INTERNATIONAL PROPERTY RIGHTS INDEX

Transcription

1 COVERING 98% OF WORLD GROSS DOMESTIC PRODUCT AND 93% OF WORLD POPULATION INTERNATIONAL PROPERTY RIGHTS INDEX Case Study: Property Rights in the Unique and Profitable Venezuelan Energy Sector By Víctor J. Poleo Uzcátegui By Víctor J. Poleo Uzcátegui, CEDICE

2 PROPERTY RIGHTS IN THE UNIQUE AND PROFITABLE VENEZUELANENERGY SECTOR ABSTRACT There is a debate in Venezuela over who owns natural energy resources and who should receive revenue derived from their sale. Currently, the resources are said to be owned by the nation, yet revenue from these resources do not go to the public, but to the Executive Branch, which is under the control of the dominant political party. This has created a power imbalance and caused a great deal of political instability as the incumbent party is able to take advantage of the national resources for partisan purposes. This paper suggests the creation of an Energy Council to oversee revenue distribution from resource extraction industries. This is a stark contrast from the current policy, which is a product of socialism in the twenty-first century ideas. The Energy Council, would be mandated to use revenue derived from resource extraction industries efficiently and would protected from political manipulation. The existing socialist policy, implemented by the past and current Bolivarian governments has nationalized electricity, oil, gas, and mining industries. The results have been nothing short of disastrous: shortages of essential goods and declining revenue. It is time for change and fresh ideas. The Energy Council proposed will play a stabilizing role by separating the oil, gas, coal, and gold industries from partisan politics. The paper contains details on how the current system operates and how an independent energy council can be formed to play a constructive role in solving the Venezuelan crisis. By: Víctor J. Poleo Uzcátegui vpoleo@gmail.com Universidad Central de Venezuela Energy Unit CEDICE Caracas, Venezuela 1

3 Introduction The Bolivarian Revolution and Socialism for the 21st- Century policies contend that natural resource wealth from bodies of water, oil, gas, coal reservoirs, and other resources found in the ground belong to the people. The former president of Venezuela, Hugo Chavez, and the current president Nicolás Maduro enacted several laws with the explicit intention for the State to collect revenue from energy resources and then share the revenue with the people. Such laws dictating shared ownership are the prima facie conundrum at the root of the public vs. private debate on property right ownership. They often led to confusing mutually exclusive dictates such as the stipulation that oil barrels belong to the nation, but oil revenues belong to the Executive Branch. Oil revenue, has been the primary breadwinner for the regime. However, every energy resource including production of electricity and gas have been effected by similar policies- condemning each one to ruin; and, by design, instead of the State bearing the cost of failure is has been businesses that are unable to power factories and families struggling to keep the lights on. Therefore, resolving property ownership of natural resources is necessary for economic revitalization. A historical institutional vacuum prevents this from happening. An Energy Council that is above reproach from the Executive branch is the missing institution that can hold property rights to the nation s oil revenues and energy resources. This paper examines the creation of the electric and oil industries in Venezuela, from their inception when they were completely private, to their complete ruin under Socialism for the 21st Century public policy. The paper then covers the state Empresas Mixtas (joint ventures), a co-ownership of resources and oil revenues between the Venezuelan State via the Corporación Venezolana del Petróleo (60%) and multi-national government oil companies (40%), including Cuban, Byelo-Russian, Russian, Chinese joint ventures and many other nations. Finally, the paper provides a political analysis of Socialism for the 21st Century and the political economy of oil revenue in sustaining the regime. This section also discusses the creation of an Energy Council as a solution to the Executive Branch controlling property rights to energy resources. Electric Power The Venezuelan electricity industry started in 1888, it grew slowly and by the 1990s achieved electrification of 90% of the country. However, after a series of successive nationalization policies and property seizures in the period it became completely nationalized resulting in a 50% decrease of coverage nationwide. 2

