Introduction
After two decades of a relatively cooperative environment between host countries and International Oil Companies (IOCs), during the last boom in oil prices between 2003 and 2014, the global economy witnessed a new wave of resource nationalism.Footnote 1 Different political regimes pursued changes in the terms of engagement with private contractors in the oil sector.Footnote 2 As Haslam and Heidrich characterize, the 2000s saw the emergence of a diversity of forms of resource nationalism in Latin America, ranging from limited to moderate to radical policies.Footnote 3 Despite this rise of resource nationalism, progressive intellectuals have noted the continued dependence on foreign investment in neo-extractivist Latin American governments.Footnote 4
International relations and IPE scholarship has explained the kind of resource nationalism associated with revolutionary regimes as a result of institutional failures, and their advocates are portrayed as outliers in an otherwise cooperative international system. In a widely cited article, Ian Bremmer and Robert Johnston define revolutionary resource nationalism as linked with “broader political and social upheaval, not merely directed at the natural-resource sector.”Footnote 5 This type of resource nationalism is characterized as having “dangerous effects” on international resource companies with nationalizing actions that are “top-down, arbitrary and accompanied by little if any compensation or recourse.”Footnote 6 But even more so, the re-emergence of resource nationalism in recent years has been associated with wider rogue state actions that are part of the greatest evils in international relations: “exporters such as Russia, Iran, Venezuela, and until recently, Iraq and Libya, actively defy global norms, invade neighboring countries, expropriate foreign investors, flout human rights, and finance terrorism and armed rebellions in foreign countries.”Footnote 7
Venezuela under Hugo Chávez is prominently cited as a “radical” resource nationalist or “revolutionary resource nationalist” country.Footnote 8 In 2007, the Venezuelan government completed its “full oil sovereignty campaign” by establishing new associations in the form of joint ventures with majority shares for the state. These policy changes meant a stark difference from previous policies of liberalization that opened the oil sector with favorable conditions to foreign investment in the 1980s and 1990s. This contrast between the Chávez policies and the opening of the 1980s and 1990s is what has probably compelled scholars to label Venezuela a “revolutionary” or “radical” resource nationalist country.Footnote 9 Nevertheless, a close examination of these policies against the backdrop of the history of state-IOC relations demonstrates that these labels can be misleading.
Venezuela in the 2000s did not follow a recipe of complete nationalization of its resource sector, as it was the case in the 1970s, but rather a renegotiation of the terms in which foreign companies can take part in the resource business to enhance state participation and control. Most importantly, the Venezuelan government articulated foreign investment alliances to pursue control over its own national oil company (NOC), Petróleos de Venezuela (PDVSA). I conceptualize these policies as hybrid: They forced changes in the contractual arrangements between the state and foreign oil companies to extract higher rents, while continuing to pursue foreign investment.
What explains the approach the Venezuelan socialist government took regarding foreign investment in oil? I argue that for Chávez's government, effecting changes in the oil policy was only possible after waging an intense battle with PDVSA over control. Association with foreign investment then became crucial to erect its socialist model of rent distribution and, most importantly, to control its own company, PDVSA. In order to understand the Venezuelan government's policies regarding oil investments, one has to consider both material and ideational variables that led to increasing control over the industry while continuing to pursue foreign investment.
Theories of obsolescing bargain have traditionally been used to explain the different motivations governments have to increase their control and appropriation of rents from the oil business.Footnote 10 The Obsolescing Bargain Model (OBM) explains the behavior of two sets of actors—host states and foreign companies—whose interests are not always completely incompatible.Footnote 11 The bargain is described as positive sum, wherein actors can arrive at certain points of equilibrium and both may procure benefits.Footnote 12 By viewing actors as unitary and rational, bargaining theories tend to downplay the diversity among them and the role of ideational motivations in resource nationalism. In the Venezuelan case, the logic of the (rent-seeking) state and that of a (global-producing) national oil company clashed over a long period in a rather unique set of disputes.
Ideational approaches have gained recognition in recent years, especially since constructivist literature established itself as a dominant perspective in international relations.Footnote 13 For the purpose of this study, ideas carry strong weight through the meanings that development has had in different historical periods but subjectivity has also played a role in the growth of contrasting sets of interests between the state and its national company. By integrating both approaches, it is possible to comprehend the strategic importance for the state of controlling its own NOC and the desire to use foreign investment to achieve that goal. Integrating a constructivist lens to the motivations on the rise of resource nationalism helps explain the complex motivations that underlie the shift in oil policy during the Chávez regime.
This article draws on extensive primary research developed about Venezuela's state-IOC relations. It builds on thirty-five elite interviews carried out between 2014 and 2016 with current and former senior officials, as well as scholars and oil experts. Moreover, it builds upon a broad range of secondary literature in Spanish and in English on the evolution of the state-IOC relations and the oil industry in Venezuela. This article contributes to a better understanding of resource nationalism that emerged in recent years, especially in regards to left-leaning governments in South America.Footnote 14 Furthermore, it offers new contributions to long-lasting theories in IPE that have explained the rise of nationalist policies in the resource sector.
