Beneath the banks of the Orinoco River in eastern Venezuela lies one of the largest hydrocarbon reserves in the world, a source of oil with enormous potential but with one major complication: All the crude that has been extracted from it is extra heavy, and contains high levels of sulfur and mineral residue. In 1991 and 1992, after a number of technological and financial failures, the state oil company, Petróleos de Venezuela (PDVSA), signed 11 letters of intent with transnational oil companies interested in pumping the extra-heavy crudes of the long strip of land, known as the Orinoco Oil Belt. From 1993 through 1998, Venezuela’s Congress approved the creation of four mixed enterprises to extract these crudes and then convert them, with water and a stabilizing agent, into a usable fuel called—after the river of its origin—”Orimulsion.” With the help of generous, Congressionally authorized tax breaks justified by an arrangement called “Strategic Associations,” the companies reduced the costs of pumping and improving the heavy crude to the point of economic viability, and began producing both Orimulsion and more conventional crudes. Orimulsion has been marketed as a substitute for coal in thermoelectric plants, and has also begun to be used as a substitute for standard fuel oil. While the new fuel has enjoyed only partial marketing success, PDVSA has great hopes for its future profitability.
PDVSA formulated the “Strategic Associations” program during the 1990s as part of the government’s Apertura, or “Opening” to global investment in the oil industry. Strategic Associations production-development plans in the Orinoco Belt have been less criticized than other forms of the Opening because they have been successfully promoted as “special cases” that serve the public interest. The technological challenges of extracting the heavy crudes have been great; so have the needed levels of investment. But other problems remain for Venezuela as it attempts to exercise sovereignty over its principal natural resource. Control over the project has been ambiguous, and to guarantee profitability to the transnationals, the state’s fiscal sovereignty—its ability to tax the transnationals—has largely been sacrificed.
A more controversial arrangement under the Opening is called “High Risk and Shared Profits.” Under this scheme, private capital is invited to participate in the exploration and extraction of conventional crude oil, the traditional core of the Venezuelan industry. In July 1995 Congress approved a framework within which these associations might be approved, and some six months later, 10 areas were opened for bidding, representing nearly 2% of the national territory. Private companies were asked to bid on the level of an additional tax—called State Participation in Profits (PEG)—they would be willing to pay for the right to do business in Venezuela. The maximum PEG was set at 50% of net profits. When bidding ties occurred, an additional round was held at which another bonus was offered. After an intensive week of bidding, two of the 10 areas were left without takers, and the remaining eight were acquired with PEGs of between 29% and the maximum 50%, plus bonuses. By definition, the state retains its right to tax oil profits under this arrangement. But its control over the “High Risk and Shared Profits” projects virtually disappears.
Indeed, as Venezuela’s nationalist president, Hugo Chávez, enters his third year of government, the country’s desperation for foreign capital continues to conflict with its traditional desire to exercise sovereignty over its natural resources, particularly the resource that, for over a century, has virtually defined the Venezuelan nation—oil. Chávez is clearly determined to take oil policy in a more nationalist direction, but as he does so, the legacy of the Opening, and the global pressures to keep it in place, are powerful obstacles to his ability to act.
From the beginning, a cornerstone of Venezuela’s oil policy has been its determination to keep the industry accountable to the nation. Since the second half of the nineteenth century, a modern oil industry has developed, devoted to the exploration, extraction, refining and transportation of petroleum. But not until the twentieth century did oil begin to establish itself as the principal industry of the country. In 1913, the first oil field was established. The following year the first of the very large fields—the giant Mene Grande—was discovered, and in 1918 oil appeared in official statistics as an export product.[1] The dramatic confirmation of Venezuela’s enormous oil potential came in December 1922 with the violent eruption of the exploratory well, Barrosos-2: For nine consecutive days, it gushed 100,000 barrels every 24 hours.
Since those early days, the country has engaged in a search for a coherent oil policy that would achieve two central objectives: the greatest possible benefits for the nation as a whole, and the growth of the state’s role in the administration of the industry. In short, the state has attempted to maximize its oil rents and increase its own capacity for intervention, all by way of careful negotiations with the transnational oil industry. And though there have been moments of tension between the state and the industry, the two sides have been careful never to bring those tensions to the point of rupture. Lessons were well-learned following the international reprisals against Mexico and Iran, when first the government of Lázaro Cárdenas (1938) and then Mohammed Mossedegh (1951) decreed the nationalization of oil in their respective countries.[2] Indeed, memories of the U.S.-imposed isolation of Cárdenas and the CIA’s overthrow of Mossedegh loomed large when Venezuela helped form the Organization of Petroleum Exporting Countries (OPEC) in 1960 and carefully nationalized its oil industry in 1976.