4 Venezuela s electric power industry began during the last decade of the nineteenth century1. The first initiative was a small private hydro-generation power plant in Caracas (1895): the Electricidad de Caracas; alongside the Electricidad de Maracaibo (1888) and the Electricidad de Valencia (1890), both private initiatives. Throughout the early 20th century the electric power industry expanded services primarily through entrepreneurs, and a few regional government distribution companies. Private rights were originally part on the incentive structure that allowed such firms to develop. As late as the passage of the 1999 Electric Power Law, (the first year of the revolution as well as the first electricity law in one-hundred years) rights were guaranteed in this sector.2 Private investments were not ruled out for future expansions in hydro- and thermoelectric generation and for future regional distribution networks. The law also stipulated that damages to private property are to be reimbursed, though it did not leave in place an effective compensation scheme. Users faced a highly inefficient claims system with delays so long that they deterred the use of the court system. During the same period, the State became more directly involved in electricity generation. The government commenced hydroelectric developments in the Caroni River and by the late 1990s was able to achieve electrification of 90% of the country, an achievement that required both huge investments and professional capital. By 2000 Venezuela enjoyed a robust and reliable interconnected system with the highest transmission voltages in Latin America. The Executive Branch s plan to nationalize the industry was systematic and swift. A year later, in 1999 Electric Power Law was abolished, allegedly because it was based on a neo-liberal conception. In fact, at the end of that year, the executive power issued its first socialist electricity law3, paving the way to the one enforced in which was Cuban inspired, i.e. included no private property rights whatsoever but an endless inventory of punishments for electricity users. R. Tellería et al., Historia del Desarrollo del Servicio Eléctrico en Venezuela, Caracas, 2011 y Decree # dated September 21st, Official Gazette #5568 dated December 31 st, Official Gazette # dated December 14th,

5 Later, in 2007 the executive created CORPOLEC5 (Corporation Electrica), a state-owned corporation that gobbled up a healthy and widely interconnected set of 12 utilities, half of which had been expropriated from private parties. The high-skilled professionals responsible for managing the plants were replaced by non-skilled workers and management was given to the military. CORPOELEC was projected to produce 25,000 MW to meet demand in May 2017, but sadly it could only generate 13,000 MW.6 In 2009, the Executive created a Ministerio del Poder Popular para la Energía Eléctrica7 (in English, popular power ministry of electric energy), the competencies of which had historically been fostered under the ministry of energy. This ministry, alongside CORPOELEC, intentionally gave room to an ill-designed institutional arrangement that ensured the current destruction of the electric power sector. In 2010 an electricity crisis was declared, and special financial resources were allocated to compulsively and discretionally create a shopping list for thermal plants. The Venezuelan government then purchased small diesel turbines produced in Venezuela from Cuba and other overseas secondary markets. It also purchased nearly 30 thermoelectric plants, each grossly overpriced, from individuals close to the regime. All in all, of $25 billion was spent acquiring nearly 13,000 MW in the period. Only one third of these plants can still be used today. Decree #5.330 Official Gazette issued on July 31st, 2007 MW = mega-watts is a measure of installed electric power generating capacity able to satisfy an equal level of demand. MW = 1,000 kw = 1,000,000 watts = 10,000 light bulbs of 100 watts each. The energy generated in 1 hour is measured as MWh, megawatts-hour, or TWh, tera-watts-hour, = 1,000 MWh =1,000,000 kwh, kilowatts-hour. 7 Official Gazette # dated October 28 th,

