We Fight for Oil

Ludwell Denny

CHAPTER SIX
Standard Arrives Late in Venezuela


VENEZUELA has suddenly emerged as one of the important oil fields of the world.119  It ranked second to the United States in monthly production in November 1927.  In that year it almost doubled its output, and with a total of 64,400,000 barrels edged Mexico out of third place.  Now it is racing Russia.  Hence the Dutch-Shell and Standard struggle is being carried on in that South American country with vigour and bitterness.

The importance of Venezuelan wells is enhanced by the favourable position of the country.  It is close to the Panama Canal, on the short-cut route to the Far East markets, and 100 miles nearer than Tampico, Mexico, to New York and 800 miles nearer London.  Venezuelan oil was put to a severe test in 1927 when forced to compete on the United States market with low-priced American oil resulting from over-production in the new fields of west Texas and the Seminole.  The Venezuelan product was put down in New York at $1.10 a barrel, or 20 cents less than Texas crude.

Mr. Deterding’s organization was first on the ground.  British Controlled Oilfields followed.  Standard (Ind.) arrived four years later in 1922.  Then came the Gulf interests of Andrew Mellon, United States Secretary of the Treasury.120  Despite this time handicap American companies are now passing the British in output.

Political conditions are similar to those of Mexico in the days of Diaz.  General Juan Vicente Gomez, President since 1908, gives the country a dictator’s reign in which the rights of labour are restricted and foreign capital is favoured for a consideration.  The British drilled into the Gomez regime and grabbed the best oil lands before the Americans realized the importance of Venezuela, just as the Americans had done in the Mexico of Diaz.  Like Diaz, however, Senor Gomez has found it expedient to balance the monopolistic power of one foreign group by letting in a second group, in this case American.

Lawless methods of competition, running into violence, are charged against British and Americans.121  Political graft has a part in obtaining and holding concessions.  Much of the land is unsurveyed wilderness, hence disputed titles and bribery.  The gushers of the La Rosa-Lagunillas district at Lake Maracaibo are in the state of Zulia, which is relatively inaccessible and far from the capital, Caracas.  President Perez Soto of Zulia boasts of his alliance with foreign oil interests.  Separation of Zulia from Venezuela is favoured by certain American companies fearing the fall of Gomez.

Petroleum and mineral rights are vested in the Federal Government.  This is traditional, dating from colonial days when the Spanish Crown granted land titles but retained the mineral resources.  Under the present law the landowner has no vested subsoil rights.  Concessions granted by the Government are limited by the hydrocarbons law of 1925 to 40 years.  Royalties, from which the Government received $4,000,000 in 1927, range from 7½ to 11¼ per cent.  There is no corporation tax.  Other oil taxes include 10 per cent on production at market value, and small taxes on export, tanker clearance, exploration, and exploitation.

After passing mining laws not entirely satisfactory to foreign capital, the Venezuelan Government in 1922 called in American and British oil men to write a law practically to suit themselves.  With only slight changes this foreign draft was enacted and oil capital began to flow into the country as desired.  Satisfactory arrangements were made regarding old concessions of foreigners, which had been adversely affected by a regulation of 1920.  The 1922 law, rewritten without basic changes in 1925, is praised by the companies as a model for all other Latin American countries.

But foreign companies fear that Venezuela, either under Gomez or his successor, may follow the Mexican lead and take a heavier toll by taxes and restrictive legislation.  The abortive student-military rebellions of February and April 1928 increased this foreign fear of a future “radical” regime.  Labour problems grow increasingly serious, though the predominantly Indian population has achieved no strong labour organization.

Transport difficulties are the chief immediate obstacle.  The present producing area is the Lake Maracaibo basin, covering about 30,000 square miles in the north-western part of the country.  Moving sand-bars at the lake outlet to the sea block passage of ocean tankers.  Specially constructed lake tankers are required for import of material to the fields and export of crude.  Pipe-lines to the coast and extensive lake-channel dredging operations are planned, but for several years the companies expect to depend upon the present method of transport.  Lake tankers now building are expected to permit an increase in export, and therefore of production, to about 90,000,000 barrels in 1928.  Limited transport necessitates restricting output in all fields of the basin, and caused complete closing of the La Paz-Concepcion wells during most of 1927.  Potential production in 1927 was 250 per cent greater than transport capacity.  This situation forced American and British companies in that year to enter a short-lived production curtailment agreement in the La Rosa and Lagunillas districts.  The competitors are pushing exploration and initial drilling in the race which is extending over practically the entire northern half of the country.

Standard of New Jersey in 1928 obtained control of the Creole Syndicate and has option on or ownership of immense areas in the undeveloped provinces.  Into this concern Standard put $8,000,000 of working capital.

Dutch-Shell acquired ownership in the Mene Grande field of the Maracaibo basin and began small scale production in 1917, through its subsidiary, Venezuelan Oil Concessions.  Mene Grande produced 9,000,000 barrels in 1927.

In the period of 1918-20 British Controlled Oilfields, under tutelage of the London Government, bought up as much Venezuelan land as it could.  This included a large tract, still undeveloped, in the eastern Orinoco Delta region.  Of more importance it acquired the Buchivacoa concession in the Maracaibo district, covering 15,000 square miles.  Being essentially a political company without producing experience, British Controlled spent much money without being able to develop this extensive tract.  It chose the safer method of permitting Standard to prove and develop the eastern part of the concession for it on a 12½ per cent royalty basis, under careful time and other restrictions.  A better portion of the concession was leased or sold under restrictions to Dutch-Shell.  The remaining western part of Buchivacoa was developed slowly and inefficiently by British Controlled.  At this same time Anglo-Persian, Dutch-Shell, and Standard were taking up open lands, and Gulf was coming in on a large scale.

