The New PdVSA: Sowing the Oil for Greater Dependency

The symbolic re-appropriation of the national oil company Petroleos de Venezuela, S.A. during the national oil strike in 2003 signaled the beginning of a new era. The firing of Opposition allied PdVSA workers was a historically symbolic gesture because it signified a departure from the past; the last frontier in the changing of the guard from the old Punto Fijo model to the new Bolivarian Venezuela and the opportunity to effectively repeal the policies of the Apertura process. Through the Full Sovereignty over Oil program President Chavez and Minister Rafael Ramirez seek to restore national control over Venezuela’s natural resources by giving the state greater jurisdiction over the operations and profits from oil production. Oil revenues, which have traditionally funded a large percentage of the state bureaucracy, have been assigned to funds supporting social initiatives like the Misiones projects. The irony of the policies for nueva PdVSA is that even though they signal a change with the past they still foster the rent-seeking behavior and corrupt climate that was characteristic of the old PdVSA and perpetuate the problems associated with the Petro-State.

Since PdVSA was established in 1976, it never completely assumed the “identity” of a national oil company. That is to say, management was under the influence of the ethos of international oil companies and resented the squandering of oil revenue on disastrous government programs initiated by President Carlos Andres Pérez. Congress had passed a law giving Pérez autonomy over spending in order to pursue his vision of “Greater Venezuela,” which initiated the country’s economic decline.[1] In response, PdVSA initiated the Internationalization policy as a way to protect revenue from the spending whims of the state.

In 1983, faced with the fallout from the oil shocks, production cuts, and a currency crisis the leadership at PdVSA refused to invest the money in Venezuela and instead spent profits abroad. That same year Venezuela bought into a German refinery for light crude.[2] There was no accountability or checks and balances on PdVSA’s spending by Congress or the President. Even when the policy of discounted “transfer” prices was implemented, PdVSA profits were shifted away from the state. Objections were made, but President Lusinchi defended the practice and further allowed PdVSA to set its own prices. [3] This gave PdVSA license to establish Citgo, it’s retail outlet in the United States, and invest in an extensive fleet of refineries in Texas, Louisiana and New Jersey. After signing long term supply contracts with foreign affiliates and agreements that effectively transferred profits abroad it was no surprise that by 1990 PdVSA was on the way to privatization. This is how PdVSA became a “state within a state.”

The Ministry of Energy and Mines lost the ability to monitor the levels of production as PdVSA surpassed its OPEC quota. Oil from the Orinoco fields was classified as outside the OPEC definition of crude oil because it was bitumen and not included in quota assessments.[4] In addition, PdVSA bypassed the quotas established by OPEC measuring production at the refinery gates rather than at fields, as is the industry standard, keeping barrel prices low.[5] Therefore, not only was there an indiscriminate amount of oil being sold at lower levels of taxation, that was not included in the OPEC quota, but due to the contract agreements the state was actually paying out and thereby losing money. As a result, PdVSA established a multidimensional hegemony over the nation’s oil production. Authors of the Apertura, or the “opening process,” were strong advocates of Neo-liberalism and hoped that continued defiance of the OPEC mandate would incite conflict and resulted in Venezuela’s resignation from the organization.

By 1989, the combination of PdVSA’s internationalization policy, government overspending despite the lack of funds, the absence of much needed economic reform, and an increasing currency crisis, Venezuela was ripe for financial and political collapse. The Punto-Fijo leadership over the last two decades had refused to accommodate the changing needs in the economy as a result of the oil shocks and the policies of PdVSA. Successive governments increased state spending despite rising inflation, unemployment, and poverty. The middle class was being squeezed out of the crippling system. Inherent in the nearly twenty years of denial was the perception that Venezuela was rich because of the nation’s vast oil and gas reserves; but what people failed to realize was that the oil wealth, due to internationalization, was not in Venezuela. Accepting the harsh reality that Venezuela was in financial crisis wouldn’t compare with the shock of the price hikes that led to the Caracazo in February of 1989.