6 Out of more than $40 billion discretionally assigned by the executive to the electric power sector in the , we estimate8 greater than $20 billion ended up being lost due to theft and pilferage. Private property, despite being protected in the earlier 1999 law, is now weakly protected. A significant amount of industrial mechanical and electrical infrastructure has been damaged or rendered useless after suffering recurrent non-programmed blackouts, as a result power rationing has increased since The commercial and residential electric power markets have equally suffered. As of today, it is estimated that about two-thirds of private industries and enterprises have closed, mostly due to expropriations, insecurity, damages to property and unreliable electric power supply. As electrification and economic growth are closely related, the sudden drop in energy supply is reflected in economic indicators. Industrial and commercial power demand decreased 15% over the period, and continues to decrease to date. It has led to unemployment and the scarcity of manufactured goods in agriculture, healthcare, construction, telecom sectors, and other sectors Venezuela s GDP dropped from $337 billion9 in 2009 to $239 billion in In short, Venezuela has been de-capitalized and impoverished, in 2000 only 37% of the population lived in poverty, in 2017 that number became 74%. Ironic as it may seem, the executive power has forced (industrial and residential) private parties to self-generate electricity and buy diesel fuel in the international markets. Though, revolutionary ideologists have derided residential users as electricity spendthrifts, thus penalizing them. On the other hand, property rights of foreign companies seem to be firmly intact. The executive power granted energy sector rights to friendly governments 10 (Chinese, Russian, ByeloRussian, Cuban, etc.) and to friendly contractors, thus reducing to nil domestic engineering, consultancy, procurement and construction services. V. Poleo U., Gasto Público en el Sector Eléctrico venezolano. Caracas, OPEC Annual Statistical Bulletin. OPEC Secretariat, Vienna. 10 Emblematic examples are Lula-ODEBRECHT and Kirchner s IMPSA contracts for building Tocoma hydroelectric plant in the Caroni river (2.200 MW), currently unfinished after a 10-year delay and costing $15 thousand million, five times the base price of

7 Figure 1: Caroni-Paragua Hydroelectric Developments Today, the industry that was once growing and dominated by private enterprises, if it is to be revived, must rely on foreign engineers and foreign capital, as well as a deep change of Venezuelan politics. Any new reform must rescue the current hydroelectric infrastructure in the Lower Caroni as well as plan and execute potential developments in the Upper CaroniParagua. Oil The first oil company in Venezuela was Petrolia del Táchira.11 It began operations in 1878 producing asphalt, oil, kerosene, benzyne, and heavy oil (about a ton a day) from La Alquitrana. Shortly afterwards a change began in the mindset of policymakers from seeking concession of wealth from mines12 to concessions of wealth from oil, which eventually resulted in the first Hydrocarbon Law in A. R. Martínez, El camino de Petrolia. Caracas, By decree dated October 24th, 1829 (Quito, Ecuador) Simón Bolívar enforced the Ordenanzas de Minería para la Nueva España (1784), stating the property rights of mines for the Republic, as opposed to the Anglo-Saxon approach to property rights for the land owner or the res nullius for the one discovering the mine. 6

