A Conversation with Professor Carlos Molina

In a recent Energy Brief, Carlos Molina, Associate Professor at IESA Business School in Venezuela, comments on the current situation in Venezuela noting that though Venezuela has the potential to eventually become the largest oil producer in the world, there are also considerable challenges.

I would like to follow up with a few brief questions. First, Carlos, you mention that there is a disconnect between the production numbers provided by PDVSA, the Venezuela national oil company, and the numbers provided by the International Energy Agency. To what do you attribute this discrepancy and which numbers do you think are more reliable?

Carlos responds:
Since oil activities by PDVSA represent between 13 and 18% of the Venezuelan GDP, and about 70% of the country exports, the Venezuelan economy as a whole is dependent on these figures. It benefits the Venezuelan government to manipulate PDVSA’s oil production figures in order to window-dress the outlook of the Venezuelan economy. My belief is that the International Energy Agency figures are more credible. They are consistent with the OPEC (Organization of the Petroleum Exporting Countries) figures and with the estimations of the U.S. Energy Information Administration (EIA) and the U.S. Department of Energy for Venezuelan exports to the U.S.

Let’s ignore political issues for the moment and consider only what is technically and economically feasible. From a purely technical and economic perspective, how many barrels per day of oil can be produced in Venezuela by 2015, and by 2020?

Carlos responds:
PDVSA’s current strategic plan forecasts 5 mbpd for 2015 and 6.5 mbpd for 2020. (The previous plan, in 1997, had forecasted 8 mbpd for 2010.) Any oil production forecast depends on what the Venezuelan government wants to do, and how they structure the oil business. I think that current strategic plan is perfectly attainable. Moreover, I believe with a more aggressive investment agenda Venezuela could reach 10 mbpd by 2020. Of course, this agenda would require substantial private investment and have attractive conditions and protection for the investors, which is not likely to occur under the current government.

Of course, political issues cannot be ignored. Can you comment on the extent to which the Chavez administration currently influences oil production and how they will affect the ability of PDVSA to increase oil production over the next 10 years?

Carlos responds:
Chavez’s current term ends in 2012. I think PDVSA will be producing about the same oil output by 2012 that it is producing today. Given the negative environment for private investment in Venezuela, it is unlikely that Venezuelan oil output will increase in the next two years.

The recent auction of the three Orinoco oil belt blocks proves there is still interest in investing in Venezuela, even under current conditions. However, the investment is likely to be small relative to the Orinoco oil belt potential, particularly given the reserves that have been found.

If Chavez stays in power after the 2012 elections, I think that current PDVSA’s forecast of 6.5 mbpd by 2020 will be difficult to reach, given the negative influence of Chavez’s administration on PDVSA’s oil production. As we have said before, large investments are needed in order to exploit the heavy oil reserves of Venezuela; unfortunately for this administration, legal security and political risk are likely to impede these investments.

However, if Venezuela’s government changes in 2012 we could have a different story. With open policies and adequate investor protection, Venezuela’s vast oil reserves could attract the necessary investment.

What advice would you give the foreign oil companies that are engaging in joint ventures with PDVSA? Is there considerable political risk associated with doing business in Venezuela? Is it possible for them to structure contracts in ways that mitigate this political risk?

Carlos responds:
There is certainly a high political risk of doing business in Venezuela. Poor investment protection, continuously changing laws, arbitrary expropriation of lands and companies, and a lack of international arbitration create a difficult business environment. Under these circumstances it is almost impossible to structure contracts in ways that mitigate Venezuela’s political risk.

There is, however, a substantial opportunity for those ready to assume the risk. Foreign oil companies that decide to face current adverse conditions could profit in the future by being awarded oil projects with favorable geological conditions, vast proved reserves, comparably low production costs, and weak competition. Foreign oil companies that enter and stay in today’s Venezuelan oil market may be those that benefit the most if and when current political conditions change. Companies already in the Venezuelan oil business will be the best positioned to exploit the Venezuelan vast reserves tomorrow, in exchange for the risk they are assuming now.

In addition, foreign oil companies know that given Venezuela’s current economic uncertainty, Mr. Chavez needs them. PDVSA’s current oil production is falling every month, the Venezuelan economy is deteriorating fast, and there is an electricity and water crisis. The current vast oil reserves are of no use to him while they are buried in the Orinoco Belt. The current administration needs private investment and expertise to exploit Venezuela’s oil potential, now more than ever, which may be a deterrent against political risk.

Do you have any suggestions for PDVSA and the Chavez administration? What should they be doing differently to facilitate the development of the Venezuelan oil industry?

Carlos responds:
Chavez’s administration needs to make PDVSA more efficient and productive, certainly. Bringing private investment into PDVSA will only help country’s oil output (especially with a goal of doubling current oil production) and my main recommendations are in that vein.

My suggestions for PDVSA and the Chavez administration is to open the Orinoco oil belt for a large international auction, in which better conditions are offered to foreign oil companies. Conditions such as: a) giving at least 50% participation to the foreign oil company in the business in a sort of joint venture, b) including international arbitration in the contracts to give legal security, c) lowering the royalty rate from 33% to 16.67% as it is in other countries, and d) looking into financing alternatives such as those used in the past in the Petrozuata joint venture.

An alternative is to sell a portion of its stocks in the international and local stock markets, in a similar way to what Colombia’s ECOPETROL and Brazil’s PETROBRAS have done.

In an economy that depends that much on the oil profits, Venezuela needs to be open to private investment, not only for the oil sector of their economy, but also for their overall economic well-being.




  1. 1   Will Venezuela Become the Largest Producer of Oil in the World? | Texas Executive Education News

    [...] Titman and IESA Business School Associate Professor Carlos Molina, a McCombs Ph.D. alumnus, discuss Venezuela’s potential (and challenges) to becoming the largest oil producer in the world on Titman’s Energy Insights [...]



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  • About Sheridan

    Sheridan Titman, Professor of Finance at the McCombs School of BusinessSheridan Titman is a professor of finance at The University of Texas at Austin and a research associate of the National Bureau of Economic Research. He was recently elected Vice President of the American Finance Association and is incoming President in 2012. He is also the Executive Director of the Energy Management and Innovation Center (EMIC) at The University of Texas at Austin.

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    This blog’s primary focus will be on energy and this will be, more or less, a learning blog. The blog will offer some of my own views, as well as the views of some of the participants at EMIC. I will also raise questions in the hopes of receiving answers, insights and opinions from our participants. Since my own expertise is in finance, much of the initial focus will be on issues that relate to hedging, financing, derivative markets, and the financial evaluation of alternative energy sources. As my knowledge of these issues expand, I would also like to explore issues that relate more broadly to innovation and the role of public financing in this sector.


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