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DIRECTORATE OF 
INTELLIGENCE 
Intelligence Memorandum 
Problems Of The Venezuelan Petroleum Industry 
CROUTUST nECOWD 
Z es 
oe 
eS 
25X1 
ER IM 70-79 
June 1970 
Copy No. 
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for Release: 201 110/31: CIA- RDP85T00875R001600030079- 2 
WARNING 
‘This document contains information affecting the national 
defense of the United States, within the meaning of ‘Title 
18, sections 793 and 794, of the US Code, as amended. 
Its transmission or revelation of its contents 
to or re 
ceipt by an unauthorized person is prohibited by law. 
mene emerson 
GROUP 
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CONFIDENTIAL. 
25X11 
CENTRAL INTELLIGENCE AGENCY 
Directorate of Intelligence 
June 1970 
INTELLIGENCE MEMORANDUM 
Problems 
Of The Venezuelan Petroleum Industry 
LE LL 
CEA 
rte 
rehearse nn 
rattan 
Introduction 
Petroleum development has provided the decisive 
impetus 
for Venezuelan economic growth during much 
of the post-World War II period. 
The industry has 
given Venezuela the largest export trade and foreign 
exchange reserves 
in Latin America, 
the highest eco- 
nomic growth rate, and the highest per capita income 
after Argentina. 
Since 1958, however, petroleum 
exploitation and general economic growth have slowed 
markedly because of government policies, 
growing 
competition 
for oil markets, 
and other obstacles 
to 
export expansion. 
Economic momentum in the 1970s will 
depend mainly on the government's ability both to 
revitalize petroleum development 
anda to reduce 
the 
economy's heavy dependence 
on this one resource. 
This memorandum examines the petroleum industry's 
problems, 
their repercussions on the economy, 
and 
Prospects 
for accelerated growth during the next 
several years. 
The Industry's Deteriorating Position Since 
1958 
1. 
In 1969, Venezuela with 
a crude oil output 
of about 
3.6 million barrels per day 
(bpd) 
still 
ranked next to the United States 
and the USSR as 
a 
Note: 
This memorandum was produced solely by CIA. 
It was prepared by the Office of Eeonomte Research 
and was coordinated with 
the Office of Current 
Intelligence. 
CONFIDENTIAL 
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CONFIDENTIAL 
producer. 
But the dynamism characteristic of the 
Venezuelan petroleum industry from 1945 through the 
Suez Canal crisis in 1956-57 has given way to 11 years 
of sluggish growth. 
In 1970 Saudi Arabia and Iran 
and in 1971 Libya will almost certainly surpass Vene- 
zuela, which will then fall to sixth place. 
Venezuelan 
output has risen an average of only 
3% annually since 
1958 and only 
i8% annually since 1964 in contrast to the 
9% rate of 1946-58. 
World output meanwhile has risen 
much more rapidly than Venezuelan output, which made 
up only 8%% of the total in 1969, 
compared with 14% 
in 
1958 
(see Figure l). 
2. 
Venezuela's position as 
a petroleum exporter 
has suffered even more. 
Even though -- with ship- 
ments of about 3.3 million bpd of crude oil and re- 
fined products 
in 1969 
-- the country still ranks first, 
its share of world exports has now slipped to about 
15%, 
compared with an impressive 334% share in 1958 
(see 
Figure 
1). 
Saudi Arabia, 
Iran, 
and Libya probably will 
soon outrank Venezuela in exports. 
; 
3. 
Petroleum exports 
to the United States, 
Venezuela's principal customer, 
have grown an average 
of only about 3%% annually since 1958, 
and exports 
to 
Western Europe 
(the second most important market) 
have declined in recent years 
(see Table 1). 
Exports 
to Argentina and Brazil also have slipped because they 
have boosted their own output considerably and have 
been able to get Middle East oil at lower prices. 
Although Venezuela and Canada are strong competitors 
for sales to the United States, Venezuela ironically 
has been able to expand exports more 
to Canada than 
to any other country. 
This gain was possible be- 
cause, 
rather than building a pipeline from its 
western oilfields 
to its industrial east, Canada 
adopted a policy of importing oil for the eastern 
area and shipping the rapidly rising output of the 
western provinces to the United States. 
Growing 
sales of petroleum products to Japan have offset 
Venezuela's 
sales difficulties somewhat 
in its 
traditional markets.* 
. 
* 
YVenesauela plans 
to export crude otl to Romania 
during 1971-75, 
but the amounts 
are 
very small. 