OPEC was formed for the purpose of defending oil prices in international markets. It was founded in Baghdad under the leadership of energy ministers Juan Pablo Pérez Alfonzo of Venezuela and Abdullah Tariki of Saudi Arabia. Venezuela, Saudi Arabia, Iran, Iraq and Kuwait were the founding members, and in its first resolution, the group affirmed its commitment to stabilize international oil prices by taking concerted actions on levels of production.[3] In the same year, the government of Rómulo Betancourt founded the Venezuelan Oil Corporation (CVP), the country’s first state enterprise charged with directly participating in all phases of the oil industry. To accompany OPEC’s defense of international oil prices, the CVP was created as a structure that would manage the state’s growing intervention in the oil industry at home.
Nationalization took place in 1976, during the first administration of Carlos Andrés Pérez, leaving all the private firms licensed to operate in the country fully compensated and converted into 15 newly formed state companies. Overall management of the industry’s activities was the responsibility of a new state enterprise, PDVSA, created as a central company with 14 affiliates, including the previously created CVP. Aside from the CVP, the affiliates were the former licensees, transfomed into newly formed divisions of the state corporation, and the industry was organized just as it had been before nationalization. Thus, Standard Oil became Lagoven; Shell became Maraven; Mobil became Llanoven, and so on. Ten other affiliates were created, all with names ending with “ven.” This irrational organizational structure was defended with the argument that nationalization should produce as little alteration as possible in the old operating activity. In 1977, the first reorganization took place, reducing the affiliates from 14 to seven, as the largest absorbed the smallest. Later that same year, they shrank to five and, by 1986, to three: Corpoven, Lagoven and Maraven.[4]
This organizational structure, according to the nationalization law and the Presidential decree that created PDVSA, had three clearly defined levels of administration, each with its own responsibilities. The highest level, the national executive, embodied in the Ministry of Energy and Mines (MEM), was given the task of defining general policies for the sector. An intermediate level, exercised by PDVSA, had broad powers of coordination, supervision and control over the operators. At the lowest level, the operating affiliates were charged with directly executing the industry’s plans and programs.[5]
This operating scheme, with its seemingly clear division of labor at each level, has sometimes been fraught with tension. Above all, post-nationalization conflicts between the Executive and PDVSA have typically been presented to the public as contradictions between the “political objectives” of the government and the “entrepreneurial goals” of the industry. Growing pressure on the industry to act “more like a business” led—until the advent of the Chávez government—to the gradual displacement of policy design from the MEM to PDVSA.[6] Under the direction of PDVSA, the Oil Opening of the 1990s was a form—and perhaps the most important one—by which Venezuela uncritically responded to the demands of globalization over the past decade. With the Opening, a process began that included the transfer of important activities of the country’s petroleum industry from the public to the private, fundamentally transnational sector. What’s more, with the Opening, the autonomy of the state oil company, PDVSA, was reinforced.
The process actually began in the 1980s, most dramatically when Lagoven, one of PDVSA’s affiliates, discovered four major offshore natural gas fields just off the northeast coast, under the Caribbean floor. Lagoven and a private partner, Shell International Gas Limited, did a preliminary study to evaluate the commercial feasibility of exploiting the fields and exporting the liquid gas to the U.S. market. Findings led to the Christopher Columbus Liquid Gas Project, which became emblematic of the intense struggles that peaked in the 1990s—and continue into the 2000s—over the role of transnational capital in the country’s oil industry. Besides the usual commercial uncertainties, several legal obstacles had to be overcome for Christopher Columbus to get off the ground. First of all, the joint venture turned out to contradict certain aspects of the 1971 Law Reserving the Natural Gas Industry to the State (LREIGN)—a law that, as its name indicates, reserves to the state the right to extract all natural gas from hydrocarbon fields. In addition, the 1967 Hydrocarbons Law had established procedures for approving public-private, joint-production contracts that made those agreements difficult to negotiate.
