Month: September 2019

Rebuilding Venezuela – Opportunity & Path Forward

It is clear we are nearing the end of the Chavez-Maduro era: the “starting bell” is now ringing for organizations yet to establish an exploratory group tasked with assessing commercial opportunity. For those planning to participate in the recovery and reconstruction of Venezuela, it’s time to consider historical context, make reasonable comparisons (pre-Chavez vs now) regarding transformation of local cultures, current societal realities (in-country & diaspora), and focus on what comes next.

What organizations should know regarding opportunities and expected duration –

• Venezuela is a founding member of OPEC and possesses the world’s largest known oil & gas reserves, approximately 20% of the global total
• Chavez Era production peaked in 2008 at 2.4 MM BPD, currently production hovers around 700,000 BPD and declining
• Oil & Gas required annual investment = USD$15-$20 Billion, medium-term (5-10 years) – predominantly from private sources – with expectation of three (3) years to increase production to 1.5 MM BPD – per Francisco Monaldi*
• Agricultural Equipment required annual investment = USD$5 Billion, during next 5-8 years – per Hiram Gaviria*
• Transportation Infrastructure estimated annual investment = USD$10 Billion, next 5-10 years
• Electrical Power Grid investment requirement = USD$1.5 Billion – next 3 years

Who are likely candidates from the USA? We begin with Oil & Gas Exploration companies and their classic support network (Chevron is currently operating there under a US Govt waiver). Engineering, Procurement & Construction (EPC) firms: Bechtel, Foster-Wheeler, Fluor, others, and their competent sub-contractors – teams capable of handling projects broad in scope: oil & gas facilities to transportation infrastructure, water systems, electric power plants/grids and likely some expansive agricultural/farming infrastructure. Original Equipment Manufacturers (OEM) of earthmoving, mining, construction, power generation, agricultural, pipeline and associated machinery. Manufacturers & Suppliers of Construction Material. USA-based Service Partners engaged in rebuilding high-value capital equipment and spares for heavy industry – in Venezuela these networks, contractors and service providers have been depleted and are currently unreliable.

In my opinion, an irreversible process leading to change in government consistent with the demands of the political opposition lead by Juan Guaido, National Assembly President, will likely commence within sixty (60) days, and certainly by the end of 2019. Criteria as follows –

1. El Cese de Usurpación – End of the Usurpation of Power (by Nicolas Maduro)
2. Gobierno de Transición – Transitional Government based on Plan Pais model*
3. Elecciones Libres – Free and Fair Elections within 9-12 months

Involving oneself in “nation building” is not a typical career discussion; however, my unique experience and strong ties to Venezuela & Latin America require a sharing & transfer of knowledge intended to accelerate relief for a traumatized population and commence a complete rebuild of their Country. Déjà vu, all over again…what happens next has been foreshadowed by what transpired two decades ago during Venezuela’s brief, and sole period of Oil & Gas industry privatization in the last 43 years.

Upon arrival in Venezuela (April 1996), I was an ExPat “operations manager” for a coal stockpile & loading facility on Lake Maracaibo: receiving product (predominantly from Colombia), sizing and loading oceangoing ships with tugboats, barges and clamshells into the holds: a process built on archaic technology, as was the reality for many sectors of society. Coincidentally, a longer-term opportunity was just ramping-up under the administration of President Rafael Caldera: Venezuela’s “Apertura Petrolera”, a privatization effort inviting multi-national companies into the Oil & Gas industry via partnerships with PDVSA and other government entities. Oil & Gas revenues were in decline following twenty years of “nationalization” (1976-1996) which left production infrastructure poorly maintained and dilapidated due to endemic corruption.

The first round of privatizations began in January 1996, and structured to leverage the capital, experience and technology investment of international partners. Bidding packages were presented on specific oil field “blocks” via long-term production leases, usually 20 years – with the government taking royalties after partner-operators met a measurable threshold, defined by unique agreements. The clock started when a partnership deal was signed. At the time, Venezuela was exporting crude at approximately 2.8 MM barrels per day, sourced mainly from mature fields on Lake Maracaibo, Cabimas and several others in Western Venezuela. By mid-1997, the vast, previously unquantified reserves in the East of the Country (Orinico Belt, Anaco, Jusepin, El Furrial, Dacion, Pariaguan, etc), were undergoing significant expansion on the shoulders of the new “private sector partners”, increasingly managing operations, exploration and refinement of the Country’s vast petroleum and natural gas deposits.

Chevron, Conoco, ENI, Total, LASMO, ExxonMobil and a multitude of other “internationals” were participating, mainly building new facilities in Eastern Venezuela with experienced, domestic contractors executing the civil works and mechanical builds under project management by competent international contractors – a classic Oil & Gas boom. The Venezuelan Government was “having it’s cake and eating it too”, overseeing a revenue-earning model with much needed investment financed predominantly by international corporations.

