SDS-Website
Subversive
Oil
(To
be published as Chapter 7 in Steve Ellner and Daniel
Hellinger (eds.) Venezuelan
Politics in the Chávez Era: Polarization and Social Conflict,
Lynne Rienner, November 2002).
The
IV th
Republic,
as the political regime prior to 1998 has been posthumously baptized,
was torn apart by two subversive movements, one in the military and
the other in the national oil industry. The story of military
subversion is well known, but not the story of subversion in the
national oil company, Petróleos
de Venezuela, Sociedad Anónima (PDVSA). After nationalization of the oil industry in
1976, PDVSA became something of a ‘state within a state.’ Its
Venezuelan executives shared the outlook of international oil
companies, for whom they had worked for many years. Furthermore,
successive governments of AD and Copei during and after the boom
period of the 1970s failed to create a new efficient fiscal and
regulatory system, at the same time that they implemented disastrous
developmental policies characterized by poor planning and waste. This
ultimately led, after 1989, to the ‘oil opening policy’ (Apertura),
which put Venezuelan oil policy on a path toward re-privatisation of
the industry. It also put Venezuelan oil policy on a path toward
minimization of fiscal oil revenues. President Hugo Chávez arrested
the momentum, but the direction of oil policy remains very divisive
not only in Venezuelan society but within the Chavista
movement
as well.
There
are some remarkable parallels between the ways each of these two
subversive movements arose. Chávez founded his movement around 1982;
PDVSA executives embarked on their strategy of internationalisation in
1983. Internationalisation was devised by PDVSA to create a conveyor
belt to relocate profits out of the reach of the government through
transfer pricing (i.e., the price charged by one affiliate to another
affiliate in the accounts of the mother company). Both PDVSA
executives and Chávez and his followers believed that the current
political regime was beyond repair. In the judgment of both groups of
conspirators, the squandering of oil revenues played a crucial role in
this steady decline. Both the military and PDVSA took a moralizing
approach, blaming corruption for the crisis. The military dreamed
about saving the country; PDVSA executives dreamt about saving the oil
industry from the country.
Nationalization
in Venezuela in 1976 was the outcome of a long-term policy of
maximizing fiscal revenues collected from oil exports. For the last
two years prior to nationalization, for every dollar of oil exports,
the government collected 80 cents in rents, royalties and taxes. By
1970 the government had asserted a right to levy export taxes at its
sole discretion, effectively leaving the companies with nothing but a
regulated profit.
The
foreign companies were losing control of their businesses. They could
no longer maximize their own profits because additional earnings were
subject to appropriation by the government via the export levy. They
hardly resisted when President Carlos Andrés Pérez nationalized the
industry on January 1, 1976. However, only a few years after Pérez
left office, his plans to create ‘Great Venezuela’ and develop the
country through an overnight program of industrialization had failed
disastrously. PDVSA then began to develop its own ‘hidden agenda’
to break away from state control.
Nationalization
changed ownership
of
the oil industry but not, for the most part, management.
Prior to nationalization, there were three major foreign companies
operating concessions in Venezuela: Exxon, Shell, and Mobil. Over the
years, partly in response to political pressure, the companies
selected Venezuelan nationals for executive positions. These
executives accepted nationalization in 1976 only because they had no
choice. Once they were in charge of PDVSA, their prime objective was
to displace the Ministry of Energy and Mines (MEM), the traditional
steward of the ‘landlord’ state. The company certainly did not
have in mind the maximization of fiscal revenues (royalties, income
taxes, and export levies). On the contrary, once the ‘Great
Venezuela’ of Pérez had crashed, PDVSA sought to limit its own
fiscal obligations. The failures of development policy only reinforced
the company’s determination. Why generate fiscal revenues that would
be squandered anyway? Why maximize profits when the state would
inevitably siphon them into the Treasury? Instead, the company
concentrated on its own agenda: the development of the oil sector in
real terms, maximizing volume, turnover and sales (not profits) in all
the segments of the industry, both at a national and an international
level, at the same time that fiscal revenues were disregarded. PDVSA
thus undermined nationalization and paved the way for the return of
private investors. By 1989, when Pérez was back in office and
implementing his ‘Great Turnabout,’ which included the Apertura
to
foreign capital, an alliance emerged between the national oil company,
on the one hand, and the international oi1 companies and the consuming
countries, on the other. Contrary to what is widely believed, outright
privatisation was not the top priority of this alliance. The
international companies and the consuming countries were primarily
worried about dismantling the political and institutional framework
that had led to nationalization in the first place. That is, they
wanted to reduce the power of the state to maximize its share of oil
revenues and to control prices and supply. Their strategy was to put
in place a new governance structure designed to prevent the government
(in the form of the MEM) from ever again pursuing a strategy of
maximizing fiscal revenues. Only then would full-scale privatisation
move to the top of the agenda (Mommer 2002a). In the meantime, foreign
capital in association with PDVSA became again a major producer in
Venezuela. At present about 25 percent of Venezuelan oil is produced
in this form. According to the contracts signed under the terms of the
post-1989 period of Apertura,
this percentage will increase to over 40 percent by the year 2010 (Mommer
1998).