The 
trade agreement signed in September 
1969 calls for 
delivertes 
of only about 
28 millton barrels 
-- 
60% 
less 
than the amount scheduled in the 1968 agreement 
in prinetple and only 
2% of current 
Venezuelan 
output. 
ee 
CONFIDENTIAL 
CONFIDENTIAL 
Figure § 
Venezuela’s Declining Position 
im World Oi! Cutput and Exports 
Venezuela as 
Percent of World 
Total 
14.3 
4 10.3 
10.1 
‘ 
m 
2:4 
8.6 
o 
1958 
1966 
!967 
1968 
1969° 
Crude Oil Output 
250 
Index (1958=100) 
150 
Venezuela 
100 
1958 
1960 
1962 
1964 
1966 
1968 
1969° 
Venezuela as 
Percent of World 
Petroieum Exports 
(crude oil and refined products) 
350 
300 
250 
ano 
1958 
1966 
1967 
1968 
1969° 
index (1958=100) 
150 
Venezuela 
100 
= 
1958 
1960 
1962 
1964 
_ 
1966 
1968 
1969° 
78422 5-70 
; 
* *Estimated 
-3- 
CONFIDENTIAL 
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Table 1 
Venezuela: 
Exports of Petroleum 
(Crude Oil and Refined Products) a/ 
1958 
(1961 
1965 
estern Hemisphere 
1,882 
1,937 
Of which: 
United States 
(including 
Puerto Rico) 
1,224 
1,370 
Canada 
236 
277 
Panama 
19 
11 
Argentina 
112 
68 
Brazil 
145 
129 
urope 
482 
630 
Of which: 
European Economic Community 
181 
236 
United Kingdom 
211 
244 
apan 
0 
5 
ther countries 
79 
104 
Total 
2,444 
2,677 
tl producers and process Venezuelan 
crude 
o 
tates. 
Some Venezuelan erude otl also ts shtpped to Trintdad for 
ainly 
to the US market. 
These erude oil shipments 
are treated as 
tates 
tn thts 
table. 
Provisional. 
Ineluding the Canal 
Zone. 
66 
3,170 
69 
3,110 
_ 
Because 
of rounding, components may not add to totals shown. 
f erude 
otl te Aruba and Curacao in the Netherlands Antilles and 
efined produets, 
The refineries 
in Aruba and Curacao are operate 
1967 
2,466 
71 
3,285 
c/ 
1968 
2,600 
66 
8,326 
b/ 
Thousand Barrels 
per Da 
ne 
OU aNd Barvels per Day 
Jan-Sep 
1969 b/ 
2,674 
55 
3,344 
The data exclude exports 
tnelude their exports of 
d by Veneauela's major 
tl almost exclusively for export 
to the United 
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refining and export 
exports 
to the United 
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CONFIDENTIAL 
Causes 
of the Industry's Difficulties 
Venezuelan Oil Policy 
4, 
Because of the very rapid increase of lower 
cost petroleum exports elsewhere in the world, 
the 
growth of Venezuela's oil exports could have been 
expected to slow in the 1960s regardless 
of the 
government's efforts. 
Growth was further hampered, 
however, 
by the conservation-oriented policies of 
the Venezuelan government. 
Following the overthrow 
of the Perez Jimenez dictatorship in 1958 and the 
inauguration of Romulo Betancourt 
as President in 
1959, 
the government has striven for only a moderate 
pace of petroleum exploitation 
-- 
and for the largest 
tax share compatible with it. 
The new policy was 
predicated on the assumption that petroleum, being 
a wasting asset, would become scarcer and more 
valuable over the long term. 
Externally, Venezuela 
has tried unsuccessfully to persuade other members 
of the Organization of Petroleum Exporting Countries 
(OPEC)* to fix crude oil prices and prorate produc- 
tion. 
5. 
Petroleum companies in Venezuela 
-- mostly 
US-owned -- traditionally have had considerable 
freedom of action, but they have been subjected to 
growing government control and financial demands 
under the new policy. 
The maximum corporate income 
tax rate 
(affecting mainly the petroleum companies ) 
was raised from 28% to 474% at the end of 1958 and 
further increased to 52% in 1966. 
in 1966 the govern- 
ment also began to receive payments 
in settlement of 
its claim for back taxes and instituted 
a more lucra- 
tive system in valuing petroleum exports 
for income 
tax purposes. 
As a result of these measures, 
the 
government's share of the industry's gross profits 
rose from 65% in 1958 to 70% in 1969. 