Bridging the conditions of shifting bargaining powers and ideational motivations
The politics of state-IOC bargaining
By virtue of being a crucial commodity for the world economy as the most preferred source of energy, the international market price for oil allows companies to earn potentially large rents. This phenomenon characterizes the nature of the politics behind the oil industry, as well as the bargaining that takes place in order to determine the division of those rents.Footnote 15 According to the OBM literature, the state-IOC bargain is crucially dependent upon the market cycle of investments and the maturity of the industry. The theory assumes that in early stages, most oil-producing states in resource-endowed countries lack the technology and labor capacity to invest in exploration and future extraction of the resource. Thus, foreign capital becomes necessary to establish the groundwork for oil exploitation.
The relationship of interdependence and power balance between these actors tends to change over time. Once the initial phase of investments is complete and extraction is in motion, states gain confidence, develop necessary knowledge, and eventually seek further control over the industry. Vernon states “the foreign enterprise whose successful establishment had rested on some superior capability or knowledge lost its security of position as time eroded the initial advantage.”Footnote 16 He further argues that “when the initial risks are overcome, however, and the capital is put in place, the attitudes of both parties—business and government—undergo a basic change. The capital has been sunk; the initial risks have been overcome.”Footnote 17
The early discussions of OBM included important considerations regarding states’ strategic views of development, such as import-substitution industrialization goals, and relatedly, state regulatory and technical capacity. In recent iterations of bargaining theories, however, different contributions help expand and adapt OBM's core arguments, often emphasizing objective variables.Footnote 18 Determining factors that affect the bargaining relationship between foreign companies and host states are related to the nature of the industry and the context in which it operates. A highly concentrated industry typically increases bargaining power of the foreign company whereas an industry with more intense competition contributes to the host state's bargaining power.Footnote 19 The price of oil is another crucial market factor that affects the distribution of power in this relationship. Higher prices tend to benefit host states while lower prices shift the balance toward companies.Footnote 20 The 2007 partial re-nationalization in Venezuela occurred in the context of high oil prices and was indeed a crucial factor in these decisions. In a sum, for the OBM tradition, resource nationalism is generally more likely to emerge at times of higher prices, when there are larger sunk costs, increased state capacity, and at times of more intense competition between extracting companies.
The issue of “industry concentration” is considered largely within the domestic industry. Yet, the position and outlook of companies in general have changed considerably in recent years world-wide. While IOCs have historically been the main form of foreign investor, new types of foreign companies have recently appeared in the global energy market. Specifically important have been Chinese SOEs, which have been instrumental in China's “go-out” strategy used to satisfy the country's energy demands. In general, the global energy market has witnessed an increased presence of state firms and these firms have been noticeably present in Venezuela. According to de Graaff, the world's main five NOCs from various regions of the developing world have increased their corporate relationships. This state-capital nexus supports the view that resource nationalism has been “more pragmatic and opportunistic” in recent years than it was in the 1960s and 1970s.Footnote 21
In the 2000s, both higher prices and a less concentrated industry (in this case, globally) gave producing countries greater bargaining capacity to shift the balance in their favor vis-á-vis IOCs. Changes in the global energy market produced processes that transcend the traditionally linear power-shifts between states (NOCs) and markets (IOCs) to more transnational and “hybrid alliances and coalitions of interests.”Footnote 22 The growth of emerging powers impacted the market not only in terms of oil prices, but also in the way the oil industry was organized, as new major “consumers” are also represented through state companies that operate beyond their borders. The specific case of China's apparently non-interventionist attitude toward developing countries created the opportunity for increased investment in extractive industries while also benefitting state bureaucracies and incumbent alliances.Footnote 23 Chinese SOEs and financial lending mechanisms have become predominant in Venezuela at least until 2015, bringing about important state-to-state alliances that include new foreign investors in the Orinoco belt.Footnote 24
Beyond material determinants for changing state treatment of foreign investment, ideological contestations are crucial in capturing some of the complexities in state-foreign company relations. In order to develop this explanation further, it is important to complement material motivations and “incentives” that are paramount in shaping the behavior of actors according to OBM models. The manner in which host states engage with global factors may also differ according to dominant and contested ideas that various social alliances employ to impact policy.
Ideational contestations: the paths of meaning and subjectivity
Material exogenous factors such as fluctuating oil prices or the quantity and quality of a country's underground endowments are not the only determinants affecting actors’ interests. They are also shaped and transformed by ideas and beliefs. Constructivist literature has made important contributions toward uncovering linkages between widely held inter-subjective meanings that can influence policy.Footnote 25 National and cultural identities, in turn, affected state behavior internationally.
Abdelal argues that constructivism “emphasizes that policy practices may result from international institutions, international norms (which specify the practices associated with a particular state identity), domestic cultural norms, and national identities.”Footnote 26 In contrast with exclusively materialist approaches, which assume that agents act according to material incentives, this line of ideational scholarship considers that “agents endow the economies in which they are embedded with social purposes.”Footnote 27 Ultimately, what social agents struggle to achieve is largely dependent on how they interpret their own identities. Social purposes can be a result of broad contestation or be latent and taken for granted by groups in society.