When
foreign companies controlled oil production and set prices, the state
was naturally vigilant over their operations. After nationalization,
vigilance seemed unnecessary. Worse, in response to the explosive
growth of oil prices and, hence, fiscal revenues in 1973/74, the newly
elected Congress passed an Enabling Law that gave President Pérez
complete liberty to spend the money at his discretion, in accordance
with his vision of a ‘Great Venezuela.’ In other words, Congress
shirked its most elementary and essential task: the control of public
finances. Pérez launched a series of huge investment projects,
nationalized the iron industry, and forced foreign capital out of many
other key economic areas, such as banking and chains of retail
commerce, while a system of state enterprises arose in the heart of
the new economy. Simultaneously, private Venezuelan enterprise was
marginalized. Fedecámaras, the peak organization of the business
community, had grown on the eve of nationalization into a politically
(even economically) relevant body. Once the foreign members of the
organization left, among them the international oil companies, what
remained was only a shadow of its former self.
During
the post-nationalization years, the government – or more precisely,
the President – appeared to hold all the trump cards. Fiscal income
from oil increased from $1.4 billion in 1970 (about ten percent of
GDP), to $9 billion in 1974 (a staggering 40 percent of GDP). Such an
influx relative to the nation’s productive structure was far beyond
the absorptive capacity of the economy. Worse, in the rush to build
his ‘Great Venezuela’, the Pérez government contracted
international loans, in effect spending future oil revenues on top of
huge current earnings. With foreign enterprises leaving, the capacity
of the economy to absorb capital was actually falling. The country did
not need the money of foreign investors at the time, but it certainly
needed their managerial skills in order to bring its ambitious
investment plans to fruition.
Thus,
at the end of the day, the government, isolated and helpless, was to
drown in its financial wealth. Political clients, not citizens or
business partners, surrounded the state, which was supposedly
possessed of magical powers to develop the economy (Coronil 1997).
This was a recipe for disaster. Congress never recovered control over
public finances; nor would the private sector ever recover its proper
role. Only foreign creditors were eventually able to force the
government and state enterprises to change policies, and then with
their own particular agenda. After 1983, there was only one strong and
working institution left standing within the national economy: PDVSA.
The lack of checks and balances was to become of consequence for this
company as its virtually autonomous status allowed it to go ahead with
its own particular agenda.
The
Internationalisation Policy of PDVSA and Transfer Pricing
PDVSA’s
first response to the implementation of exchange controls in 1983 was
its internationalisation policy (Boué 1997). In a last minute and
unsuccessful effort to contain the developing foreign debt and
currency crisis, the government fell back on the investment fund of
the company, totalling about $5.5 billion, which it had been allowed
to accumulate during the years of high prices. At the same time,
however, oil price hikes led to sharply falling demand and to ever
more restrictive OPEC quotas, which left the company no outlets for
new investments in Venezuela. In order to prevent the government from
appropriating its liquid assets again, PDVSA decided not to have any.