As the fol- 
lowing tabulation shows, government petroleum revenues 
jumped by about one-fourth during 1965-68 even though 
petroleum export earnings stagnated: 
* 
OPEC's members 
are 
Veneauela, 
Saudt Arabia, 
Iran, 
Iraq, 
Kuwatt, 
Qatar, 
Abu-Dhabi, 
Libya, Algeria, 
and 
Indonesta. 
ah 
= 5s 
CONFIDENTIAL 
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CONFIDENTIAL 
Million US $ 
1964 
1965 
1966 
1967 
1968 
—— 
Ne 
A 
8 
NN 
Petroleum exports 
2,319 
2,260 
2,158 
2,262 
2,294 
Government petroleum 
1,069 
1,073, 
1,132 
1,299 
1,326 
of government 
ues 
to petroleum 
export earnings 
(per- 
46 
47 
52 
57 
58 
Government revenues equaled about $1 per barrel 
produced in 1969, making Venezuela's profit share 
and revenue per barrel among the highest in the 
world. 
6. 
Since 1959 the government has also pursued a 
publicly stated policy of granting no additional 
petroleum concessions. 
Because many concessions 
granted during the early 1940s will expire in the 
early 1980s, petroleum companies have been uncertain 
about their future operations and hesitant to make 
large development expenditures. 
The industry drilled 
an average of only 460 wells annually during 1965-68, 
compared with nearly 1,200 in 1958, 
and new invest- 
ment averaged only $158 million, compared with 
$579 million in 1958. 
In fact, net disinvestment 
occurred each year from 1960 through 1966, 
as de- 
preciation allowances exceeded new investment. 
Al- 
though crude oil production has risen only slowly 
since 1958, proved reserves have dropped somewhat 
and the reserve/production ratio has slumped from 
17% to 114 
(see Table 2). 
7. 
Venezuela's net foreign exchange earnings 
from the petroleum sector stagnated during most of 
the 1959-68 period. 
Petroleum exports were 
36% 
higher in 1968 than in 1958, but a drop in the aver- 
age realized price from about $2.55 to $1.90 per 
barrel prevented any gain in export value. 
Although 
the Venezuelan government's tax take from petroleum 
rose during the 19€0s, reduced production costs also 
allowed gains in net company profits. 
This improve- 
ment enabled the companies 
to restore the 1958 level | 
of profit remittances of about $600 million during 
1964-68; moreover, 
sharp cuts in investment permitted 
the companies to repatriate depreciation allowances 
totaling several hundred million dollars in 1962-66. 
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TIVILLNAGIANOO 
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Table 2 
Venezuela: 
Indicators of Petroleum Development Activity 
_ eee 
1958 
1961 
1965 
1966 
1967 
1968 
1969 
New fixed capital investment 
(million USS) 
579 
171 
152 
117 
119 
242 
NAA. 
Wells drilled 
(number) 
1,184 
477 
694 
394 
319 
438 
487 
Proved reserves 
(billion 
barrels) 
16.8 
16.9 
17.2 
16.9 
16.0 
15.7 
14.8 
Ratio of reserves 
to 
production 
17.7 
15.9 
13.6 
13.7 
12.4 
11.9 
11.3 
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Growth of New Sources 
of Low-Cost Oil 
8. 
Rapid growth of production 
in other oil-rich 
countries also has weakened Venezuela's competitive 
position. 
Between 1958 and 1969, Venezuelan output 
increased by only 38% while world output more 
than 
doubled -~ rising from 18.0 million bpd to 41.6 mil- 
lion bpd. 
Leading this growth was 
the Middle East, 
where production rose by 190% 
(to 12.4 million 
bpd) despite political turmoil. 
Important petroleum 
discoveries in Libya, Algeria, 
and Nigeria since the 
mid-1950s also have made Africa a major producing 
area. 
African production of crude oil rose 
from 
only 85,000 bpd in 1958 to 5 million bpd 
(12% of the 
world total) 
in 1969. 
2, 
Venezuela's 
oil industry is falling behind 
partly because its costs considerably exceed those 
in the Middle East and Africa, where new investment 
is being concentrated. 
In the Middle East, 
for 
example, 
exploration and operating costs are very 
low because vast 01i1 deposits were discovered and 
the average well produces about 4,600 bpd compared 
with 400 bpd in Venezuela. 
Although the Middle 
Eastern and North African governments have now in- 
creased their profit share almost to the Venezuelan 
level, 
lower production costs generally still enable 
the companies 
to earn substantially more per barrel 
than those in Venezuela. 
Net profit per barrel in 
Venezuela is estimated to be about 40-45 cents. 