To overcome these obstacles, Lagoven took the case to the Venezuelan Supreme Court in November 1990, arguing that critical portions of the LREIGN interfered with national development and should be nullified. In April 1991, the Court found for Lagoven, opening the the door not only for the Christopher Colombus Project but for the decade-long Oil Opening.[7] Lagoven and its parent body, PDVSA, nurtured the project, and in 1993, amid a severe political crisis and an unstable transitional government—President Carlos Andrés Pérez had just been removed from office for misappropriation of funds—Congress approved the partnership of Lagoven with Shell, Exxon and Mitsubishi. The Christopher Columbus Project, two-thirds privately owned, was granted the right to produce, liquefy and export the free gas from the off-shore deposits discovered by Lagoven.
Then, unexpectedly, in December 1996, the project was put on hold for five years for commercial reasons. The postponement probably signalled the death of the Christopher Columbus Project, but even so, the project’s legacy was enormous: Not since nationalization had such important innovations been seen in the “uses and customs” of petroleum practices. In the years following the 1976 nationalization of the oil industry, “mixed enterprises” had been deemed state-controlled only if the state managed more than half the firm’s capital. With Christopher Columbus, however, state control meant control over only a third of the enterprise. The law was also bent to allow the partnership a longer life span than previously allowed for such joint ventures. International arbitration was permitted to resolve conflicts, thus bypassing Venezuelan courts. The project’s tax burden was reduced from 67% to 34%—the level normally reserved for non-petroleum activity—and foreign investors were protected by a regulation mandating that Lagoven compensate any partner who might be damaged by changes in Venezuela’s tax laws. In short, the country’s desperation for foreign capital had trumped its desire to maintain control of its oil.
The expansion of oil production that the Opening promoted was rationalized by optimistic short- and medium-term projections about the behavior of the international petroleum market—specifically that year after year, demand would increase 1 or 2% annually. But if there is one certainty about international energy markets, it is their uncertainty. Projections about prices, demand and productive capacities have constantly been overtaken by events, demonstrating that any projection about market behavior must be made with great caution. Sure enough, at the tail end of the Opening, as Hugo Chávez took office in February 1999, the price of the Venezuelan “basket” of crude oil and related products had plummeted from its 1997 average of $15 a barrel to an average of $8.43 a barrel.
In short, the Opening proved unviable in the face of the collapsing oil prices of the late 1990s. By that point, it had become apparent that the goals of the Opening would sooner or later lead to a confrontation with OPEC, to whose goals Venezuela said it was still committed. Under the Opening, tensions with OPEC would always be present.
Before Chávez’s triumph in the 1998 elections, he had gathered a group of advisors who opposed the oil policy of the Opening. This permitted him, at the beginning of his rule, to install a team of MEM leaders with a distinctly different approach from the one that prevailed through the previous decade. MEM’s Minister and Vice Minister, Alí Rodríguez and Alvaro Silva Calderón, respectively, were the key advocates of this new approach. As president of the Commission on Energy and Mines of the Chamber of Deputies during the first years of the Rafael Caldera government, Rodríguez, a member of the leftist party Homeland for All (PPT), opposed Caldera’s liberalized oil policy. Silva Calderón has long been an important player in drawing up the country’s oil laws, including those of the 1970s nationalization period. (In early January, as we go to press, Rodríguez has been named Secretary General of OPEC, and Silva Calderón has moved up to be Minister of MEM.)
At the outset of Chávez’s rule, the most important task facing the new team was the need for prices to rise to their former levels. One of the first measures taken to achieve this objective was the strengthening of ties with the OPEC countries and independent producers like Mexico and Norway. The new government adjusted production to comply with the 525,000-barrel reduction that the outgoing government had agreed to in response to the drop in prices beginning in late 1997. In March 1999, first in a meeting in The Hague with the energy ministers of Saudi Arabia and Mexico, and later at an OPEC meeting in Vienna attended by new MEM Minister Rodríguez, Venezuela committed itself to a further reduction of 125,000 barrels.
Since the September 1999 meeting, Rodríguez has proposed to the organization the idea of permitting OPEC to increase or decrease its global production if prices go above or below an agreed-upon range. This past March, OPEC finally adopted the price range, and fixed it at $22 to $28 for the equivalent of a barrel of crude—the OPEC “basket” of oil production. Since its implementation and after a production increase agreed to in April 2000, this policy has led to adoption of four subsequent increases of 500,000 barrels each (except in September, when it was 800,000 barrels), shared proportionally among the various countries. With these increments, the Venezuelan quota went from about 2.8 million barrels a day in April to 3.1 million in early November.