As
investing in the country was not feasible, accumulated profits had to
be spent abroad. But where could the money be spent at a time when
production was to be cut? The answer was PDVSA’s
internationalisation policy. In 1983 PDVSA bought its first share of a
foreign refinery (VEBA) in Germany. At the time, the company argued
that this refinery would provide a market for Venezuela’s heavy
crude, which were difficult to market otherwise. To this very day,
however, the German refinery has never processed heavy crude. Over the
years, PDVSA has supplied VEBA lighter crude oil that could have been
easily placed on the world market anyway. Furthermore, PDVSA has sold
the oil to its European interests at substantially discounted
‘transfer’ prices, thereby shifting a portion of its profits
beyond the reach of the Venezuelan government (Guevara 1983).
Some
politicians belonging to Acción Democrática (AD)
– Rafael Guevara and Celestino Armas – became aware of the
maneuver and raised the alarm in Congress, but to no avail. On the
contrary, the issue of transfer pricing was settled entirely in favor
of PDVSA when the government of President Jaime Lusinchi (1984-1989),
himself a member of AD, decreed that the company would henceforth set
its own prices. This decree gave the internationalization policy a new
boost. Subsequently, PDVSA shifted its attention to the U.S. market,
where it operates under the name of Citgo. Once again PDVSA bought
systematically into refineries, signing long-term supply contracts and
granting substantial discounts to its new affiliates for the purpose
of transferring significant portions of its profits abroad. In order
to ensure that this money was definitively beyond of the reach of the
government, the contracts were used as collateral to secure foreign
loans. Thus, before Chávez or any other future government can change
the terms of the contracts between PDVSA and its own subsidiaries, it
will have to cancel all of PDVSA’s debts, which now total nearly $10
billion.
This
goal of shifting profits abroad is the real motive for
internationalization and explains the unchecked growth of PDVSA’s
international refinery network, presently capable of handling about
two million barrels per day (b/d), and its retail business, consisting
of over 14,000 gasoline stations in the U.S. By the second half of the
1990s, PDVSA was remitting through transfer pricing an average of
about half a billion dollars annually from its domestic accounts to
its foreign affiliates (Mendoza Potellá 1995; Boué 2002). For
eighteen years after the beginning of internationalization, the
foreign affiliates of PDVSA never paid dividends to the holding
company in Caracas. But earning profits for the country was never the
objective of the policy in the first place. In December 2001 the Chávez
government obliged them to pay dividends for the first time.
In
the early 1980s, after world-wide demand began to flag, OPEC created a
quota system in an attempt to maintain high prices. Both PDVSA and the
financially troubled Venezuelan government started to look for ways to
minimize the impact of, or to bypass, these quotas. Thus, in 1983,
Venezuela began to measure production subject to quotas at refinery
gates and ports of exports rather than in the storage tanks of the
producing fields (as usual everywhere in the world for the purpose of
royalty payments). At the time, PDVSA promised MEM that it would
install modern meters in the fields. This never happened, despite the
repeated and formal protests of the Ministry over the next fifteen
years. As a result, MEM effectively lost its ability to monitor and
control levels of production of crude oil and natural gas, giving
PDVSA significant leeway to minimize its royalty payments.
PDVSA
looked for other ways to manipulate the definition of crude oil
subject to OPEC quotas: increasing production of the extra-heavy (i.e.
heavier than water) crude of the Orinoco Belt, by far the largest
reserves of its kind in the world. The company argued that Orinoco
deposits – which are processed into a product called “Orimulsión”
– did not fall under the definition of crude oil. (This assertion is
technically correct, as they do not constitute a liquid at normal
temperatures.) Therefore, PDVSA argued, the Orinoco Belt should be
classified as ‘bitumen’ and, hence, not be subjected to OPEC
quotas. In 2000, PDVSA produced approximately 100,000 b/d of Orimulsión
derived from about 70,000 b/d of extra-heavy oil – and it planned to
triple this figure in the near future.
After
1989, with the initiation of Apertura,
PDVSA entered into joint ventures with foreign companies in four
integrated projects for the production of synthetic crude (‘syncrude’)
from the same extra-heavy grades of oil. PDVSA planned to increase
production of syncrude to 1.2 million barrels per day (requiring about
1.5 million b/d of extra-heavy crude) by the year 2010. Like Orimulsión,
syncrude is subject to lower levels of taxation (one percent royalty
and 34 percent income tax). If this oil were included in Venezuela’s
OPEC quota, it would displace more highly taxed conventional crude
from PDVSA’s exports. Calculated on prices in the first half of
2001, the loss in revenue for the government would be as high as ten
dollars per barrel.