Development of the Supertanker 
10. 
The cost advantage of Middle Eastern and North 
African oil has also improved with introduction of 
supertankers. 
Use of these tankers 
has significantly 
reduced long-distance transportation 
costs and sharply 
diminished Venezuela's ability to compete in West 
European markets. 
Closure of the Suez Canal in 1956 
and again in 1967 benefited Venezuela temporarily, 
but the longer term result of the two Suez closures 
has been to hasten widespread use of supertankers, 
thus eroding Venezuela's competitive position even 
further. 
US Import Restrictions 
ll. 
Expansion of oil exports to the United 
States 
-- still the most important market 
-- 
has been 
impeded by US import controls and concern over air 
ee 
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pollution. 
The United States initiated mandatory 
import controls in March 1959, following two years of 
unsuccessful attempts 
to obtain voluntary limitations.* 
12. 
Since the imposition of US import controls, 
Venezuela has supplied 
a declining share of US crude 
oll imports. 
Venezuelan deliveries dropped from 
550,000 bpd in 1960 to only 305,000 bpd in 1969, 
and 
their share of total US crude oil imports fell from 
50% to 22%. 
The decline would have been even sharper 
if the import program had not been modified in 1965 
to require that petroleum refineries 
in Puerto Rico 
and the Virgin Islands 
use Venezuelan crude oil. 
The 
special treatment accorded Canada as 
an overland sup- 
plier, 
on the other hand, has permitted its exports 
to quintuple since 1960. 
As a result, 
its share of US 
crude oil imports has risen from 10% to 40% 
-- about 
as much as Venezuela's 
has declined. 
The change 
reflects Canada's expansion of exports 
far beyond the 
voluntary limits negotiated with the United States 
in 1967. 
African producers also have won an im- 
portant share of the US market 
(see Table 
3). 
13. 
The decline in Venezuelan crude oil exports 
to the United States has been partly offset by larger 
exports of residual 
fuel oil, but problems 
are aris- 
ing in this field also. 
Altnough these deliveries 
reached a record level of 880,000 bpd in 1969 
(com- 
pared with 615,000 bpd in 1960) 
and made up about 70% 
* 
Imports of crude oil and petroleum products 
(other 
than restdua. fuet ott) 
into the region east of the 
Rocky Mountains are now limited to 12.2% of domestic 
productton of erude otl and natural gas 
liquids. 
Im- 
ports of crude otl into 
the West Ccast 
are permitted 
tn quantities sufficient 
to balance supply and demand. 
Because US refining ts geared to 
the demand for the 
lighter, 
higher valued petroleum products, 
demand for 
fuel ott ts satisfied mainly by imports, 
which are 
ea- 
empt from the quota. 
Overland imports of erude otl 
-- 
chiefly from Canada but also ineluding small amounts 
from Mexico 
-- and petroleum products shipped from 
Puerto Rico and the Virgin Islands also are exempt 
but are dedueted from the overall quota and thus enter 
at the expense of tmports from other sources. 
a 
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CONFIDENTIAL 
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Table 
3 
Share of Venezuela and Other Producers 
in US Crude Oil Imports 
A 
rt 
greene 
Source 
of Imports 
(Percent) 
US Crude Oil 
Imports 
Middle 
Other 
Year 
(Thousand Barrels per Day) 
Venezuela 
Canada 
Africa 
Hast 
Areas 
1960 
1,100 
50 
10 
iF 
28 
ile 
‘@) 
‘ 
e) 
S 
1965 
1,240 
35 
24 
5 
27 
9 
S 
7, = ! 
1966 
1,225 
33 
28 
7 
24 
8 
5 
= 
2 4 
1967 
1,130 
32 
36 
5 
17 
10 
5 
4 
1968 
1,295 
27 
36 
12 
13 
12 
ae 
> 
_— 
- 
1969 
1,390 
22 
40 
15 
12 
11 
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CONFIDENTIAL 
of all such US imports,* several large US east coast 
cities have begun to restrict the sulfur content of 
fuel oil in order to reduce air pollution. 
The 1%- 
2% sulfur content of most Venezuelan oil exceeds the 
present limits, which will be lowered during the next 
few years. 
Consequently, 
importation of low-sulfur 
oil, notably North African crude with a sulfur con- 
tent of less than \%, 
is becoming increasingly de- 
Sirable. 
Nearly all of the growth in US imports 
of residual fuel oil in 1968, 
for example, 
came from 
African producers or West European producers using 
African crude oils. 
Economic Repercussions 
14. 
