We may come to miss you, Hugo

Chavez was a godsend to the oilpatch.

(Photo: Leo Ramirez/AFP/Getty Images)

(Photo: Leo Ramirez/AFP/Getty Images)

If his passing results in improved management of Venezuela’s oil resources, Alberta’s oilmen might one day miss Hugo Chávez as much as Caracas’s mourners do now. Like Alberta, Venezuela is blessed with huge reserves of heavy oil—more than any other nation on earth, according to some recent estimates. Despite the dominance of the national oil company, Petróleos de Venezuela (PDVSA), its oil industry was for a long time professionally run. Foreign companies were courted as partners during the early 1990s, a period known as “La Apertura” (“The Opening”). All that changed after Chávez rose to power in 1998.

During his 14 years in office, Chávez tightened his grip on PDVSA while simultaneously pursuing programs aimed at improving access to health, education and food for poor Venezuelans. “For Chávez to have control over PDVSA meant a huge cash cow for the sort of social programs he wanted to implement,” says Maxwell Cameron, a professor of political science at the University of British Columbia.

Yet Chávez soon began neglecting that cash cow. In 2002, he fired nearly half of PDVSA’s workforce, and at times he tasked PDVSA with duties that had nothing to do with the oil business, such as buying and distributing food, or loaning money to farmers. Meanwhile, his government appropriated ever larger portions of its cash flow, rendering PDVSA unable to invest in exploration and development. Inevitably, its output dwindled, by about a quarter since 2001.

Decline in imports of Venezuelan oil, 1998-2012
Source: US Energy Information Administration

Just five days’ journey away by tanker and still the world’s biggest importer, the U.S. is an obvious export market for Venezuelan crude. Many American refineries along the Gulf of Mexico coast are optimized specifically to process it. Yet Chávez antagonized the U.S. at every opportunity. Squeezed both by PDVSA’s falling production and deteriorating relations, U.S. imports of Venezuelan crude fell by nearly half from a 1997 peak. Alberta emerged the prime beneficiary of these circumstances, becoming America’s prime outside supplier. Alberta further benefited as thousands departed PDVSA to work in the province. Pedro Pereira Almao, originally from Venezuela, now an engineering professor at the University of Calgary, estimates one-fifth of the company’s technical capacity migrated to Canada.

Substantial reforms in Venezuelan energy or foreign policy seem unlikely in the near term. As his illness progressed, Chávez anointed Vice-President Nicolás Maduro, a staunch loyalist, as his successor. Although Maduro lacks Chávez’s charisma, many expect him to prevail in the coming election. Yet Chávez’s successors will inherit a petro-state burdened by high inflation, elevated public debt and violent crime. They can no longer rely on oil prices to cover governance deficiencies, as could Chávez during much of the 2000s. “Maduro is boxed in,” says Cameron. “He has fewer options.”

Should Venezuela seek to reinvigorate PDVSA, it would be bad news for Alberta’s oil industry, which is already struggling to compete with rising tight-oil production in the United States. But even under ideal circumstances, says Pereira Almao, it would take five years for Venezuela’s output to start rising again.