The
rush into the Orinoco Belt was justified during the years of Apertura
with
the argument that it was not subject to OPEC quota. A more
far-reaching purpose, however, was to force Venezuela into conflict
with OPEC, possibly forcing it out of the organization, by committing
the country once and for all to an oil policy predicated on high
volumes and low prices. This strategy is consistent with goals of the
International Energy Agency (IEA), which was founded by the consumer
countries in the early 1970s in order to confront OPEC. Indeed, Andrés
Sosa Pietri, PDVSA president in the early 1990s, has consistently
advocated Venezuela’s withdrawal from OPEC and its membership in the
IEA.
The
Chávez government had to confront this situation. The practical
compromise has been to include syncrude in the OPEC-quota, but not
Orimulsión. Nevertheless,
the
recent cuts in production (2001) are causing very substantial and
disproportionate losses in fiscal revenues. Lower prices, however,
would even be worse. Leaving OPEC is not an option the Chávez
government is about to consider.
Apertura
in the Context
of Neoliberal Policy after 1989
In
1988, Pérez was elected President for a second term, but he faced a
totally different situation than fifteen years earlier.
Notwithstanding the oil price collapse in 1986, the preceding
administration of Jaime Lusinchi had carried on spending as usual.
Thus, at the time Pérez took office in February 1989, the Central
Bank was left without foreign reserves. Pérez immediately accepted
agreements with the International Monetary Fund and the World Bank
that included an increase in domestic gasoline prices. Pérez now
promised a ‘Great Turnabout,’ which came as a surprise to the
Venezuelan people who had never been told that there was anything
fundamentally wrong with the economy in the first place. Indeed, an
increase in gasoline prices, reflected in higher transport fares,
sparked the Caracazo
of
the week of February 27, 1989.
Pérez
also began to allow private investors back into the Venezuelan oil
industry. As part of the opening
of
the Venezuelan economy to the outside world, PDVSA was put in charge
of the Apertura
Petrolera.
The role of MEM, which prior to nationalization had overseen
contractual and fiscal relations with oil companies, was reduced to
rubber-stamp status. PDVSA preached the gospel of competitiveness to
the government, arguing that royalties and taxes would have to be
lowered to attract foreign investors. The government followed its
advice. In addition to the aforementioned joint ventures for
extra-heavy oil, PDVSA opened ‘marginal’ fields producing
conventional grades to private investments (arrangements known as
‘operating services agreements’), which by 2001 accounted for
about 500 thousand b/d. The greater part of this oil is not subject to
OPEC quotas, and is low-taxed. In the process, the higher-taxed
production of PDVSA was cut. Moreover, in these agreements PDVSA acts
as an ‘umbrella’ shielding private capital from the state,
guaranteeing that the state company will pay an indemnity to its
‘partners’ if there is any ‘detrimental’ legislative change.
These contracts were made subject to international arbitration, an
arrangement Venezuela had never accepted until then. Last but not
least, in case of disputes PDVSA exports are subject to sequestration.
Nevertheless, Congress approved all of them.
Having
acted on behalf of private foreign investors, PDVSA also insisted on
lower taxation for itself as well. Its best opportunity came in the
chaotic year of 1993. President Pérez was removed from office, mainly
as a consequence of the two coup attempts in 1992. A very weak
provisional government took over and accepted a new Income Tax Law
with generous allowances for inflation. In addition, the
government’s power of discretion over the export levy, which had
been created in 1970 to allow capture of extraordinary profits in
periods of high prices, was phased out, and finally abolished in 1996.
These measures contributed to a significant drop in fiscal revenue
from oil.
Figure
7.1
Fiscal
Revenue from Oil as a Percentage of Gross Income from Oil
 |
Div.
Source: Ministerio de Energía y Minas: Petróleo y otros datos estadísticos.