Since petroleum activity accounted 
for 92% 
of Venezuela's export earnings, 
62% of government 
revenues, 
and 29% of GDP by 1958, the industry's 
subsequent slowdown has cut the economic growth rate 
considerably and had other important repercussions. 
Export surpluses have been shrinking, budget expendi- 
tures have outpaced the growth of revenues, 
and the 
investment rate has slipped from the previous high 
level. 
Venezuela has, however, avoided large budget 
deficits, balance-of-payments constraints, 
and serious 
inflation. 
15. 
Value-added in the petroleum sector rose an 
average of only 4%% annually during 1959-64 and 1% 
annually in 1965-69, 
compared with 7%% in 1951-58 
(see Figure 2). 
Venezuelan governments have tried 
to compensate 
for the petroleum sector's sluggish- 
ness by stimulating production elsewhere. 
Price 
supports, protective tariffs, 
import quotas, and land 
colonization programs have brought an impressive 
75%-80% gain in agricultural output since 1958, sus- 
taining the previous growth rate. 
Continuing import 
substitution helped to double manufacturing output, 
but at the cost of creating various high-cost opera-~ 
tions requiring protection from foreign competitors. 
Growth in manufacturing and the non-petroleum sectors 
* 
Ineluding exports of fuel oil from 
the Netherlands 
Antilles and Trinidad by companies 
that ship 
Veneauelan crude otl there for refining. 
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Figure 2 
Venezuela: 
Output Growth in Petrcleum 
and Non-petroleum Sectors 
175 
sectors 
150 
Indox (1958100) 
? 
Non-petroleum tan” 
Gross domestic 
’ 
product 
\“%% 
125 
Petroleum sector 
(extraction and 
refining) 
100 
LS 
1958 
1960 
1962 
1964 
1966 
1968 
1969 
Est. 
78423 5-70 
as a group nevertheless slipped below the boom levels 
sf 1951-58 and contributed to the decline of nearly 
one-half in average annual gains in GDP, 
as the fol- 
lowing tabulation shows: 
Average Annual Increase 
(Percent) 
1951-58 
1959-69 
Petroleum sector 
7% 
3 
Non-petroleum sectors 
B45 
5 
Of which: 
Agriculture 
. 
535 
535 
Manufacturing 
10% 
645 
Gross domestic product 
84 
435 
ms 
Se 
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CONFIDENTIAL 
16. 
Traditionally strong by Latin American 
standards, Venezuela's balance of payments has ab- 
sorbed the impact of sluggish petroleum activity 
without great strains 
so far. 
Despite lagging 
exports, 
no shortage of foreign exchange developed 
because of continued opportunities to substitute 
domestic production for imports and because 
Venezuela's foreign exchange reserves were large. 
Imports were held down by controls in the early 
1960s, 
and although they have risen fairly rapidly 
sinve 1964, the average growth rate since 1958 is 
well below that of GDP. 
The relatively slow growth 
of imports permitted Venezuela's traditionally large 
trade surplus to be held at about $1 billion in 1968, 
compared with an average of $1.3 billion annually 
in 1960-64. 
17. 
To balance 
its foreign payments, Venezuela 
had to draw down its foreign reserves 
from $1.0 bil- 
lion in 1958 to about $583 million in 1962. 
Most 
of these losses were recouped in the late 1960s, 
however, when the oil companies started building 
desulfurization plants and both private foreign 
investment in other sectors and foreign aid increased. 
By December 1969, 
foreign exchange reserves reached 
$933 million 
-- enough to pay for eight months! 
im- 
ports. 
18. 
Slackening growth of petroleum and other 
revenues 
has not led to large budget deficits, 
primarily because investment spending has been held 
below earlier levels. 
Rapidly rising current ex- 
penditures, especially for education, 
health, 
and 
national defense, 
have absorbed most of revenue 
growth. 
Recent governments have chosen to keep def- 
icits small -- 
a policy that helped hold cost-of- 
living increases to in average of only 1% in 1963- 
67 and 24% in 1968-69. 
19. 
The cuts in public investment, however, 
were 
a major cause of the decline 
in economic growth. 
Real investment expenditure 
did not surpass the 
1958 level until 1968, when it still made up only 
18% of GDP including petroleum investment and 
16% excluding petroleum investment, compared with 
the 27% and 20% averages of 1951-58. 
Although 
- 
13- 
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public investment has been growing rapidly in recent 
years, 
its 7% share of GDP in 1968 remains far less 
than the 12% average of 1951-58. 