While Dutch-Shell dominated production in 1922, its share fell to 53 per cent in 1927.  The two American companies took 46 per cent, with Standard leading Gulf.  American development in that year was especially rapid.  Dutch-Shell subsidiaries, Venezuelan Oil Concessions and Caribbean Petroleum, produced 2,000,000 barrels in November 1926, compared with Standard’s 550,000 barrels.  A year later when Dutch-Shell ran 3,000,000 barrels, Standard had risen to 2,000,000 and Gulf to 1,500,000 barrels a month.

These three largest producers are restricting expenditures in their Mexican fields and borrowing additional capital for Venezuelan expansion.  The Standard subsidiary, Pan-American Petroleum and Transport Company, one of the largest Mexican producers and parent company of Lago Oil and Transport through which Standard operates in Venezuela, borrowed $7,000,000 late in 1927 for use in Maracaibo.  Gulf is building tankers, wharves, and concentrating capital for new drilling.  Atlantic Refining in the same year acquired half interest in the Andes Petroleum tract of 4,000000 acres.  California Petroleum and Union Oil of California contracted late in 1927 to spend $7,000,000 within six years in developing 1,500,000 acres on the Pantepec Oil tract.  Anglo-Persian plans extensive developments on its large tract in the State of Falcon, near the Caribbean, where light oil is flowing.

Profits mount despite transport obstacles.  Dutch-Shell’s subsidiary, Venezuelan Oil Concessions, in 1927 paid a 55Y2 per cent dividend, besides a 15 per cent dividend to its holding company.  It earned $3,400,000 on $10,000,000 working capital.  General Asphalt, a British Trinidad concern selling its Venezuelan output to Dutch-Shell, in the year 1926-27 earned $2,000,000 on a working capital of $6,500,000.  Trinidad Leaseholds paid a 27½ per cent dividend, besides providing capital for British expansion both in Trinidad and Venezuela.  Apex [Trinidad] Oilfields paid an 80 per cent dividend in 1926-27.  Standard’s subsidiary, Lago,122 earned in the year 1927 nearly $8,000,000 on a working capital of $3,500,000.  Shares in some of these British and American operating companies increased in value about 600 per cent from 1924 to 1927.

American success in the production and profits race does not mean, however, that British companies have been driven from their dominant position.  Most of the acreage of proven lands is still owned by Dutch-Shell and British Controlled Oilfields.  British policy requires that much of this land remain undeveloped until present operating fields are exhausted.  Even in some producing fields, the British restrict production more than the transport limitations require.  They expect American companies to be as prodigal and short-sighted in Venezuela as in the United States.  Under provisions of the petroleum law by which half of land originally explored by a concessionaire must revert to the State, Americans may get some of the present British land if they are on better terms than their competitors with the Government.

Fearing a radical Government may come into power when the dictator Gomez dies, British and American companies hesitate to invest capital in refineries there.  Dutch-Shell, British Controlled, and Standard have only very small “topping” plants in that country.  Sir Henri chose the neighbouring Dutch West Indies.  His refinery at Willemstadt, Curacoa, handles most of his company’s Venezuelan production.  Dutch-Shell in 1928 completed another refinery at Oranjestadt, Aruba, which will also treat products of its Mexican Eagle subsidiary.  Standard has a terminal at St. Nicolas Bay, Aruba, where its Venezuelan oil is transferred from Maracaibo barges to sea tankers.

Standard is manoeuvring for a privileged position with the Caracas Government in connexion with the refinery issue.  The Government resents the Deterding policy of refining crude products outside the country, thus enriching the Dutch West Indies at the expense of Venezuela.  A 30 per cent surtax is levied on re-imports for domestic consumption from the Indies.  Standard must build a refinery somewhere soon.  The Government is anxious that this $10,000,000 to $20,000,000 investment be retained in Venezuela.  Unless Standard can make a satisfactory deal with President Gomez, which will aid it in future conflict with Dutch-Shell over concessions and titles, the Rockefeller company intends to erect its large refinery on the Dutch island of Aruba, near its present terminal.  Minister of Interior Arcaya in a memorial to Congress in 1927 indicated the Government will discriminate in favour of companies maintaining terminals and refineries within the country.  On this basis Standard hopes to dominate Venezuela in the future as Dutch-Shell has in the past.



 

119. Cf., Tulsa Oil and Gas Journal, Dec. 29, 1927, pp. 49. 113, 274.  Commerce Department, Commerce Reports, Dec. 5, 19, 1927, April 9, 1928. Petroleum Facts and Figures; supra, pp. 33-35.  Unless otherwise credited, statistics in this chapter are from Commerce Department publications, including Commerce Reports and Foreign Trade Notes, April 1927-April 1928.

120. Cf., New York Wall Street Journal, Jan. 6, 1928, for Gulf Oil Company organization.

121. Cf., London Contemporary Review, December 1927.  New York Foreign Affairs, October 1927.  New York Nation, April 25, 1923, article by Mauritz A. Hallgren.

122. New York Wall Street Journal, Nov. 15, 1927, April 18, 1928.