dominates the economy.

International Business Times spoke to an expert on Venezuela to discuss the country’s petroleum sector and how Chavez has handled the economy.

Federico Barriga is a London-based economist at the Economist Intelligence Unit, with a focus on Latin America.

IB TIMES: Venezuela still exports oil to the U.S., despite President Hugo Chavez's hostility to Washington. How much of U.S. oil is imported from Venezuela? Is this figure declining?
BARRIGA: The latest figures show that the U.S. imported around 760,000 barrels per day from Venezuela in 2011. This is one of the lowest levels in the past decade -- there was a slump in imports in 2003-04 when workers at the state-owned oil company Petroleos de Venezuela S.A. (PDVSA) went on strike.
In the past, under normal circumstances, the U.S. would import over 1-million barrels per day from Venezuela.

IB TIMES: Which countries are Venezuela's biggest oil buyers?
BARRIGA: The U.S. still remains Venezuela's biggest oil buyer (40 percent of the total). Venezuela also provides several Latin American countries with subsidies in oil, while selling the rest to a number of different buyers.

IB TIMES: What about China? How much oil do they purchase from Venezuela?
BARRIGA: It is difficult to calculate how much China buys from Venezuela as the data from both sides is not very transparent. That said, both countries have signed a number of oil-facility agreements in which China provides Venezuela with loans paid by future oil shipments.
These deals will mean that China will become a bigger customer in the coming years. In fact, from importing almost nothing a decade ago, optimistic calculations speak of 500,000 barrels per day today.
The Caracas government wants to increase this to 1-million barrels per day by 2015, an objective that seems plausible and which would also make China Venezuela's biggest customer.

IB TIMES: Does the state-owned Petroleos de Venezuela SA (PDVSA) dominate Venezuela's oil industry? Or are also private players involved?
BARRIGA: PDVSA is the main actor in Venezuela. The industry is in the hands of the state, and all oil belongs to Venezuela. However, private companies can be involved by signing a joint-agreement with PDVSA. These include: “empresas mixtas,” under which investors operate marginal or low-yielding fields under contract to PDVSA; strategic associations, a special category of joint venture designed for lower-return, longer-term projects such as the Orinoco heavy-oil belt; and risk/production-sharing agreements (RPSAs), whereby private companies bear all the exploration costs but have to share production with PDVSA in the event of a commercial deposit being discovered.

IB TIMES: Does rising domestic demand hurt Venezuela's oil export business – considering that fuel is heavily subsidized in the country?
BARRIGA: Not really. Venezuelan domestic demand is estimated at around 300,000 barrels per day and due to the weak economy in the past two years, has not increased substantially. Although demand might pick up faster in the future, the country has enough production capacity to sustain high levels of exports

IB TIMES: Why does oil-rich Venezuela periodically suffer from electricity/power shortages?
BARRIGA: Electricity in Venezuela is produced mainly from hydropower, so oil prices have little influence.
The reason for the shortages has been the lack of investment in the sector and weather-related incidents. They need to expand capacity but, most importantly, they need to upgrade the transmission and distribution networks, which cause most of the shortages.

IB TIMES: Does Venezuela commit a lot of money to upgrading its energy infrastructure?
BARRIGA: The Chavez government has promised substantial amounts of money to upgrade both the oil and the electricity sectors. It is very difficult to see how much has been actually spent, as public accounts are not transparent at all.
But comparing past promises of rising oil output and electricity generation with the fact that both have stagnated, it is clear that not much has been done.

IB TIMES: Venezuela depends heavily on hydroelectricity – why?
BARRIGA: They have a good topography for hydroelectricity and in the 1970s the government was keen to develop that kind of energy. This policy has continued since.

IB TIMES: Venezuela energy and petroleum minister Rafael Ramirez has claimed that his country has about 297 billion barrels of proven oil reserves (even more than Saudi Arabia), making it the world's largest reserve. Could this be accurate? If so, might Venezuela one day become the biggest oil producer in the world?
BARRIGA: It is likely that Venezuela has close to 300-billion barrels of oil, most of it in the Orinoco heavy oil-belt. This number is recognized by OPEC, the BP annual energy review and other organizations. Although Venezuela could be a much bigger oil producer, it is unlikely that they could surpass Saudi Arabia or Russia in the next two decades or more, as the investment required would be enormous -- and even without Chavez the political situation will remain difficult.

IB TIMES: Venezuela also has huge natural gas reserves – are they also among the world's largest?
BARRIGA: Yes, they have 185-trillion cubic feet -- the second largest such reserve in the western hemisphere behind the U.S.

IB TIMES: Generally speaking, has Venezuela under Chavez managed its energy sector well and inefficiently?
BARRIGA: No -- it has politicized the sector, especially PDVSA, which has meant that production has fallen/stagnated in the past 10 years; investment projects have been put on stand-by, accidents in the country's refineries have become much more common; and the company's finances have become highly murky. PDVSA’s debt levels have also risen sharply in the past few years, used mainly to finance the state and sustain the currency rather than for investment purposes.

IB TIMES: Has Venezuela's oil wealth benefitted its people, particularly its poor?
BARRIGA: The Chavez government has enjoyed an oil windfall with few precedents. The government has established many programs for the poor, so there is no doubt that there has been a transfer of wealth (poverty has fallen, inequality as well).
That said, corruption has worsened and there is very little accountability on how the money is spent.

IB TIMES: How has Chavez steered the country's overall economy?
BARRIGA: Venezuela has one of the most distorted macroeconomic frameworks in the world. Before Chavez the country suffered from boom-and-bust cycles, but under his administration the economy has become even more dependent on oil.
There are exchange and trade controls, increased nationalizations, corruption, very high inflation, weak growth and capital flight.

IB TIMES: Will the oil industry (and its performance) play a major role in the upcoming presidential election?
BARRIGA: Oil has always been a political topic, especially in terms of who owns and produces oil. However, for the upcoming elections it will play a secondary role, behind issues such as crime and security.
That said, Chavez will still try to portray the opposition as wanting to sell the industry to Western powers, particularly the U.S.

IB TIMES: Venezuela's economy grew last year, after two straight years of GDP contraction. Was the oil boom largely responsible for this turnaround?

BARRIGA: Yes. The oil bonanza helped Chavez to open his purse-strings, thereby boosting some consumption.

IB TIMES: If Chavez loses the election, how would that impact Venezuela's oil sector?

BARRIGA: The opposition candidate, Henrique Capriles Radonski, has talked about increasing private participation in the oil sector, yet it is unclear how exactly he plans to do so.
In any case, a new government is very likely to de-politicize the sector and improve PDVSA's balance sheet and also make transactions more transparent. This will be a positive step that would reinvigorate the state oil company, allowing the investment projects currently on the pipeline to be completed. Thus, production would eventually rise in the medium term.