(Caracas: 2001)
(graph on p. 211)
Statistics
put in evidence the government’s declining share of oil income. In
1981, gross income from hydrocarbon production, including refining,
peaked at $19.7 billion. In 2000, a new peak was reached of $29.3
billion. Nevertheless, in 1981 PDVSA paid $13.9 billion in fiscal
revenues, but only $11.3 billion in 2000. In other words, for every dollar of gross income, PDVSA paid 71 cents
to
the government in rents, royalties and taxes in 1981, but only 39 cents
in
2000. Moreover, government revenue derived from syncrude production
coming on stream in the near future will be substantially lower. Thus
the trend of falling fiscal revenue is bound to continue.
The
End of the IV Republic
In
the general elections of 1998, the two subversive movements – one
led by PDVSA executives and the other by elements in the military –
confronted each other (Arrioja 1998; see also Hellinger’s chapter in
this volume). PDVSA had become powerful enough to play a high-profile
political role, and its leadership was convinced that the time had
come to implement fully its liberal
agenda.
Liberalism, in the context of international oil politics, is to be
understood in its original revolutionary conception based on replacing
the visible hand of the landlords with the invisible hand of the
market. Like their forbearers, today’s liberals would reduce the
power of ‘landlords’ (i.e., sovereign nation-states) to restrict
access of capital (i.e., international corporations). It is this
restriction on access that is the basis for the landowner, private or
public, to collect a rent. The goal for liberals is ‘land to the
tiller,’ or, to be more precise, ‘minerals to the miner’. They
want natural resources considered a free gift of nature, freely
available to the producing companies and consumers. ‘Free’ thus
refers to elimination of the obligation to pay rent.
Is
Venezuelan
oil
a free gift of nature to international producing
companies and foreign consumers? PDVSA’s liberal agenda answers this
question with an unqualified ‘Yes.’ This view is antithetical to
everything that Venezuelan oil nationalism has ever achieved,
including the founding of OPEC and nationalization. It is imperialism
in its most ancient of definitions: the conquest of foreign land and
its mineral resources.
Not
surprisingly, PDVSA enjoyed strong backing from the governments of the
developed consuming countries as well as international oil companies.
Their experts designed the changes in Venezuela’s fiscal system
following the example of the British North Sea, the most liberal
oil-producing region in the world in terms of allowing capital free
access to natural resources. PDVSA thus came to play an important role
in bringing the country into a global world where the territorial
state is supposed to have disappeared.
Venezuela
joined the World Trade Organization (WTO) without reserving any
special rights regarding its oil (in contrast to Mexico). According to
the vision adopted by PDVSA, natural resources are an advantage in
attracting investment, more than it is a leverage to promote national
development. In contrast to earlier periods, the nation no longer
should require foreign investors to transfer technology or to purchase
needed components from national producers.
PDVSA
argued that any insistence upon measures to maximize oil revenue would
obstruct the free flow of much needed investment. If the paramount
goal of the state as owner of natural resources is to attract foreign
investment, then the more investment the better. Hence, the lower the
levels of taxation and the more flexible the fiscal regimes, the
better. Consequently, the fiscal revenue maximization policy of the
past was replaced with a policy of minimization.
In February 1998, it seemed very likely that independent candidate
Irene Sáez would easily win the elections and that PDVSA would play a
central role in her government. Venezuela was on the brink of becoming
Latin America’s model pupil of natural resource-liberalism and
globalization. A nation that had played a key role in founding OPEC,
the epitome of an organization dedicated to strengthening national
sovereignty over exhaustible natural resources, was now to become a
leader in dismantling what had been achieved within the OPEC
framework.
Then,
to spoil it all, Chávez turned up as a popular candidate. The small
political groups that had opposed PDVSA’s liberal oil policy
supported Chávez, although he had no specific agenda for oil beyond a
more or less vaguely formulated commitment to follow a nationalistic
approach. He and his followers were still unaware of subversive oil,
but one thing was certain: his victory would at the very least slow
down the implementation of the liberal agenda. And there was nothing
the PDVSA leadership and the traditional political parties could do
about it. Desperate, AD and COPEI joined in a last minute common
electoral front, but to no avail. During the electoral campaign Chávez
moved steeply and inexorably upward in the opinion polls as world
petroleum prices moved downwards. PDVSA had been publicly boasting
about never again cutting a single barrel of output. It was already no
longer a question of extra-heavy oil not being subject to OPEC quotas,
but to put an end to the quota system per
se.