Private non- 
petroleum investment has held up fairly well, 
absorb- 
ing 8% of GDP in 1968, 
as in 1951-58. 
20. 
Despite the slowing of economic growth, 
job 
opportunities have been sufficient to absorh the new 
entrants into the labor force 
(which is growing about 
3% annually) 
and reduce the still large pockets of 
unemployment and underemployment. 
Employment in the 
non-petroleum sectors has been expanding at an average 
rate of about 5% annually. 
This relatively rapid 
growth was possible because of the continuing agri- 
cultural colonization program and because gains in 
output per worker in the manufacturing and services 
industries were fairly meager. 
Efforts 
to Revitalize the Industry 
21. 
Although Venezuelan economic growth slowed 
during the 1960s, 
it was 
on the whole satisfactory 
by Latin American standards. 
By the middle of the 
decade, however, 
the government was becoming in- 
creasingly concerned about the petroleum industry's 
deteriorating international position and the sharp 
decline in investment that was allowing the ratio 
of reserves to production to decline. 
Realizing that 
the economy would have to depend heavily on petroleum 
for many years to come to provide funds 
for both 
economic diversification and social development pro- 
grams, both government officials and businessmen 
questioned the wisdom of the moratorium on new con- 
cessions and urged that a new legal basis for 
petroleum exploitation be devised. 
The Leoni govern- 
ment's solution, 
approved by the Venezuelan Congress 
in 1967, provided for negotiation of service con- 
tracts with private firms instead of traditional con- 
cessions. 
Under service contracts, 
companies would 
form partnerships with the government-owned Venezuelan 
Petroleum Corporation 
(CVP). 
22. 
The Caldera government, inaugurated in March 
1969, 
is trying to carry out and extend the program 
of the Leoni government, 
hoping to invigorate the 
os 
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oil industry by negotiating service contracts, 
en- 
couraging construction of desulfurizing plants, 
and 
obtaining more favorable US import measures. 
Although 
Venezuela has been getting a large cut of oil revenues, 
service contracts 
are legally 
more favorable to the country 
been. 
Within this limit, the 
tract are to be determined by 
they would be partners of CVP 
required to be basically 
than concessions have 
details of each con- 
negotiation. 
Although 
and receive only a small 
share of any profit, petroleum companies would be ex- 
pected to provide all the funds’ for new ventures and 
to assume all the risks. 
Service contracts normally 
will extend for 23 years 
(including 
3 years 
for ex- 
ploration) 
as contrasted with the 40 years granted 
for concessions. 
In special cases, 
upon recommenda- 
tion of CVP and Congressional approval, contract 
periois may be extended to 30 years. 
At the end of 
the contract period, 
all facilities and equipment 
revert to the CVP. 
23. 
Progress toward concluding service contracts 
has been slow because the companies want to keep full 
operational control and the government has been un- 
able to obtain a Congressional blessing of their 
terms. 
CVP called for tenders by March 1968 to nego- 
tiate service contracts covering five blocks of 
acreage in southern Lake Maracaibo, 
an area that 
heretofore has not been cpen for exploration. 
From 
their geological knowledge of the Lake Maracaibo 
basin, which accounts 
for about 803 of production, 
the companies believe that the new area has an 
excellent petroleum potential. 
CVP received 11 
offers from foreign companies. 
The more acceptable 
offers generally provided that the central govern- 
ment would receive the same royalties and taxes as 
in recent years and that CVP would receive 
10% of 
crude oil production, 
a depletion payment equal to 
5% of the central government's royalties, 
and bonus 
payments 
as production increased beyond certain 
levels. 
Venezuelan officials estimated that the 
offers would give Venezuela 85% of profits; 
some 
of the companies estimate 90%. 
Although the tenders 
improved upon the present financial terms 
for con- 
cessions, 
they fell short of the government's 
as-~- 
pirations, particularly in the area of operational 
control of exploration and production. 
The govern- 
ment wants CVP to have a voice in decisions con- 
cerning production rates, pricing, 
and marketing. 
The companies, however, 
appear willing only to keep 
CVP fully informed. 
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24. 
Upon taking office, 
the Caldera government 
extended the deadline 
for final tenders 
to July 1969 
in the hope that more generous 
terms could be ex- 
tracted in a second round of negotiations. 
Although 
several companies improved their offers, most did 
not. 
The government then submitted the best offers 
for Congressional approval. 
President Caldera had 
hopes of signing the first contracts before the end 
of 1969 and giving the economy 
a needed psychological 
boost. 
Caldera's Christian Democrats, 
however, 
are 
a minority in Congress and could not win the approval 
of the Democratic Action Party, 
the largest opposi-~ 
tion force. 
