Monday, November 05, 2007

“Fatherland, Socialism or Death!”

The New york times (yes, i've gone back to reading that leftist rag) has
a fantastic article written by Tina Rosenberg on oil in Venezuela. It goes
through the problems that having large amounts of oil can cause and what
the best solution can be. The article goes through some history of oil in Venezuela
and what chavez has done to pdvsa.

What happened in the previous nationalization is a clue to what is about to happen
in venezuela during the current nationalization:

Paradoxically, nationalization brought the government less money and less control. When Venezuela’s oil was still in private hands, the government collected 80 cents of every dollar of oil exported. With nationalization the figure dropped, and by the early 1990s, the government was collecting roughly half that amount. This low return to the country’s coffers was partly a result of that age-old conflict between short- and long-term reward. Because wells run dry and machinery ages, oil companies everywhere must invest lots of money just to keep production steady, and to grow, they need even more. Without new investment, Pdvsa would lose 25 percent of its oil production every year. Its officials were convinced that Venezuela benefited more if Pdvsa’s profits went to producing more oil, not more government. “Social revenue has always overshadowed investing in the industry,” said Ramón Espinasa, who was chief economist of Pdvsa from 1992 to 1999. “But I think the priority has to be to maintain oil. If you have one dollar left, it should be invested in keeping capacity. Otherwise next time around you will not have a single dollar to distribute.”

Most laymen think that you just drill a hole in the ground and oil comes out forever,
but in reality the oil production declines with decreases in pressure, and more money has
to be spent to drill more wells and expose new formation to production, or workover the
wells that are in production or inject fluids to maintain pressure and production. Money
has to be spent to produce oil, and lots of it. Oil companies might make huge profits of
billions of dollars, but as a percentage of revenues it's not that terrific. (exxon makes $377 billion in revenue, but only $40 billion in profit, Cisco makes $40 billion in revenue but
$7 billion in profit).

National oil companies are even worse, even the good ones are treated as jobs factories,
when I took a trip for a well in south asia, every service hand position had a national oil
company counterpart, so every meeting had 25 people in it, instead of the typical IOC
6 or 8 people in a meeting. So if Chavez is making pdvsa take out all it's cash to support
charity, production will decrease even faster than it does for average NOC's.

To me, the money quote:
As a slogan, “Negotiate a Better Royalty Rate!” doesn’t have the ring of “The Oil Is Ours!”; nationalization of natural resources can bolster a country’s psyche even if the management of those resources is a failure. The urge to nationalize is, at its core, a political one. Chávez seized Pdvsa not so it would produce more but so he could directly control the money. When governments give into this urge, they tend to be susceptible to the temptations of using oil for short-term gain.

NOC's should do what is done in the USA for collecting royalties from oil and gas.
Charge a high bonus to get rights to drill in an area in an open auction, then charge
the highest royalty the market will bear, then be fair and open about how the money
is collected and don't change the rules in the middle of the game. Oil companies are
smart, they do the calculation and if they won't make their corporate minimum profit
then they won't bid. If they will make enough profit but the reserves will be safe for
some foreseeable future than most companies will pay high royalties to stay in the game.
(I don't think exxon and cop left venezuela because of the extortionate royalties, but
because it seems more likely they'll lose the whole investment).

anyway, go read the article.

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