8 However, even before the Hydrocarbon law, starting around 1910, concessions to exploit oil resources were granted to private Venezuelans who, in time, exchanged and or shared their property rights with foreign oil companies, see research by Dr. McBeth13 covering the 1909 to 1935 period. In 1943, Venezuela s parliament passed a hydrocarbon law that set a 16.66% royalty14 on the price of every barrel extracted from the ground. As these were large tax payments to the State, it was the first step along a path that would eventually lead to the government relying on oil wealth for fiscal expenditures. Soon after, huge oil reservoirs were discovered in the coastal fields of Bolivar in Maracaibo allowing the Venezuelan industry to explode in popularity. During the 1950s and 60s the new reservoirs allowed Venezuela to be a top exporter to the world. It also encouraged the State to create the first state owned oil enterprise: Corporación Venezolana del Petróleo (CVP) in The taste was too much, and on January 1st, 1976, the State nationalized15 the oil industry and created Petróleos de Venezuela (PDVSA) out of the assets from about 14 seized companies. Only foreign companies and a handful of domestic private firms continued to operate independently. Worth noting was that, at the time, certain political classes disliked nationals having property rights over the oil industry16. Moreover, leftist ideologists argued17 then that (their) nationalization would improve sovereignty (by operating refineries and increasing taxes ad libitum!), to no avail 30 years later, now that PDVSA is currently ruined. Today the State holds all rights to property on oil resources, markets and industry activities, the exception being the Empresas Mixtas (joint ventures). However, debate to privatize, or not, continues to be a lively political topic. The Orinoco Oil Belt Let us now consider the Orinoco Oil Belt, purportedly the world s largest proven reserve: 220+ billion barrels (the same volume as Saudi Arabia s proven reserves, but these are comprised of light and medium crudes). As it stands, the Orinoco Oil Belt s heavy and extra-heavy crudes (8 to 12 API) are unmarketable. There are no modern refineries in the country that process the material to make Cfr.: Hernández, José Ignacio, El pensamiento jurídico venezolano en el Derecho de los Hidrocarburos. Editorial Jurídico Venezolana, Caracas, Brian S. McBeth, Juan V. Gómez and the oil companies, Cambridge University Press, 1983; Brian S. McBeth, El desarrollo de la industria petrolera venezolana, Academia Nacional de Ciencias Económicas, 2008; Brian S. McBeth, Gunboats, corruption and claims; foreign intervention in Venezuela, Praeger, Royalty is a tax payment to the Crown paid by the land user. Expectedly, the government subconsciously behaved as a monarch, any royalty or regalía being a futile scientific exercise 15 Ley sobre bienes afectos a reversión en las concesiones de hidrocarburos, Ley que reserva al Estado la industria y el comercio de los hidrocarburos, Cfr. Foro en el Ateneo de Caracas con M. R. Egaña, D. Maza Z., E. Monsalve C., G. Rodríguez E., R. Sader Pérez Nacionalización Petrolera en Venezuela. Monte Ávila Editores, Cfr. Foro en el Ateneo de Caracas con M. R. Egaña, D. Maza Z., E. Monsalve C., G. Rodríguez E., R. Sader Pérez Nacionalización Petrolera en Venezuela. Monte Ávila Editores,

9 products out of them. The heavy crude must be converted to a synthetic crude of at least 14 API first. Heavy investment and modern machinery is required for the production of synthetic crude oil. This is especially true at the time PDVSA began operations, as Venezuela had no previous experience, on a commercial scale, for combined hydrogenation and decarbonization processes (hydro-coking18). Qualified foreign companies were asked to join PDVSA under joint ventures (Empresas Mixtas). In 1993, four joint ventures were in place (see the following chart): Petrozuata, Cerro Negro, Sincor and Hamaca (Ameriven), together they produced 550,000 barrels per day of API synthetic crudes with a gross investment of $13 billion. Figure 2: PDVSA Ownership The needed joint ventures (embedded into a broader PDVSA oil policy called Apertura Petrolera Oil Openness) were bitterly criticized by the same leftist ideologists who, 15 years later, enforced a clumsy approach to synthetic crude production in the Orinoco Oil Belt (see Figure 2). In fact, in 2001, one of the latest hydrocarbon laws19 was passed. It required PDVSA-CVP to own 51% or more (now 60%) of any oil enterprise. In 2007 the revolution further nationalized 20 the oil industry and the original 4 joint ventures were forced to fit into a 60:40 distribution scheme. Exxon-Mobil and Conoco-Philips refused to do so and international arbitration lawsuits and appeals ensued. This pattern was replicated in almost all of the Nation s non-oil economic activities as well. Small scale 5,000+ bpd hydro-cokers are commercially available. Cfr. communication from Eng. J. Echenagucia, Official Gazette #37323 dated November 13, The Re-Nationalization Law was preceded by (the enforced) Migration Law in 2007, yet national private investment was not ruled out. 18 8