There is no doubt that prices have been vigorously strengthened. Nevertheless, it is difficult to precisely quantify how much this strengthening emanates from the new policy. Other factors, external to OPEC, have also contributed to the steady rise in prices since February 1999. Economic recovery in southeast Asia and, most recently, the sharpening of the Arab-Israeli conflict have also been major variables in the complex equation of oil prices. OPEC has argued that the high current prices result mainly from the scarcity of final oil-derived products, and not the scarcity of crude. In the United States, for example, refining capacity has fallen from 19 million barrels a day in 1981 to about 16 million today. Although there is an evident connection between the price of final petroleum products and that of crude, the connection is not so direct, since crude accounts for less that half the price of derived products. Furthermore, as taxes comprise a large percentage of the final price in the industrialized countries, high oil-consumption taxes have also created higher market prices for petroleum products.[8]
And in addition to limitations on refining capacity, high taxes and high shipping costs, the futures markets of New York (Nymex), London (IPE) and Singapor (SMEX) have played a key role in determining oil prices. These markets, driven by speculation on future crude oil sales contracts, have grown appreciably over the last 20 years, and have been known to negotiate the contracts for more than 150 million barrels a day, about double the real world demand of approximately 76 million. Expectations generated by the arrival of winter in the principal consuming countries, combined with deepening conflict in the Middle East over the past two years, have produced an artificial growth of future demand with a corresponding increase in price.
But in any case, we should recognize that OPEC’s current discipline and cohesion gives that organization important regulatory ability in a global oil market whose non-OPEC members generally produce at maximum capacity. And even though OPEC has had difficulty trying to reduce prices in recent months while showing considerable efficiency when its members felt they needed raising, no longer does the organization seem to be trying to get the highest possible price for raw materials regardless of consequent damages to the producing countries.
What’s more, during the past year, the group became a recognized participant in a dialogue between producers and consumers. Late this past October, outgoing U.S. Energy Secretary Bill Richardson spent two days in Caracas to meet with his Venezuelan counterpart, Rodríguez—who then also held the rotating presidency of OPEC. At this meeting, Richardson expressed his satisfaction with the increase in production of crude oil by the OPEC countries that had been announced for the end of that month in accordance with the price-range policy. Richardson also sent his best wishes to the Seventh Annual Energy Forum, a meeting held in Saudi Arabia in late November between groups representing both consumer and producers.
Since Hugo Chávez took office, Venezuela has been much more committed to OPEC and its policies than in recent years, and this past September in Caracas, for only the second time in its 40-year history, the group convened the political leaders of its member countries for a Summit of OPEC Heads of State and Government. Chávez welcomed eight of the 11 political leaders of the organization’s member countries, as well as high-level delegations from the remaining three countries. In addition, delegations from oil exporting countries who are not OPEC members, such as Mexico, Norway, Russia and Angola, attended as special invitees.
The Summit produced an image of a coherent, revitalized organization, as well as a unanimously approved document called the Caracas Declaration. The Declaration reaffirmed positions shared since the early days of OPEC and also incorporated new positions responding to important changes in the world economy, and more particularly, to changes in the international oil market.
The resolution begins by ratifying the group’s original commitments: first and foremost, defending the interests—individual and collective—of the member countries; preserving and improving the role of oil in satisfying the energy demands of the world; optimizing the general economic benefits obtained by exploiting hydrocarbons; developing policies that contribute to stabilizing the oil market with compensatory prices that are competitive with other energy sources; developing a production policy that assures “equitable” participation for the organization; promoting cooperation between national oil companies and the international oil industry; strengthening cooperation between the organization and non-member producing countries. The heads of state also reaffirmed OPEC’s promise to take into consideration the problems of developing oil-consumer countries through individual aid programs and by strengthening the OPEC Fund for International Development and the International Fund for Agricultural Development. They also promised to carry out efforts to diversify their own economies.[9]
Just a few weeks after the Summit, top-level representatives from Venezuela and ten Central American and Caribbean countries met in Caracas for the signing of a document agreeing to lower the oil bill of the signatory countries when the international price of crude becomes high. When the average annual price exceeds $15 per barrel, the signatories agreed, part of the oil bill can be paid in installments over a 15-year period, with an initial grace period, and at a very low rate of interest. The possibility that part of the bill could be paid with goods and services was left for further discussion. On October 30, barely two weeks after the accords were signed, Fidel Castro paid a four-day visit to Venezuela, and Cuba became the eleventh country to sign on to the agreement. Cuba, whose rapidly growing tourist industry has made it the largest energy market in the Caribbean, signed a contract committing Venezuela to supply up to 53,000 barrels a day.