The latter group claimed that the 
offers lacked sufficient assurances that CVP would 
have 
a prominent management role and succeeded in 
having a decision postponed until the next Congres- 
Sional session, which began in March 1970. 
25. 
To maintain Venezuela's dominant position in 
the US fuel oil market, 
the Leoni and Caldera govern- 
ments have strongly encouraged the industry to build 
desulfurization facilities. 
In 1968 the two largest 
petroleum companies agreed to build desulfurization 
plants at a total cost of $136 million. 
As incentives 
for this step, Shell of Venezuela and Creole Petroleum 
Company 
(a subsidiary of Standard Oil of New Jersey) 
are allowed to reduce their taxes by accelerating 
depreciation of their investments 
and are granted im- 
port duty exemptions on materials and equipment not 
manufactured domestically. 
26. 
Shell's plant, which can turn out about 50,000 
bpd of oil annually with no more than 1% sulfur, 
be- 
gan operations in December 1969. 
The Creole facility 
has a capacity of 100,000 bpd annually and is sched- 
uled to commence operations in July 1970. 
Because 
the two facilities 
can process only about one-fifth 
of US imports of Venezuelan residual 
fuel oil, the 
government anticipates that additional capacity will 
have to be constructed. 
Some US east coast cities 
have stretched out their schedules 
for tightening 
restrictions 
on su] fur content to give consumers more 
time for compliance, but Venezuelan authorities still 
are concerned that the geographic coverage of the 
restrictions will be broadened and the acceptable 
sulfur limits reduced faster than fuel oil shipments 
can be desulfurized. 
Moreover, 
the government fears 
that the US oil import program will be changed to 
encourage construction of desulfurization facilities 
in the United States, which would deter investment 
in Venezuela and encourage the import of high-sulfur 
oil from other producers. 
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- 27. 
Venezuela has been pressing for changes in 
US oil import policy for several years. 
The program 
is viewed as strongly favoring Canada at Venezuela's 
expense, 
and Venezuela's treatment under it has be- 
come 
a highly charged political issue. 
The Caldera 
government also was dissatisfied with the differential 
tariff system recently proposed by a US Cabinet Task 
Force as 
a substitute for import quotas. 
Venezuelan 
officials claimed that the differentials 
for 
Venezuela were too small to give it a sufficient 
competitive edge in the US market. 
Although the Task 
Force recommended that tariff differentials be fixed 
to produce volumetric parity between crude oil imports 
from Canada and Venezuela, the Caldera government was 
skeptical that parity would be enforced. 
28. 
As much as the Caldera government disliked 
the recommendations 
of the Task Force, 
it still re- 
mains opposed to the present import quota system 
and has not reduced its efforts to change it. 
Al- 
though pleased by President Nixon's decision in 
March 1970 to impose a formal import quota of 400,000 
bpd on imports of Canadian crude oil, which were run- 
ning at an annual rate of 730,000 bpd in January- 
March 1970 compared with Venezuelan exports of some 
255,000 bd, 
the Caldera government still questions 
what benefits 
if any will accrue 
for Venezuelan 
exports.* 
Because of its objections 
to the Task 
Force recommendations, 
the Caldera government also 
welcomed President Nixon's decision to defer action. 
Pending further study of the import program by the 
US government, Venezuela is proposing multi-national 
discussions among the United States, Canada, Mexico, 
and itself to press 
its case for a system that would 
accord Venezuelan petroleum equal access 
to the 
US market. 
Venezuela contends that only on this 
basis would it be assured of participating in some 
reasonable share of the growth in petroleum demand 
in the United States. 
Prospects 
29. 
During the next few years, Venezuela probably 
will not be able to improve much upon the 4%% economic 
growth rate achieved since 1958, 
A rate of 4%%-5% 
* 
“Canada has strongly protested imposition of the 
quota. 
If the quota becomes 
a permanent feature 
of US import policy, 
it would spur Canadtan construe- 
tion of a ptpeline from the western provinees 
to the 
east coast and jeopardize Veneauelan exports 
to Canada. 
o 
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seems likely ~~ approximately the expected Latin 
American average but well short of the level still 
believed to be feasible by Venezuelans 
if only the United 
States would cooperate. 
Barring a major improvement 
in access 
to the US market 
(or in world market con- 
ditions), petroleum production and exports are un- 
likely to increase by more than 1%-2% annually during 
1970-72. 