10 A new set of 12+ joint ventures21 were then invited from ideologically-akin governments worldwide as Socialism of the 21st century carried on, betting on it rendering geopolitical benefits, to no avail: most of them22 did not qualify on financial and technological grounds. Figure 3: Mixed Foreign Ownership Partnerships Predictably enough, 10 years later (2017) not a new barrel of synthetic crude oil has been produced. Only rust and ashes remain of that pompous and futile revolutionary endeavor. At the time of its creation it was predicted to produce of 3 million barrels of API synthetic crude per day in The seeds for such a free-for-all fiasco were planted since the inception of the revolution: the now ruined PDVSA has no financial resources to honor its self-imposed 60% share of $330,000 million which is the estimated Magna Reserves of current overall investment23; and, more crucially, there is no market for synthetic crudes since marginal and shale crude production continue to meet incremental demands. To sum up: after 100 years, Venezuela has some of the largest oil reserves in the world, are unable to refine it for international markets, and the people of Venezuela are unable to buy or sell property rights related to oil production or own of reserves. Carlos Bellorín, Régimen fiscal y contractual de los proyectos de la Faja Petrolífera del Orinoco. Vide Petróleo Bendición o Maldición?, 100 años del Zumaque-1, pp C. Tablante y H. Jiménez G., editors. Caracas, Government-owned Russian oil companies Rosneft, Gazprom, Lukoil, are of the same kind of joint ventures and their shares are partially in Anglo-Saxon hands. 23 Costs per syncrude barrel escalated 3.5 times vs. the 1990s syncrude costs of $31.5k per barrel per day. 21 9

11 Orimulsion In 2005 the Executive branch decided to end a two-decade long project of PDVSA that produced thermoelectricity fuel using a mixture of 8 API heavy oil and bitumen (70%) mixed with water (30%) from the Orinoco Belt. The project, called Orimulsion, had a production cost per barrel of $3.50 and yielded a profit per barrel of about $18. Yet, the revolution s ideologists24 argued that ORIMULSION was not profitable! At the time of ORIMULSION s assassination, the PDVSA was able to supply power to 10 thermoelectric utilities worldwide25 for a total of 3,000 MW (see Figure 4), and a growing client list. Figure 4: Orimulson Building an ORIMULSION plant in the 1990s that could produce 100,000 barrels per day had a cost of $350 million. Today building a synthetic crude plant, producing the same number of barrels costs $11 billion. As there is no replacement fuel for electricity (unlike the growing number of alternative gasolines), the most certain and profitable destination for the Orinoco s Heavy Oil Belt is to be a quasi-infinite thermoelectric raw material reservoir. Of course, such a development would depend on granting private property rights for production and trading ORIMULSION. B. Momoer, El mito de la orimulsión. PDVSA, A mercenary arithmetician, the author is a newcomer to the oil and electric power industries. 25 Cfr. Saúl J. Guerrero, La realidad económica del negocio de ORIMULSIÓN. Caracas,

12 A Political Analysis Socialism for the twenty-first century has now been in power for 18 years and its track record shows two sequential stages, namely: Stage I : a bizarre socialist ideology pursuing the State s dominance of social institutions Stage II to date: a society asphyxiated by the State totalitarian machinery, survives as a failed State was a turning point in regard to property rights issues and oil revenue, both of which were triggered by two non-correlated events, namely: 1. Venezuela from 2002 to 2003: Political Turbulence In April 2002, the revolutionary government was deposed (but promptly re-instated) after facing a genuine constituent event: 1 million people in the streets of Caracas In December 2002, a civilian upsurge took place and, in retaliation, the revolution fired PDVSA s 18,000 highly qualified and trained professionals- 75% of the work force, with an average 20 years of experience between them. It de facto decapitalized the nation s 100 years of accumulated knowledge in the industry. Once in full control of PDVSA, the executive added to PDVSA s functions, making the oil company a jack of all trades agency trading in all kind of goods. Investments were ruled out, along with rational decision-making. The revolution then relied on Chinese and Russian oil companies, in exchange for loans and military hardware. Once the revolution exercised its right to property, it ended up with an oil sector dominated by Russian and Chinese owned plants. Predictably, PDVSA became an inefficient and unreliable oil company, both financially and operationally. 2. World Oil: A Wave of High Oil Prices from 2004 to 2014 Unlike the 1974 wave (the Arab Oil Embargo) and the wave of the 80 s (when Iran s Shah was deposed, followed by the Iran-Iraq war), this third wave in was not related to a scenario of political disruption. Instead, thanks to the so-often vilified capitalism, the revolution enjoyed nearly $870 billion in revenues from petroleum exports during Stage II (see Figure 5). 11