These examples of recent oil diplomacy are not the only changes in oil policy to be implemented by the Chávez government. In fact, petroleum is the area in which the new government has so far gained its most important economic achievements. These achievements have given Chávez the time and resources to set in motion what might be called a popular model of development. Among the changes has been a shifting of the center of oil-policy design. Following nationalization, as we have mentioned, this center moved toward PDVSA, so that during the 1990s—and specifically during the second half of the decade, with the full development of the Oil Opening—formulation of oil policy was firmly in PDVSA’s hands. Since the beginning of Chávez’s presidency, however, responsibility for the design and implementation of policy has been moving back to the Ministry of Energy and Mines, reinforcing the idea that industry strategies have goals that go beyond simple profitability.
The orientation of the new oil policy has clearly been nationalistic, demonstrating the state’s recovered ability to defend Venezuelan interests. The rebound of prices in 1999, followed by strong increases throughout 2000, was due in part to OPEC’s ability, once again, to stabilize prices in the global petroleum market. The resulting growth of fiscal revenues has allowed the government to mitigate the severe economic crisis that the country has been suffering since the early 1980s, and it has even generated some indicators of recovery.
This oil policy, and the increased fiscal income it generates, underpin the entire Chávez project. Public investments and the employment they bring, for example, in education, health, housing and infrastructure, are necessary not only to sustain expectations of improved living conditions for the poor, but to generate the human and physical capital necessary for future economic development. At least in the short run, oil income is crucial to maintaining a public consensus about the sociopolitical project underway. Oil policy, for these reasons, has played a key role in Chavez’s government, and it will continue to do so.
ABOUT THE AUTHOR
Luis E. Lander is a social researcher at the Economics and Social Science Faculty at the Central University of Venezuela (UCV). His most recent contribution to NACLA was “Refounding the Republic: The Political Project of Chavismo” with Margarita López-Maya in the May/June 2000 issue. Translated from the Spanish by NACLA.
NOTES
1. Efraín E. Barberii, De los pioneros a la empresa nacional 1921-1975 (Caracas: Departamento de Asuntos Públicos de Lagoven S. A., 1997), pp. 35-44; Aníbal R. Martínez, Cronologías del petróleo venezolano (Caracas: Ediciones Foninves, 1976), pp. 57-69; Luis Vallenilla, Auge, declinación y porvenir del petróleo venezolano (Caracas: Monte Avila, 1990), pp. 40-60.
2. Daniel Yergin, La historia del petróleo (Barcelona: Plaza & Janes, 1972), pp. 359-367, 595-621.
3. Resolution #1 of OPEC, September 14, 1960, cited in Vallenilla 1990, p. 589.
4. Juan Carlos Boué, Venezuela: The Political Economy of Oil (Oxford: Oxford University Press, 1993), pp. 17-23.
5. Venezuela: The Political Economy of Oil, pp. 23-26; Jesús Mora Contreras, “La Apertura petrolera venezolana: un proceso inconcluso de cambios de estructuras,” Investigación Económica (Mexico: July-September, 1995), No. 213, pp. 130-135.
6. Former PDVSA president Andrés Sosa Pietri, for example, recounts his tense relationship with MEM, and his constant struggle with the Ministry over the administration of the corporation. See Andrés Sosa Pietri, Petróleo y poder (Caracas: Planeta, 1993). Also see Bernard Mommer, “Venezuela, Política y petróleos,” Cuadernos del CENDES (Caracas, September-December, 1999).
7. Luis Vallenilla, La apertura petrolera, un peligroso retorno al pasado (Caracas: Ediciones Porvenir, 1995), pp.13-15.
8. Statement of Alí Rodríguez at the forum,”Venezuela y la II Cumbre de la Opep,” September 21, 2000, Central University of Venezuela, Caracas; OPEC, “Why you pay so much for Gasoline and other Oil Products,” http://www.opec.org, September, 2000.
9. OPEC, “Why You Pay So Much for Gasoline and other Oil Products.”