Even the formidable public relations machinery of PDVSA – which
contended that lower prices would secure more markets for Venezuela
with the overall balance being positive – could not convince the
country that falling prices was good news, try as hard as it might.
The
V Republic
Hugo
Chávez took over the Presidency in February 1999 in the middle of the
worst price collapse in world petroleum markets in over fifty years.
The situation, however, soon turned around radically and favorably,
and there is no doubt that the Chávez government played a crucial
role in the recovery. The last government of the ancien
régime had
come close to abandoning OPEC. PDVSA’s publicly heralded policy to
maximize volume in disregard of OPEC quotas and price objectives was a
major cause of the 1998 oil price crisis. Even the Caldera government,
which had shown little resistance to PDVSA initiatives, had to reverse
its policy, and in its last months agreed to new OPEC quotas, but at
home a weakened MEM was unable to impose them. Had it not been for the
victory of Chávez, PDVSA would have been transformed into little more
than a licensing agency, and the privatization of its subsidiaries
would have been the inevitable outcome.
President
Chávez and his oil minister, Alí Rodríguez Araque, reversed the
policy of spurning OPEC quotas, and began to defend prices. Together
with Mexico and Saudi Arabia, Venezuela successfully promoted a new
understanding on quotas between OPEC members and other exporting
countries. Venezuela also promoted and hosted in September 2000 the
second summit meting of OPEC heads-of-state. Prices recovered.
The
gross proceeds from hydrocarbon exports peaked at $29.3 billion in
2000. However, price was only one aspect of oil problems confronting
Chávez. His other task was to find a way to arrest the fall in fiscal
revenues due to long-term structural and legal problems that may also
be extremely difficult to redress.
Re-Gaining
Control of the Nation’s Natural Resources
As
soon as Rodríguez Araque took over the Ministry in 1999, he began to
implement a policy aimed at asserting control over natural resources
and fiscal policy. Rodríguez Araque opposed the previous
government’s decision to leave the negotiation of upstream contracts
to PDVSA. At the heart of the issue of formulation of fiscal policy is
the question of royalty, which is the most secure form of revenue for
the owners of natural resources (Mommer 1999). The virtue of royalties
is the ease with which they can be collected, as there are only two
variables involved: volumes and prices. Unlike in the case of income
tax, they are immune against the manipulation of production costs. For
that very reason PDVSA wanted the royalty scrapped; in its place it
was willing to accept increased income tax rates on highly profitable
fields (Espinasa 1998). The problem with this proposal is that
effective collection of income taxes is more difficult to achieve,
especially for a state whose bureaucratic capabilities were declining.
The Venezuelan government, as we have seen, was struggling just to
measure and control volumes and prices. Although only partially
successful, MEM, under the direction of Rodríguez Araque began to
monitor the volumes produced in some fields and rejected ‘transfer
prices’ (prices charged by PDVSA to its foreign affiliates) as the
basis for calculating royalty payments. PDVSA was thus obliged to pay
royalties on the basis of international market prices. However, the
Ministry of Finance continued to accept transfer prices in calculating
what the company had to pay in income taxes.
Under
Rodríguez Araque, MEM also redesigned the terms of contracts for
natural gas, which had been in preparation when the new government
took over. A new Natural Gas Law, enacted in 1999, established a
minimum royalty rate of 20 percent, and in practice they reached as
high as 32 percent. At the same time, this sector was completely
opened up to private investors. A new Organic Law of Hydrocarbons,
enacted in 2001 – drafted by Álvaro Silva Calderón, who succeeded
Rodríguez Araque as Minister (Rodríguez Araque became Secretary
General of OPEC) – establishes a minimum royalty rate of 30 percent
for oil (with some downward-flexibility to 20 percent for conventional
oil, and to one-sixth in the case of extra-heavy oil). At the same
time, the law lowers income tax on conventional crudes from 59 per
cent to 50 per cent; for extra-heavy oil the tax rate remained at 32
per cent. All in all, there is an increase in taxation based on the
increase of royalty rates. The law also reserves for the state
majority shareholding in any joint venture for exploration and
production.