Enter President Hugo Chavez in February 1999, with a socialist agenda including the re-nationalization of Oil & Gas exploration, extraction, refining, and other natural resource industries: most notably coal, gold, iron ore mining and processing. Fortunately for Venezuela’s petroleum industry, three years into the front-end investment significant completion of upgrades and new facilities construction had been executed by the international partners, most were in early production mode. Over the next few years President Chavez methodically began the “buyouts” of block concessions granted under the “Apertura Petrolera”, and the Country was again subject to the “culture of corruption” that had precipitated the decline of production experienced several years prior. Chavez also had a popular revolt on his hands in response to aligning his government with Cuba. Venezuela became polarized as dissident businesses, politicians and individuals were marginalized – property and commercial interests were confiscated and placed under the management of Military leaders and Chavista loyalists. Capital flight and a “brain drain” ensued, finally capped with currency controls instituted in Q1/2005. Once again, the mismanagement, inexperience, ineptitude, corruption and lack of maintenance in the Oil & Gas sector – responsible for 85% of export revenue – set the table for another decline in production and revenues.

The similarities between Venezuela “then & now” are clear – so are the stark differences. Expectations moving forward require the recognition of a “new reality”: a country void of technical experience, competent general contractors, heavy machinery, materials and social stability. For the next several years, direct investment in Venezuela won’t be for the faint of heart, while the upside could be strong and sustained for decades.

Demand for the human capital required to competently manage the massive slate of projects will far exceed short-term supply. In my view it is naïve to expect educated and experienced Venezuelans in exile to return in large numbers, at least not quickly. Plan Pais*, a Venezuelan Exile’s think-tank based in the United States, estimates only twenty percent (or less) would consider such a commitment. They would have to see an indisputable level of national unity, reconciliation and public safety to consider repatriation. An influx of Ex-Patriot talent will be required for a minimum of several years.

Painting an accurate picture of what Venezuela will be initially must include known current challenges and expected conditions on the ground based on experience – including, but not limited to the following:

