When Hugo Chávez announced late last year that Chinese energy companies had been awarded access to oil reserves in Venezuela's Orinoco River basin, it seemed the mercurial strongman had moved one step closer to achieving his vision of a "new world order." President Chávez seeks a United States -- el imperio, in his terms -- with its ambitions severely curtailed and hemmed in by "[stronger] new poles of world power." In a 2009 visit to China, Chávez gushed: "No one can doubt that the center of gravity of the world has shifted toward Beijing.... A new world is being born,... the multipolar world that we have all dreamed about for a long time."
The charismatic Venezuelan leader has long envisioned his country's vast natural resources fueling the emergence of that "multipolar world." Unable to unseat the United States alone, Chávez plans to combine his country's hydrocarbon might with the economic and military strength of China. In return for access to energy supplies, China has agreed to loan billions of dollars to Venezuela, accepting repayment in oil. Unmentioned are the additional inducements likely accompanying these deals. Last year, Venezuela sent its first communications satellite into space and acquired three JYL-1 aircraft radar systems, all with Beijing's generous assistance.
And it is not just China that has been active in the Latin American country. Caracas also granted Russian companies blocks in Orinoco in February, with Chávez acquiring $2.2 billion in Russian tanks and anti-aircraft missiles on credit. Since 2005, Venezuela has spent $4.4 billion on Russian weapons, including fighter jets, combat helicopters, and 100,000 Kalashnikov assault rifles. The two countries recently held joint exercises in the Caribbean, bringing the Russian navy there for the first time since the Cold War. After calling this part of a strategic alliance with Russia, Chávez snickered, "Go ahead and squeal, Yankees."
But Chávez's plan is not quite working out as he hoped -- indeed, he has discovered it takes more than handshakes and public displays to get oil out of the ground and onto the market. Venezuela's decaying oil industry and mounting domestic problems have prevented the Chávez government from effectively tapping the country's reserves, even with Chinese and Russian help. And they have forced Chávez to invite back the private energy companies he pilloried as the "overthrowers of governments" just three years ago.
Venezuela's oil industry is in crisis. Mismanagement and lack of investment have caused production to fall from a high of 3.5 million barrels per day in 1998 (when Chávez was elected) to 2.5 million barrels today. With oil trading at half its peak 2008 value, el presidente's profligacy has emptied the state coffers. Blackouts are common; violent crime is rampant; and inflation is high and rising, forcing the currency's devaluation. In an ironic bit of timing, the power went out during one of Chávez's interminable televised speeches on Feb. 25, just as he started to lambaste former U.S. President George W. Bush. It flickered back on to reveal a stern Chávez glaring and being served a cup of coffee. Far from negotiating from a position of strength, Chávez needs investment and hard currency to stay in power.
The roots of his current predicament go back nearly a decade. In 2002, a coup attempt briefly removed Chávez from power. Less than a year later, in an effort to force the president to call early elections, thousands of managers and employees at PDVSA, the state oil company, shut down production and went on strike. Chávez responded by firing nearly 18,000 of them, replacing them with loyalists who swore oaths of allegiance to his government. The replacements sorely lacked the decades of experience working Venezuela's tricky oil systems that their predecessors possessed, leading to a critical shortfall in expertise.
Human capital is particularly important in Venezuela because of the nature of much of the remaining oil found there. Unlike the light, sweet crude found in West Texas, the North Sea, and Saudi Arabia, Venezuela's shallow Orinoco oil belt holds what's known as "extra-heavy oil" -- crude full of sulfur, coke, and metals. Special on-site refineries have to strip the minerals from the viscous, tarlike oil and dilute it just to make it soft enough to move via pipeline from the wellhead to a second refinery, which heats and treats the oil to remove the remaining contaminants. Only then -- after an expensive and energy-intensive upgrade -- is the oil ready for export and sale.