143. National Intelligence Estimate1
[Omitted here are a cover sheet, map, and the table of contents.]
VENEZUELA: THE POLITICS OF OIL
- Venezuela, whose modernization was launched and sustained by oil, has become concerned about its future development. The high [Page 356]price of Venezuelan oil on the world market—a result of government demands for ever-larger shares of the profits of the oil companies—and a virtual standstill on exploration of new fields have slowed the growth in oil production and revenues and, as a consequence, the pace of economic development over the past decade. Because of the slowdown in growth and a new sense of nationalism, the Venezuelan Government has adopted a tougher stance towards the companies and is making stronger demands for a larger share of the rapidly expanding US oil market.
- Despite persisting social problems, stemming in part from maldistribution of Venezuela’s oil riches, one of the two major center parties, AD or COPEI, seems likely to win the presidential election in December 1973 and to perpetuate the country’s generally moderate political course through the next presidential term 1974–1979. Emerging anti-establishment parties are seeking to radicalize the nationalist mood. But the leaders of the country’s sizable business sectors are exerting strong counterpressures; and the military, though not directly involved in the political scene, remain a strong force for moderation.
- The major parties cannot ignore rising nationalist pressures. But neither can they overlook the need for cooperation with the US and the oil companies to guarantee the markets and capital required for steady national development. AD and COPEI have recently agreed to try to keep the touchy issue of oil on the side lines in the coming political campaign, and the government has adopted a more prudent attitude in dealing with the companies and the US on oil. This more accommodating approach is encouraged by recent US proposals for a long-term treaty that would provide the Venezuelans with continuing high revenues, large new amounts of foreign investment, and a secure US market. At the same time the treaty would extend to the companies financial incentives and guarantees to explore and exploit new deposits believed to be large enough to provide the US with a reliable source of oil to help meet rising energy demands.
- Radical or opportunistic politicians are likely to continue to exploit aspects of the oil problem for partisan purposes, and negotiations for an energy agreement will be complicated and delicate. If the negotiations become stalled or are abandoned over the coming year, we would expect a new government squeeze on the companies, leading to a further slowdown in production and possibly a phase-out by one or more of the companies. In such circumstances there would be considerable pressures to give vent to popular nationalist feelings against the oil companies. Another conflict with the companies could touch off anti-US incidents in the country and lead to a crisis in Venezuelan-US relations generally.
- The prospects now seem good, however, for completion of a treaty during 1974 after the new Venezuelan administration takes office, [Page 357]which will meet the essential long-range requirements of Venezuela, the US, and the companies. The favorable negotiating climate reflects in part the concerns of Venezuelan political leaders about declining proved reserves and their efforts to work out a common petroleum policy.
- Once in force, the treaty will be subject to continuing nationalist pressures. In the event a rightist regime, e.g., one headed by Pérez Jiménez, came to power in 1979, we would expect that it would abide by the agreement, as long as it provided the income required to sustain economic growth and did not hinder nationalist aspirations in other directions. A radical leftist victory in 1978, on the other hand, would probably lead to pressures for major revision of the treaty to maximize Venezuela’s advantage over the companies. The country’s continuing need for oil revenues and access to the US market, and strong moderating influences from centrist political forces and from the military might, in the end, impel the government to try to work out new arrangements to permit continued operations by the companies. But in the absence of new mutually acceptable arrangements, prolonged and acrimonious conflict between the government and the companies would have a serious adverse impact on the Venezuelan economy, further inflame Venezuelan nationalist passions, and create a major crisis in US-Venezuelan relations. These developments could produce a showdown between moderate and radical forces and strong pressures for intervention by the military.
- We believe, however, that the considerable advantages that would become available to Venezuela under a long-term energy agreement with the US would enhance the prospects for a centrist party to win the 1978 elections and thus reduce the chances for the above contingencies. While even a moderate government would seek periodic modifications in Venezuela’s favor, there is a good chance that under such a government the treaty would continue to hold up at least through the presidential term of 1979–1984.
[Omitted here are 8 pages: Section I, Nationalism and Income, and Section II, The Venezuelan Scene.]
III. Venezuela, Oil, and the United States
25. The interest in Venezuelan oil is essentially four-sided. On the US Government side, there is the need for increased oil imports from politically secure sources to meet growing energy needs. On the company side, the interest in Venezuelan oil is tempered by a reluctance to accommodate to the Venezuelan squeeze on profits, by the resulting high price for Venezuelan oil which makes it less competitive on the world market, and by an uncertain investment climate. On the Venezuelan side, there are the often conflicting drives to maximize income from, and at the same time to impose greater national control [Page 358]over, the oil industry. Finally, there are complicating influences stemming from the emerging world sellers’ market in oil and from Venezuelan membership in the Organization of Petroleum Exporting Countries (OPEC).