The
new Hydrocarbon Law will apply only to new licenses, concessions, and
contracts. Under existing arrangements, private companies will
continue to pay less in royalties and taxes for access to
Venezuela’s highly profitable petroleum deposits than they pay for
leases in marginal fields in the U.S. Indeed, since 1993, even PDVSA
pays less in royalty and taxes than private oil companies in Alaska (Mommer
2001b).
Controlling
PDVSA
The
Ministry under Rodríguez Araque and Silva Calderón hoped to force
PDVSA to spend less and to pay more taxes. This goal will not be easy
to achieve. In late 2001, the Ministry remained in the hands of
officials belonging to two small parties, Patria
Para Todos (PPT) and Movimiento Electoral del Pueblo (MEP).
Their weak status was further eroded when both parties lost their
small representation in the National Assembly in the general election
of 2000. Hence, the Ministry lacked political support in the
legislature, whereas PDVSA continued lobbying Chávez’s MVR. In
November 2000, PDVSA convinced the Committee of Energy and Mines of
the National Assembly to declare publicly its intention to promote
legislation in favor of lower royalty rates. This was the very day an
Enabling Law was approved, according to which the government was
authorized to do exactly the contrary – to raise royalties. The
latter position prevailed at the governmental level, but it is unclear
whether it will be defended in the National Assembly. PDVSA’s
president General Guaicaipuro Lameda publicly criticized the new
Organic Law of Hydrocarbons for increasing royalties. In February
2002, President Chávez dismissed Lameda and appointed in his place
Gastón Parra, a University teacher with a strong nationalist
background in line with the MEM.
At
first glance, the new Constitution also appears to reinforce sovereign
ownership of oil, but in reality the liberal agenda of PDVSA fared
well in the Constituent Assembly. According to the new Bolivarian
Constitution, PDVSA, which is in reality a holding
company,
cannot be privatized, but this restriction does not apply to its affiliates.
PDVSA, unlike its affiliates, does not produce a single barrel of oil.
Most Venezuelans believe that the Bolivarian Constitution has actually
strengthened nationalization, but ironically it may have paved the
road for the transformation of PDVSA into a liberal licensing agency
for a private industry.
In
the year 2000, costs and expenditures of the company increased by a
staggering 44.6 percent as reported officially by PDVSA. This is
mainly explained by the Apertura’s
operating services agreements with private companies, which were
designed to be flexible enough to allow the company to produce very
high-cost (and low-taxed) oil. PDVSA’s costs now passed the
ten-dollar-per-barrel mark. PDVSA also stuck to its old policy:
whenever OPEC quotas limit the possibilities of investing its revenue
in Venezuelan oil production, it is spent abroad. PDVSA continues to
expand into the refining and retail business, but now all over Latin
America and not just the U.S. and Europe.
The
two businesses of oil – the business of the investor, on the one
hand, and the business of the natural resource owner, on the other –
were easy to distinguish as long as the first was in the hands of
foreign investors and the latter was vested in the government of the
nation. Institutionally, MEM represented the latter. With
nationalization in 1976 the two businesses became completely confused.
If anything, nationalization required stricter and more clear-cut
fiscal control on the part of the state, but the opposite happened.
Fiscal control became more and more relaxed over the years, and
control of the company by its single shareholder – the state –
really never worked. The Ministry wields no power of its own over the
company because the President appoints all of its directors. They are
peers of the Minister. The only real shareholder is the President,
with virtually no institutional or structural support. PDVSA always
advanced the same argument for relaxation of state control: the need
to strengthen the national oil company, which was the pride of the
nation, and to enhance its competitiveness. In fact, the company acted
according to the maxim that it was always better to spend a dollar
than to pay that dollar in taxes. Investment was a matter of
principle, not a question of maximizing profits. Greater production at
lower prices was always considered a better option than defending
prices by limiting supply. Hence, PDVSA, contrary to its public
claims, does not act as a commercial enterprise. It does not maximize
profits (which might be converted into dividends for the government),
but rather volumes all the way down the line, from production to
refining, transport and retail. Along the way it clears away profits
from its Venezuelan accounts through the practice of ‘transfer
pricing’ (Boué 2002).
