Changing Venezuelan Oil Policy

The general elections in November and December 1998 brought about fundamental changes in Venezuela’s political landscape. The winner of the presidential elections, with 56% of the votes, was lieutenant colonel Hugo Chávez, the leader of the failed coup d’état of February 1992. After spending two years in jail and discharged from the army he had turned politician. And he accomplished in the political arena what he had failed to achieve as a military coup leader: to defeat and to put an end to forty years of a party system dominated by Acción Democrática and Copei. Having together collected 85% of the votes and more in previous elections, this time they only obtained approximately 40%.

This was ultimately the consequence of these parties’ performance since nationalisation of the oil industry in the 1970s. In spite of the enormous amount of oil money the economy started to decay at the end of the 1970s, and still continues to do so twenty years later. Real wages have fallen by some 75% over this period. Apart from mismanagement and incompetence, public opinion in Venezuela blames corruption. Not surprisingly, then, President Chávez is aiming at radical political reforms at the centre of which is a Constituent Assembly to be convened in the near future.

Perhaps more surprisingly, however, is the fact that his criticism regarding oil is not only limited to the squandering of oil revenues but also includes the performance of Petróleos de Venezuela (PDV), the national oil company. Since Venezuela embraced ten years ago a new oil policy known as Apertura Petrolera (opening up the oil sector to private investors), the Ministry of Energy and Mines (MEM) has been losing out against PDV. The national oil company actually took over the making of oil policy. Thus becoming a political actor, PDV transformed the traditional national oil policy, which concentrated on fiscal revenues, into a new and essentially sectorial oil policy that concentrated on the development of the oil industry. To put it differently, the policy issue was no longer prices but volumes.

Accordingly, since 1989 PDV had been promoting legal reforms to make the fiscal regime more ‘flexible’. This meant, on the one hand, allowing for increasing costs in order to increase production (i.e. cost-flexible) and, on the other, allowing the fiscal regime to absorb the effect of lower prices (i.e. price-flexible). Apart from legal reforms particularly favouring private investors, PDV took care to embody even more advantageous terms within the contracts. Obviously enough, OPEC quotas did not fit into this picture. Hence quotas came under heavy attack from PDV headquarters, including a press campaign in favour of Venezuela leaving the organisation. Most prominent amongst the campaigners were Andrés Sosa, President of PDV from 1990 to 1992, and Luis Giusti, President of PDV from 1994 until recently. Since 1994 Venezuela has no longer abided by the quotas.

At that time, opposition to these changes in Congress was weak and basically limited to a fraction of a new opposition party which, after it split, adopted the name of Fatherland for All (Patria Para Todos; PPT). PPT’s speaker on oil policy was Alí Rodríguez, a lawyer, who also acted for several years as the President of the Committee for Energy and Mines of the House of Representatives. He went to the Supreme Court to challenge the legality, and even constitutionality, of several clauses contained in the contracts granted in 1996. Three years later the Supreme Court still has not taken any decision. But there was another very different point of criticism about the way that PDV handled Apertura Petrolera; it soon became clear that ‘private capital’, practically speaking, was a synonym for ‘foreign capital’. At the beginning at least, absolutely nothing was done to promote the creation and development of Venezuelan private oil companies which, as a consequence of the nationalisation law of 1975, have so far been non existent. Even worse, in the contracts with foreign investors, nothing was done to help the Venezuelan private service and input-providing industry to obtain a fair share of this new market.

This second criticism was not completely unsuccessful and in the bidding round of 1997 PDV was forced to set aside some plots of land for Venezuelan private oil companies. However, all in all, opposition to PDV’s handling of Apertura Petrolera was very weak, at least as long as prices remained relatively high, investment levels were soaring, and production was growing. In the boom years Venezuela’s private sector had ultimately little to complain about, and also the boom largely compensated for the relative loss of fiscal revenues. Indeed, whereas in the years 1986 to 1991 fiscal revenues from oil, on average, represented more than 75% of exports, they fell below 50% in the years 1992 to 1997. Then came the fall of prices, shrinking investment, and the inevitable cuts in production. Fiscal revenues collapsed, although in 1998 they were inflated by so-called ‘dividends’. PDV had actually to borrow in order to be able to pay them. Only a month ago the outlook for 1999 was very bleak. Government revenues from oil would fall to some 35% of export revenues, which were estimated at an average price of only nine dollars a barrel for the Venezuelan basket. Obviously enough, down this road was lurking the privatisation of PDV.

However, 1998 was a year of general elections. The political role of PDV became more difficult. The government now agreed with other exporting countries (OPEC and non OPEC) to production cuts which, in the case of Venezuela, were very substantial: 525,000 b/d. Thus PDV’s programme of expansion was brought to a sudden stop, although the government was never able to force the company into full compliance. On the other hand, PDV was a political actor in that it campaigned to commit the presidential candidates to its policy. Chávez, however, on the contrary declared during his campaign that he would re-establish the political supremacy of MEM over PDV.

President Chávez appointed Alí Rodríguez as his Minister of Energy and Mines. In PDV, he appointed as President Roberto Mandini, a high-ranking member of PDV’s meritocracy who had nevertheless kept a critical distance from Luis Giusti and his policy. Chávez also appointed three outsiders as Vice-Presidents, two military and one civilian, all of them belonging to the inner circle of the President. Although the government has pledged that it will fully respect the private contracts, nevertheless these appointments signal very significant changes in Venezuelan oil politics. Internationally, the most relevant is the fact that the new government finally obliged PDV to implement fully the output cuts agreed upon last year. Moreover, it participated actively in the negotiations, which involved OPEC and non-OPEC exporters and which led to further cuts agreed upon in the last OPEC meeting in March 1999. Venezuela agreed to an additional cut of 125,000 b/d. Confident that the new agreement would work this time — to which the political changes in Caracas have contributed substantially — the market responded immediately with a substantial increase in prices. Moreover, Minister Rodríguez has already made clear that he intends to support oil prices, in the long run, by creating on top of the cost floor a ‘fiscal floor’, thus defining a minimum price level deemed to be reasonable and ultimately acceptable to everybody. This would put an end to the dismantling of the fiscal regime in oil of the last decade and actually revert it, thus contributing to the stabilisation of oil prices. Also, one may wonder if this concept of a reasonable minimum price will eventually lead to the concept of a reasonable maximum price?

Privatisation of PDV, or even part of it, has been categorically ruled out by the new government. However, the government is committed to grant a much more important role to private national investors, and it is definitely not opposed to new foreign investment. The new Minister has announced a complete overhaul of the legal framework, which has been overtaken by the events since nationalisation in the 1970s, and especially by Apertura Petrolera. Although we are witnessing in Venezuela a very important and significant policy change, this may be construed as part of a cycle. Over the last three decades or so, Venezuela’s oil policy has swung from one extreme to the other. At the time of nationalisation, oil revenues were practically the only issue of concern, and it was in order to maximise them that private capital was excluded and prices were pushed to levels far beyond what the market could possibly sustain. Then with Apertura Petrolera only volumes mattered, not fiscal revenues or the nature of investment whether public or private, national or foreign. Now Venezuelan oil policy is moving, so to speak, to the centre.

Hence, one may well argue that the most outstanding characteristic of President Chávez’s oil policy is its willingness to compromise. His Minister is looking for a new legal and institutional arrangement in line with the complex realities that have emerged since nationalisation and trying to put an end to a period of instability that originated with nationalisation. What is really at stake, is to recover the governability of Venezuelan oil, as part of a political programme aiming at recovering the governability of the country as such.

By: B. Mommer


Country and Regional Studies , Oil


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