13 Figure 5: Venezuela- Values of Petroleum Exports Without petroleum exports, Socialism of the twenty-first century would have not been what it now is. The richer the revolution became under an unexpected wave of oil revenues, the more financially autonomous the revolution became. The revolution criminally assigned oil revenues26 to erase property rights. This allowed it to expropriate lands and privately-owned businesses producing goods for domestic consumption. The goods were replaced with imports from friendly governments : meat from Brazil and Uruguay; and grains from Central America in exchange for discounted oil. The regime then imposed a multi-tier exchange system to ensure corruption of the nomenklatura and unbearable inflation for the people. But, how is it that the Executive (the revolution or Socialism of the twenty-first century) has caused so much damage to the Nation and criminally allocated the surplus petroleum revenues from the period? The fallout of the State s systematic campaign to strip property rights and erode all social and economic institutions has been a tragedy, yet not a mistake. Socialism of the twenty-first century was designed by the Communist regime in Cuba, and other affiliations as Foro de Sao Paulo, to allow the Executive branch to dominate society at the expense of freedom and a prosperous economy. To start, the Executive is only one of a several institutions comprising the State. The State, of course, being the juridical entity for the Nation, and the Nation being we, the Venezuelans. There is no foundational mandate granting the State, let alone the Executive, ownership over the revenues. There is, however, a foundational mandate granting the ownership of sub-soil Incomplete official information and secondary sources allow some authors to estimate the aggregated income of the period at ca. $1.6 million million when adding internal tax revenues and internal + external debts to the total oil exports. Cfr. Orlando J. Zamora, Concentración de poder: revés del sueño protagónico. Caracas, An illustrative comparison follows (p. 469): China s 2010 monetary reserves were $ 2.6 million for a population of 1.3 thousand million, whereas Venezuela s consolidated income from 1999 to 2016 was $1.6 million for a population of 30 million

14 resources to the res publica, the nearest entity to the Nation. If the sub-soil barrel belongs to the Nation, so must the oil revenues. When the Executive passed hydrocarbon laws in and 2001 which requiring royalties (regalías) as a tax payment (16.6% and 30%, respectively), the oil revenue became de facto appropriated by the Executive, but not de jure. Without a mandate, the Executive was now expropriating oil revenue in the name of the Nation from Venezuelans, the nationals. This explains why the executive carries on as a monarch, surviving off royalties. Royalties delenda est. Oil revenues do not belong to the executive; they belong to the nationals. If there is an institution lacking in the Venezuelan State, for sure the most important, would be one to check the granting titles of ownership to oil revenues: an Energy Council. Such an ad hoc institution must be independent from the Executive, and its mandate must be to optimize the allocation of oil revenues27, bearing in mind that there is one, and only one, best allocation of random wealth.28. An Energy Council Revenues are an indivisible resource, but on occasion it has been proposed that they can be divided among the entire Venezuelan population of 30 million. This proposal would not benefit the nation even if every Venezuelan were rational users and allocated their share in the most optimal way. In effect, the sum total of the optimal use by all nationals is never better than the optimum of the whole (as per the theorem of optimality). Ownership of the revenues by nationals diffuses the potential impact on society. We propose that the revenues be managed by a supra-executive Energy Council comprised by Venezuelans selected for their ethics and knowledge, and would be accountable to the national assembly. The Energy Council would arbitrate the property rights of nationals in the oil, gas and electric power industries. The amount of oil revenues, as well as how long they last is unpredictable. The poor use of revenues during has caused damages that require immediate reparation and if there were a new wave of revenues in the coming decade, it makes no sense to accumulate it in an investment fund. In the 70's and 90's there was an attempt of erecting an investment fund (Fondo de Inversiones de Venezuela) but it predictably ended up in a sort of bank associated with the executive branch and its state-owned companies. Cfr. V. Kantorovich, Asignación óptima de recursos económicos. Leningrad, 1932, 1936 A sub-optimal allocation is implied in annually distributing the oil revenues between people; relying on an investment fund is a failed one