A. The United States Interest
26. US oil requirements are expected to increase by about 50 percent in this decade; by 1980 oil imports are likely to be at least double, possibly triple, the 1970 level.2 While seeking to diversify foreign sources of oil, the US is likely to continue to rely on suppliers in the Western Hemisphere for a substantial portion of its imports. Within the hemisphere, Venezuela, despite its lagging production of recent years, will continue for some time to provide an important part of total available supplies.3 The US thus has a considerable interest in the establishment of conditions that would provide for a sustained expansion of imports from that country.
B. The Company Side
27. The oil companies, too, have a strong interest in development of Venezuela’s oil resources, but only under arrangements which promise stable and profitable operating conditions. And recent events have made the companies cautious and uncertain of their position. Though Venezuela still enjoys a favorable US market for its fuel oil and residual oils, it has lost its competitive position in crude oil to Middle East producing countries. In addition, the companies have become concerned over the prospect of large financial costs connected with phasing out their existing concessions after 1983. Under the government’s new reversion law the companies will be forced to forfeit not only installations and equipment connected directly with production but also property not involved in the production process which they had not expected to lose. The companies have been required to deposit 10 percent of annual depreciation allowances in a government fund for repair or replacement of equipment judged by the government to be in poor condition when the concessions expire. All of these developments have dampened the companies’ interest in further significant investment in their present holdings or in new investments to expand production in other areas of the country.[Page 359]
The Principal Foreign Oil Companies Operating in Venezuela
(Approximate percentage of total production)
|Creole Petroleum Corporation (Standard of N.J.)||40|
|Shell Company of Venezuela, Ltd. (Shell)||25|
|Mene Grande Oil Company, C.A. (Gulf)||10|
|Venezuelan Sun Oil Company (Sun)||}||25|
|Mobil Oil Company of Venezuela (Mobil)|
|Texaco Maracaibo, Inc. (Texaco)|
|Texas Petroleum Company (Texaco)|
|Sinclair Venezuelan Oil Company (Sinclair)|
|Chevron Oil Company of Venezuela (Standard of California)|
|Phillips Petroleum Company (Phillips)|
C. The Venezuelan Side
28. For their part, while increasingly anxious to attract new investment to explore for and exploit new oil resources, the Venezuelans remain heavily dependent on increased oil revenues from currently exploited fields to maintain present economic growth rates. It is this more immediate interest, as well as nationalistic pressures, that has turned the government towards ever-larger financial demands on the companies in recent years. The current round of price and tax hikes started in late 1970 with passage of a bill which raised the income tax rate on the oil and mining companies from 52 to 60 percent. In March 1971 the government arbitrarily boosted the tax reference values (TRVs) used in valuing oil exports. Later in the year, in addition to the new reversion law, other decrees further expanded government control over the companies’ operations, output, and exports; imposed financial penalties for fluctuations in production of more than 2 percent below or above the 1970s levels; and further increased the TRV rate.
29. Although additional restrictive measures are expected, there are signs of a changed government attitude towards the companies. The administration is considering measures which would make it possible for the companies to avoid the recently imposed penalty payments for excessive fluctuation in exports. It has also proposed that companies working low-productivity fields be taxed at a reduced rate.
30. One of the reasons for this more accommodating attitude is the increasing Venezuelan concern over the rapid depletion of oil reserves. New discoveries dropped drastically after 1960. Proved reserves declined from over 17 billion barrels at the end of 1960 to about 14 billion by the end of 1971—an amount sufficient for little more than 10 years’ production at the current rate (3.3 mbd). Without greatly increased exploration, Venezuelan production is likely to remain at [Page 360]about the present level for the next few years and then slowly decline. Even this prognosis is based on successful implementation of secondary recovery methods, which could add some 25 billion barrels to reserves. Venezuelan concern is reflected in a growing strength of conservationist sentiment, which would slow down production from present fields to stretch out the process of depletion. The Venezuelans would thus hope to take advantage of expected higher market prices in future years and of the fact that 100 percent of the profits will be Venezuela’s after 1983.