Economic growth should be stimulated, 
how- 
ever, 
by planned high levels of public investment 
in petrochemical and steel plants, 
low-cost housing, 
and agricultural facilities. 
Moreover, 
if the dead- 
lock over signing the first service contracts 
is 
broken before long, investment 
in petroleum should 
expand, although production would not be affected for 
some time. 
Despite the delays so far, the outlook for 
executive and legislative agreement on minimum terms 
for service contracts seems favorable. 
30. 
For the government budget, 
the outlook is 
for growing deficits financed largely by foreign 
borrowing. 
Revenues 
are likely to grow only slowly. 
unless taxes are boosted 
~~ 
a step that goes against 
Caldera's aim of improving business confidence and 
might be blocked in the legislature. 
The adminis- 
tration nevertheless 
favors 
a moderately expansionist 
budget and has announced a $900 million public in- 
vestment program for 1971-74, which would substan- 
tially raise recent spending levels. 
Because of 
Venezuela's conservative financial policies since the 
early 1960s and large foreign reserves, 
the Caldera 
government is in a good position to borrow abroad 
and should be able to incur increased deficits with- 
out generating domestic financial difficulties. 
31. 
The balance of payments probably will ex- 
perience some strains during the next few years, 
but Venezuela should be able to avoid any major ex- 
ternal difficulties. 
The foreign trade surplus will 
continue to shrink in 1970-72. 
Apart from petroleum, 
the only major new export earnings in sight are 
petrochemical products, but they will not fully 
materialize before 1973. 
Meanwhile, 
imports will 
continue to increase to meet industrial demand and 
support public investment projects. 
32. 
By the mid-1970s, Venezuela may have an 
appreciably larger petroleum production capability, 
if service contracts 
are soon negotiated. 
But the 
growth of exports to the United States may be 
hampered seriously by exploitation of new oilfields 
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in Alaska and, less importantly, 
in Colombia and 
Ecuador. 
Shipments to the continental United States 
from the Alaskan fields will not be subject to quota, 
and Colombian oil has the advantage of being low in 
sulfur. 
If the problems of transporting Alaskan oil 
to consuming centers 
can be solved satisfactorily and 
if exploitation of the new Colombian and Ecuadorian 
fields proceeds as scheduled, Venezuela's oil in- 
dustry will confront added competitive pressures 
starting in about 1973. 
In addition, prospects 
for 
sales 
to Canada will be lessened if Canada builds 
a 
pipeline to supply its eastern seaboard. 
Conciusions 
33. 
Venezuela's petroleum exports have stagnated 
in recent years, dropping from 33% of world petroleum 
exports in 1958 to only 15% in 1969. 
The government's 
policies of obtaining 
a larger share of industry 
profits and of granting no new concessions discouraged 
investment in exploration and production facilities. 
Rapidly expanding production of lower cost oil in 
other countries and the advent of supertankers 
weakened Venezuela's competitive position in inter- 
national petroleum trade. 
Exports have been hindered 
by US import controls, which have favored Canadian 
over Venezuelan oil, and by increasing consumer pref- 
erence 
for oils containing less sulfur 
(a major air 
pollutant) 
than does Venezuelan oil. 
34. 
Sluggish petroleum development is mainly 
responsible for the slowdown in economic growth from 
an 8%% average rate in 1951-58 to 4%% in 1959-69 and 
for the decline in investment from 27% of gross do- 
mestic product in 1951-58 
to 18% in 1968. 
Responsible 
financial policies have averted large budget deficits 
and serious inflation, 
however, 
and foreign exchange 
supply has not been a bottleneck, 
because of rising 
net inflows of foreign capital into the non-petroleum 
sectors. 
35. 
The Venezuelan government 
is now trying to 
spur exploration and considerably improve the in- 
dustry's access to the US market. 
The new means 
chosen to reinvigorate the industry is the service 
contract, which calls 
for private companies 
to form 
partnerships with the state oil corporation. 
Some 
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companies are optimistic abcut the petroleum-bearina 
potential of the area being offered under service 
contracts and have made offers, 
but no service con- 
tracts have yet been signed. 
36. 
Venezuela's efforts to obtain more favorable 
treatment for its oil in-.the US market have not yet 
met with success, but the building of facilities 
to 
desulfurize 
fuel oil destined for the United States 
has proceeded rapidly. 
Without improved access 
to 
the US market, petroleum exports probably will in- 
crease only 1%-2% annually during the next few years, 
and by the mid-1970s Venezuelan petroleum sales to 
the United States could be further impeded by 
development of Alaskan production and exports from 
Colombia and Ecuador. 
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