• Humanitarian Relief – immediate needs to be addressed by Governments and NGO’s while economic reconstruction is simultaneously planned and executed – expect many private businesses coming into Venezuela to include staff for community outreach and quasi-NGO activities
• Original Equipment Manufacturers (OEM) and Dealer Networks – international companies complete with physical presence to support the rebuild of Venezuela – example: Caterpillar currently has no in-country representation as their long-standing Dealer Agreement with Venequip, was recently voided – expect a boom of new machinery imports, all types
• Offshore Service Support & Equipment Sourcing – due to the mass exodus of Venezuelan contractors and support business in the 2003-2006 time-frame, “outsourcing” with USA-based (and other international) businesses will have representatives deployed to manage local administration & logistics serving heavy industry and others using their products – expect massive imports beginning with second-hand machinery of all types
• Engineering, Procurement & Construction (EPC) Contractors – as with the “Apertura Petrolera”, large contractors (complete with equipment fleets) will be required to execute the construction of facilities in all sectors: Oil & Gas, Mining, Agriculture, Water Systems, Power Generation, Health Services, Education, etc – long-term operating contracts with guarantees will be required to mitigate risk and entice investment
• Oil & Gas Exploration and Production – international companies will arrive in droves to bid on long-term contracts in this industry and other infrastructure projects – natural resource wealth will serve as collateral for direct foreign investment, crafted with financial instruments to guarantee performance of all parties
• Dollarization of Economy – happening now (by necessity) and likely to become an interim policy for the transitional government, remaining until economic stability is achieved
• Security, Public Safety & Bad Actors – upon regime change Nicolas Maduro, top level political cronies, Venezuelan military brass and security forces, Cuban influencers will depart, be taken into custody and/or fracture into formidable elements bent on survival until they are dealt with depending on agreements, reconciliation attempts and public sentiment. Under Hugo Chavez, many private businesses were expropriated and handed over to military brass, thereby politicizing the armed forces and empowering leaders to manage graft and their own enrichment – Colectivos, Cuban-style civil obedience enforcer groups will be disbanded and disarmed – Colombian guerilla groups (FARC) operating in Western Venezuela on the Colombia Border and (ELN) profiteering via wildcat gold mining mainly in Eastern Bolivar State, likely dealt with via limited military incursion
• Military Rank & File – lower level officers and their subordinates will be needed in restructuring the National Guard and Security Forces loyal to the transitional and future governments – prior to the ascension of Hugo Chavez, the armed forces were a neutral body, expect a future Constitution to restore that status
• Socio-Economic Inequality – fighting corruption and inequality (not socialism) were the principal planks of Hugo Chavez’s original campaign in 1998: a winning message resonating with the vast-majority of the population, desperate for relief from the scourge of corruption and perpetual relegation into poverty – no solution can be considered “long-term” without addressing these issues in a way which instills confidence and trust within the disenfranchised
• Chavismo as a Political Force – Hugo Chavez was a charismatic phenomenon, and a logical human response to many decades of poor governance and disregard for the masses by the “connected elite”. To that end, Chavismo will never die in Venezuela because it represents “gained ground”, hope and true representation for those previously marginalized. Much like the FARC peace accord of 2016 in Colombia, a “reconciliation with reality” is required to lend legitimacy and empower the political voice of those who subscribe to the fairness principles of the Chavismo vision
• Culture of Corruption & Descension into Criminality – a sensitive issue in any country, but very real and thriving in Venezuela decades before the emergence of Hugo Chavez, the Socialist rhetoric and grandiose projects during the early years (perfect with abnormally elevated crude-oil prices) fueled even more opportunities for graft by cronies and a newly politicized military elite charged with managing confiscated private businesses. By the time President Chavez was diagnosed with pancreatic cancer (2011), he was already surrounded by a close-knit group of beneficiaries and enablers who were so entrenched and enriched via their corruption, there was no breaking their grip on power: enter Nicolas Maduro (2013). For the self-proclaimed “Son of Chavez”, hapless to prevent the downward spiral of institutionalized corruption & criminality, finding new revenue sources was a priority. In the last several years, wildcat gold mining, the drug trade and “refuge for protection” deals with Colombian rebel groups have provided much-needed cash flow, as have massive loans from China and Russia based on repayment via natural resources yet to be extracted. Ineptitude, greed and a willingness to remain in power “at all costs” has ensured a recovery cannot succeed under the Maduro regime, and led to US Sanctions (August) currently stifling all forms of trade and designed to force imminent change
• Crimes Against Humanity – repression and Human Rights abuses on a criminal scale have now been officially documented (July) by the United Nations OHCHR* – including 6,800 “resistance to authority” killings in 2018 alone – leaving many in the highest circles of power petrified of their likely fate and seeking to make eleventh-hour deals – when the boxes are checked for outside forces to take action in recovery of a failed State, this ranks highly
• Organization of America States & TIAR* – last week the OAS convened to discuss and approve the request of the Venezuela Interim-Government, led by Juan Guaido, to invoke the “Inter-American Treaty of Reciprocal Assistance”, allowing for military intervention into Venezuelan Territory – this does not mean it will happen, but now serves as another pressure point on the Maduro-Chavista regime. In my view Colombian Armed Forces will cross Venezuela’s Western Border (at some point) in pursuit of FARC guerillas who receive safe-haven there – current political rhetoric out of Colombia alludes to the threat
• Plan Pais & Institutional Change – identifying the need for rebuilding Venezuelan institutions across all sectors – public & private – this organization’s roadmap serves as the basis of public discourse by National Assembly Member & Interim President, Juan Guaido, and on behalf of Venezuela’s opposition government. The most contentious and complicated issue, without question, will be the reversal of private property and business confiscations, a common policy tool of the Chavez Regime in the 2002-2008 period

As I position my company to participate, lead and partner in reconstruction efforts, it’s critical we share relevant experience, cultural knowledge and recent events to assess opportunities and create realistic expectations. Contact me at your convenience to discuss your interest and how we may partner.

*Links and References –

Francisco Monaldi (Plan Pais event, Tampa, March 23^rd) – https://youtu.be/zZ2ioUHQgds

Hiram Gaviria (Plan Pais event, Caracas, February 1^st) – https://youtu.be/rCNbMPS2L7A

Washington Post (September 15^th) – OAS Treaty Invoked   https://www.washingtonpost.com/national-security/fears-of-military-conflict-between-venezuela-and-colombia-as-tensions-over-maduro-government-escalate/2019/09/15/c2a4ff88-d621-11e9-9610-fb56c5522e1c_story.html?noredirect=on

Bloomberg (August 2^nd) – US Blockade/Quarantine – https://www.bloomberg.com/news/articles/2019-08-02/u-s-headed-toward-blockade-of-venezuela-trump-official-says?utm_campaign=socialflow-organic&utm_source=twitter&cmpid%3D=socialflow-twitter-politics&utm_medium=social&utm_content=politics

Wilbur Ross (August 1^st) – US Commerce Secretary – https://www.reuters.com/article/us-usa-venezuela-reconstruction-idUSKCN1UR4GS

United Nations Human Rights Council, OHCHR Report (July 5^th) – https://news.un.org/en/story/2019/07/1041902

Plan Pais – Tampa Event Summary (March 22^nd – 23^rd) – https://www.planpais.com/segmentos2019.html