When Pérez was re-elected, he was confronted with a very different country from fifteen years before and he adopted policies suggested by the IMF and World Bank.[6] Pérez charged PdVSA with managing the opening of the oil industry to foreign investment.[7] In true PdVSA fashion, Pérez agreed to lower royalties and taxes in order to attract more foreign investment and cut high-taxed production.[8] To increase momentum towards privatization, PdVSA appointed itself as a pseudo-leasing agent between the state and foreign oil companies by providing financial guarantees against state posturing and subjected disputes to international arbitration.[9] Rising domestic tensions and the impending doom of the punto-fijo model was the ideal distraction to enable the passing of favorable legislation for PdVSA and foreign investors: PdVSA was granted a decrease in taxation for itself, the export levy of 1970 was abolished by 1996, and the state was receiving nearly fifty percent less in revenue from oil production.[10]

Once Chavez won the election in 1998, the momentum towards privatization came to a screeching halt. Chavez, a former coup leader against the Pérez administration in 1992, was able to take advantage of the political vacuum left by the imploding Punto Fijo system. For more than two decades the elitist policies of PdVSA and Punto Fijistas ignored the 80% of the population living in abject poverty and the soon-to-be extinct middle class. On the wings of nationalist rhetoric and promises of social reforms Chavez landed in Miraflores on a landslide victory. Even though the reform of PdVSA was not an immediate objective, the impact of dealing with the lowest crude prices in thirty-five years caused Chavez and his Minister of Energy and Mines, Rodríguez Araque, to repeal the policies of the ancíen regime and reinvigorate their loyalty to OPEC.[11] Chavez reestablished Venezuela’s commitment to “strengthening national sovereignty over exhaustible natural resources” by adhering to OPEC quotas and increasing royalties and taxes.[12]

After the passing of the 40 decrees, opposition to Chavez began to increase and the media embarked upon an aggressive slander campaign. Faced with increasing polarization and a decline in popularity, Chavez encountered grave challenges after four years in office. The national oil strike, organized by Opposition leaders, was a second attempt at ousting Chavez from power. After three months and a loss of over $10 billion, the Opposition forces failed and provided Chavez with the unexpected opportunity to solidify unprecedented presidential hegemony over PdVSA, to implement the Full Sovereignty over Oil program and defend high oil prices. When Chavez announced that the PdVSA employees who had refused to return to work as part of the national oil strike were permanently released of their services, he had systematically rid the organization of internal opposition to his plans. By the end of the oil strike in 2003 and one year after the coup attempt he had successfully gained power of the Constituent Assembly, the Armed Forces, and PdVSA.

For Chavez, there are three fundamental characteristics to the new policy of PdVSA: first, oil is a characteristic of national identity. In line with Chavez’s nationalist rhetoric and social democracy platform, the reappropriation of profits and majority ownership of the contract agreements, under the new PdVSA, was a defiant gesture against the capitalist undertones of oil extraction by multinational oil companies. At the core of the difference between the Chavista PdVSA and its Apertuirsta past is an ideological difference in the purpose of Venezuela’s national resources. For Chavez, the oil and gas reserves are a characteristic of national identity like arepas or cachapas. PdVSA, under Chavez, was to be a truly “national” oil company, whose profits would benefit the entire population by funding much needed social programs. This was diametrically opposed to the policy of Aperturista PdVSA, because Venezuela’s oil reserves were a commodity to be sold on the open market, not to serve the spending habits of the bureaucracy.

Second, PdVSA is to have majority jurisdiction over Venezuela’s natural resources. The National Assembly passed the new Organic Law of Hydrocarbons in 2001 which established a minimum 30% royalty on oil, an overall increase in taxation, and a reservation for state majority holding in any joint-venture.[13] For Chavez, enforcing quotas established by OPEC and increasing royalties and taxation was crucial to creating revenue for the state because there was/is no tax base. In contrast, the Internationalization agreements were favorable to the foreign oil companies and hostile towards the state; they were symbolic of imperialist policies and anti-nationalism.[14]

The Plan for Sowing the Oil, the long-term vision for the new PdVSA, was initiated in 2005 and has officially reconfigured the nation’s state owned oil company to be the engine of the Chavez revolution. The National Assembly approved the new 20 year Mixed Company agreements with PdVSA that guarantees a minimum of 50% ownership in any of the revised the 32 operating agreements signed between 1992 and 1997 because they are not valid according to the 2001 Organic Hydrocarbons Law.[15] Under these new agreements the state maintains “the principle of tax sovereignty” which translates into 50% income tax on all oil production.[16] This could give PdVSA over 80% of the profits earned. [17] In addition, there is a 3.3% special advantage contribution that goes towards development projects; from that 2.2% goes to the municipal council and the rest to the Endogenous Development Fund.[18]

Third, Chavez wants to diversify consumers of Venezuelan crude and lessen dependence on the US market. So far, even though members of the Chavez and Bush administrations have exchanged harsh words, economic relations remain in tact. In addition, though Chavez would like to increase production to India and China, hoping that their growing populations will usurp the United States as a main client, the distance and lack of adequate transport remain big obstacles. Also, the refineries capable of processing the heavy crude typical of Venezuela are located mainly in the US. So, any plans to cut off ties with the US could not materialize until the following happens: expansion of the Panama Canal, allowing for the passage of larger oil barges that can supply India and China; and the restoration of refineries in Venezuela and the Caribbean that will be able to process the heavy crude from Orinoco and Maracaibo.