To
control PDVSA effectively again, the new Hydrocarbon Law requires the
company to present accounts properly, separated according to its
different activities. It should thus become evident where profits are
made, and where they are not, a sine
qua non for
any rational oil policy. PDVSA’s opaque accounting methods are
designed to hide discounts in their transfer prices as well as their
deliberately inflated cost. For example, PDVSA transfers an important
part of the costs of its internationalization program, including the
service of its ten billion-dollar debt, to its Caracas headquarters.
In many ways PDVSA has even lost control over itself, most notably
regarding its internationalization policy. The company has structured
itself in the course of many years to prevent its shareholder (the
state) from interfering. In doing so, it has made itself increasingly
difficult to steer.
Concluding
Remarks
PDVSA
turned its back to nationalization as early as 1983 with its policy of
‘internationalization’. By 1989, it actually no longer claimed to
be a national but a global company. Indeed, the gist of its message is
that globalization requires elimination of national barriers to
investments in the area of natural resources. As odd as it may seem,
there is strong public support for this approach – whereby PDVSA
aligns itself with the international oil companies and consumer
countries – among Venezuelan professionals and the middle class in
general. Until nationalization, it was clear to all
Venezuelans
that higher fiscal revenues in oil generated material well-being for
the entire population. After nationalization, however, the validity of
this thinking was questioned due to the appalling performance of the
political and economic system. Hence, to bring PDVSA again under
fiscal control may be much more difficult a task than one might
imagine.
A
large part of Venezuela’s professional classes support PDVSA’s
reasoning that higher volumes are more important than defense of
prices. Completely in the dark about oil policy (Baptista and Mommer
1987), and under the influence of PDVSA’s public relations
department, they are not likely to challenge the neoliberal logic.
They seek a decent professional working environment in a modern
(private) company and, of course, a decent salary, all of which the IV
th
Republic
was no longer able to offer. They do not believe that the V th
Republic
can offer it to them either. They thus believe that privatizing PDVSA
would better their prospects. At a popular level, however, the outlook
is quite different. The underprivileged sectors of the population fear
that they will be excluded and left behind if the nation were to
privatize the oil industry. Hence, oil policy has been caught up in
the general process of polarization that characterized the country in
early 2002.
The
whole country has been spellbound since nationalization. One
government after another has concentrated all of its attention on
PDVSA and forgotten about the MEM. One President after another has
spent many hours in PDVSA; not one has set foot in the Ministry of
Energy and Mines. The latter was progressively dismantled, and most of
its best-qualified personnel lured away to PDVSA. MEM has fallen prey
to physical decay, its workers impoverished together with other public
employees. PDVSA moved to fill the gap in the heyday of Apertura
Petrolera by
paying a monthly bonus to employees of the Ministry working in the
hydrocarbon section (a continuing practice), effectively doubling
their paltry salaries. Today the budget of PDVSA represents no less
than 40 percent of public spending. PDVSA’s financial leverage
extends deep into the world of politics, journalism and public opinion
making in general, where people are easily convinced to work for PDVSA
as part-time public relations consultants -- not to speak of the
international consultant companies which have established themselves
in Caracas after the initiation of Apertura
Petrolera in
1989.
In
short, PDVSA was transformed into a ‘state within the state’ a
long time ago, becoming more powerful the more the country became
impoverished. Under the Chávez government this trend has been reversed; as
a result, the country has made significant progress in recovering
control over its most important natural resource. In achieving this
goal, however, the government failed to win over PDVSA’s top
personnel. Today, company executives are no more willing to co-operate
with the Vth Republic, as they were with the IVth Republic.
These
conclusions were fully confirmed by the April 2002 events in
Venezuela. The failed coup left behind a highly fluid situation, and
it left unsettled the ultimate fate of oil policy. Alí Rodríguez
Araque, who at the time was serving as Secretary General of OPEC,
agreed to take over the presidency of PDVSA as a candidate of a
political consensus -- at least as far as a political consensus was
possible in Venezuela at that time.
Rodríguez
faced the task of carrying out a systematic reform of the oil sector
for the first time since nationalization. The Chávez administration
will have to demarcate the three roles of the state, politically and
institutionally: as the sovereign generally, as the owner of the
natural resource, and as the sole shareholder of the company. At the
same time, it will have to define a new role for the private sector,
national and foreign. Given the instability of Venezuelan politics,
success remained very much in doubt.
End