31. The Venezuelans are counting heavily on the development of new reserves beyond the present concession and service contract areas to improve their long-term prospects. Though estimates vary widely, some 70 to 300 billion barrels may be recoverable from deposits of very heavy crude oil along the “tar belt” bordering the Orinoco River.4 Beyond this, though definitive surveys are not available and no firm estimates are possible, the Venezuelans hope for several more billion barrels of recoverable reserves in untapped offshore areas. If proved, the total of recoverable reserves from new areas would be enough to increase Venezuelan production substantially and to maintain it at high levels well into the next century.
32. At present, however, little is being done to develop these potential resources. Although service contracts with three companies have been signed for exploration of the southern half of Lake Maracaibo, two of the companies have already suspended drilling operations after sinking seven dry wells. Unless new arrangements are made to revive investment interest, production in these new areas is likely to rise only slowly and reserve levels will remain low. In these circumstances, there would be a slowdown in the growth of Venezuela’s income from oil.
33. There is little indication that the Caldera government, or any likely successor, will come up with dramatic new solutions to reduce significantly Venezuela’s dependence on oil revenues for economic development. The results of efforts at economic diversification have so far been disappointing. Primary reliance on the present tax system, which places the largest burden on the oil and mining sectors, will probably continue to produce periodic fiscal crises and generally tight government budgets. Yet enormous sums of money will be needed to expand oil reserves and production beyond present concession areas. In addition, the government has recently assumed full control over [Page 361]the development of a liquified natural gas industry. To finance these projects the Venezuelans will require very substantial new sums of foreign investment.
D. Venezuela’s Position vis-à-vis OPEC
34. As a founding member of OPEC, Venezuela will continue joint efforts with other producing countries to gain maximum advantage from the rising world demand for oil. Yet the country’s dependence on the US market will oblige any Venezuelan Government to shape its oil policies in most respects independently of OPEC. Neither major party is likely, at this stage at least, to want to assume the enormous management or marketing responsibilities involved in nationalization à la Iraq and Libya. Neither wishes to run the risk of economic chaos and, as a possible consequence, a return to military rule by taking over an industry which in any case will revert to the state beginning in 1983. The government would probably be interested in a larger measure of “participation” in the industry along lines being pressed by OPEC Arab countries only if it involved minimal financial investment on the Venezuelan side. But Venezuela’s position is one of a bystander with respect to current OPEC negotiations on this subject.[Page 362]
35. Similarly, Venezuela would be likely to try to stay on the side lines in the event of a temporary embargo of oil supplies from the Middle East by the Arab OPEC countries. As a founding member of OPEC, the Caracas Government would feel strong pressures towards maintaining OPEC unity. But its almost total dependence on the US market would enable it to plead special circumstances, and it would probably reject any Arab demands to cut off or reduce its level of exports. On the other hand, the country’s dwindling proved reserves, its still strong commitment to OPEC objectives, and nationalist pressures against “selling out” to the companies would make it difficult for the Venezuelans to take advantage of a possible Arab embargo. Though the companies would probably be permitted some gradual rise in production, the Venezuelan Government would probably resist an increase which might be large or rapid enough to offend its OPEC partners.
36. In line with its nationalist aspirations, Venezuela seems in fact to be trying to establish new regional arrangements of its own. At a meeting of major Latin American oil consuming and producing countries called by Venezuela in late August, the Caldera government sought a common regional position on pricing and marketing policies. One objective apparently was to ensure a Latin American market for Venezuelan oil and gas, in exchange for increased imports of nonpetroleum products from other Latin American countries. Little was accomplished along this line, largely because of the conflicting interests of producing and consuming countries. But the participating governments are to consider several measures which might lead eventually to closer coordination of supply and demand and terms of trade for petroleum in the region. Another meeting is scheduled for December 1972.
[Omitted here are 7 pages: Section IV, Prospects and Implications.]
- Source: Central Intelligence Agency, National Intelligence Council Files, Job 79–R01012A, Box 446. Secret. The Central Intelligence Agency and the intelligence organizations of the Departments of State and Defense, and NSA participated in the preparation of this estimate. The Director of CIA submitted this estimate with the concurrence of all members of the USIB, with the exception of the FBI, which abstained on the grounds that it was outside its jurisdiction.↩
- Based on current estimates of the Office of Oil and Gas, Department of the Interior. [Footnote in the original.]↩
- At present Venezuela supplies 50 percent of total Western Hemisphere production (excluding the US). [Footnote in the original.]↩
- The technology required to develop the tar belt is within the present state of the art. If the means of development are made available, and sufficient reserves are found to recover the enormous capital costs required, the total cost per barrel produced would be expected to be much lower than that from most other sources of unconventional oil production, e.g., US oil shales or Canadian tar sands. [Footnote in the original.]↩