In the end, even though Chavez has re-appropriated the jurisdiction of control over the production of oil, PdVSA is still a holding company; the foreign affiliates are still intact. [19]

The irony is that the Sovereignty policies have made Venezuela just as dependent on foreign oil companies, if not more so, because without them there wouldn’t be sufficient human capital to sustain production. In fact, the new policies only exacerbated the problematic characteristics of a petro-state.

Venezuela’s economy is based on single-path development. Outside of petroleum, there are no other thriving industries; in over 50 years policymakers have yet to diversify their economy. Most basic products—milk and meat-- are expensive because they are imported. Yet, Venezuelans spend beyond their means because they have yet to overcome the perception that they are a wealthy state; even when 80% of the population is poor. The Chavez government has yet to radically reduce poverty and provide the poor with viable and marketable skills to attract industry through foreign direct investment. With the increase in government access to oil revenue, comes increased dependence on oil revenue contributing to further economic decline. The state’s autonomy and discretionary use of funds begets the same rentilistic behavior and corruption that plagued PdVSA in the past. Arguably the Chavistas have simply replaced the Aperturistas at PdVSA.

The new PdVSA may be more Venezolano by means of ownership but the structural nature of the organization still perpetuates the problems of the petro-state. For Chavez to truly revolutionize PdVSA he will need to overcome oil dependence by diversifying the economy and increasing the state’s revenues from income tax.

Bibliography

Ellner, Steve and Daniel Hellinger (eds.), Venezuelan Politics in the Chavéz Era:Class

Polarization, and Conflict. (Boulder: Lynne Rienner Publishers, 2003).

Mc Coy, Jennifer L., Andrés Serbin, William C. Smith, and Andrés Stambouli, (eds.)

Venezuelan Democracy Under Stress (Coral Gables: The North-South Center, University of Miami, 1994).

“Cornerstone,” Contact with the New PdVSA, January 2006, N.1. Petroleos de Venezuela, S.A.,

Ministry of Energy and Mines. (http://www.pdvsa.pdv.com/interface.en/database/fichero/publicacion/1101/35.PDF)

Full Oil Sovereignty: A National,Popular, and Revolutionary Oil Policy, Serie 1. Petroleos de

Venezuela, Socios Anonimos, Ministry of Energy and Mines, May 2006. (http://www.pdvsa.com/interface.en/database/fichero/publicacion/1413/61.PDF)

“Model for Mixed Companies,” Contact with the New PdVSA, March 2006, N.5, Petroleos de

Venezuela, S.A., Ministry of Energy and Mines. (http://www.pdvsa.pdv.com/interface.en/database/fichero/publicacion/1421/62.PDF)

“PetroCaribe: Integration in Motion,” The New PdVSA Contact, July 2005, N. 1, Petroleos de

Venezuela, S.A., Ministry of Energy and Mines, (http://www.pdvsa.com/interface.en/database/fichero/publicacion/935/21.PDF).

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1] Mommer, Bernard. “Subversive Oil,” in Ellner, Steve and Daniel Hellinger (eds.), Venezuelan Politics in the Chavéz Era:Class Polarization, and Conflict. (Boulder: Lynne Rienner Publishers, 2003). P. 132.

[2]Ibid., P. 134.

[3] Ibid., P. 134-5.

[4] Ibid., P. 136.

[5] Ibid., P. 135.

[6] Ibid., P. 136.

[7] Ibid., P. 137.

[8] Mommer, P. 137.

[9] Ibid.

[10] Ibid.

[11] Ibid., P. 140.

[12] Ibid., P. 139.

[13] Ibid., P. 141.

“PetroCaribe: Integration in Motion,” The New PdVSA Contact, July 2005, N. 1, Petroleos de Venezuela, S.A., Ministry of Energy and Mines, (http://www.pdvsa.com/interface.en/database/fichero/publicacion/935/21.PDF), P. 8.

[14] PdVSA, July 2005. P. 4.

[15] Ibid.

“Cornerstone,” Contact with the New PdVSA, January 2006, N.1. Petroleos de Venezuela, S.A., Ministry of Energy and Mines. (http://www.pdvsa.pdv.com/interface.en/database/fichero/publicacion/1101/35.PDF), , P. 13.

[17]Ibid.

[18] “Model for Mixed Companies,” Contact with the New PdVSA, March 2006, N.5, Petroleos de Venezuela, S.A., Ministry of Energy and Mines. (http://www.pdvsa.pdv.com/interface.en/database/fichero/publicacion/1421/62.PDF), P. 8.

[19] Mommer, P. 142.