Widely held ideas can be used by actors and inform their interests, but subjective notions can also shape the contexts in which actors interact and effectively limit or enhance their behavior. In this case, post-positivist epistemologies focus on the value of discourse and identity as a basis for subjects’ ability to effect change or to reproduce the status quo.Footnote 28 This kind of constructivism stresses the “constraining and structural role of discourses as opposed to the agential quality of constructivist scholarship that stresses ideas.”Footnote 29 Norms and identities represent power structures that determine what is possible, through acceptable action, policy, and discourse.
Contributions from political geographers and anthropologists refer to subjective meanings and the way national constructs are associated with resource ownership, and governance.Footnote 30 An early reference within this literature is Fernando Coronil's take on Venezuela as having two bodies: its body politic, and its natural body, which is demonstrated in its subsoil resources. State authority is edified as capable of governing society through controlling the natural body of the nation. In Coronil's work, the state and nation are conceptualized as two separate entities that interact in an actor-spectator fashion, where the latter is expected to magically “deliver” goods to the former.Footnote 31 The bond that makes this theater act possible is oil.
Conceptualized as a subjective construct, the state does not operate as a mere agent maximizing a set of objectively derived interests. Seen as subjects, state officials are endowed with, and constrained by, socially accepted norms and roles, embodying pre-conceived practices and discourses. The social constructs of a landlord state or, following Coronil's terminology, a “magical state,”Footnote 32 can help explain the tensions and contradictions of Venezuela's political elite with the growing neoliberal consensus around the world in the late 1980s and 1990s. For quite some time, the Venezuelan political elite held on to ideas developed throughout the twentieth century about the role of the state as a landlord that ought to extract rents from IOCs, and later, its NOC. This notion remained strong even in the midst of a neoliberal turnaround in other sectors of the economy and clashed with the managerial culture of PDVSA. The state-NOC tensions, an internalized version of state-IOC disputes, also reflected subjective ideas of “the (landlord) state” and “the firm.”
Nationalization, autonomy, and internationalization
In 1975 under the presidency of Carlos Andrés Pérez, Venezuela's Congress approved a nationalization law that ended more than fifty years of concessionary system in the country's oil industry. This nationalization came about as a result of a gradual learning process of the Venezuelan state as a landlord, which since the 1920s sought to increase regulation over companies and extract higher rents from them.Footnote 33 In the late 1960s, long after the state had pursued a policy of “no more concessions” to foreign corporations and was deeply committed to resource conservationism, the arrangement agreed upon in 1943 by President Isaías Medina Angarita had become obsolete. Since foreign investors were aware that concessions would not be renewed after their expiry in 1983 and 1996, concessionaires stopped investing, while increasing production in the existing oilfields to extract the “last drop of oil.” The companies’ attitude, in turn, incentivized the government to speed up the industry's takeover.
Nationalization was indeed an inevitable step of a long process of knowledge creation and increased state assertiveness vis-á-vis foreign companies. The form that full nationalization took in 1976 sought to maintain the technical capacity of the Venezuelan oil industry. This was achieved through state regulation but also through granting autonomy to the national company, PDVSA, and its managerial structure. At the same time, the state left a window open for strategic associations with IOCs in case it was deemed necessary.Footnote 34 There were, however, important provisions required for such associations of technical assistance to take place. They had to be approved by both chambers of Congress and they could not, by any means, undermine state control. Ultimately, joint ventures and other forms of association that would grant foreign companies rights to own assets were completely ruled out.
Autonomy and internationalization
After period of high prices of the 1970s, the 1980s saw the opposite, low prices and a sharp decline in fiscal income. Under the presidency of Luis Herrera Campíns capital flight became endemic, reaching over USD $20 billion between 1980–82. PDVSA had also autonomously acquired debt internationally to develop its investment plans. Herrera's government, “unable to control state enterprise short-term borrowing, raided the investment funds of PDVSA.”Footnote 35 In 1982, the Central Bank proposed the repatriation of PDVSA's foreign funds of up to USD $8 billion despite the resistance of the company's executives.Footnote 36 In tandem, the system of price controls and overvalued currency proved unsustainable as oil prices kept declining. In February 1983, the government decided to devalue the currency after two decades of stability.
Much like multinational corporations, which send profits abroad to their headquarters, PDVSA kept its investment fund as earnings in U.S. banks. With the fund's repatriation and after the 1983 devaluation, the company's earnings were eroded. The company had thus far insulated itself from the workings of the state and considered its managerial behavior politics-free, but after 1982, it felt as though politics had looted the company. More broadly, PDVSA's managerial elite was critical of the failure of the government industrial policies and previous attempts at “sowing the oil”Footnote 37— until then, a pillar of Venezuelan development policy goals that sought to divert oil rents to agriculture and manufacture. From 1983, PDVSA worked on different strategies to regain its financial (and, clearly, political) autonomy. Meanwhile, the government tried to juggle the new times of austerity by maintaining price controls and setting up currency controls to prevent further capital flight.
PDVSA developed an ambitious plan of “internationalization” from 1983, whereby it bought foreign refineries. The justification of this move was to assure markets for Venezuelan oil, but it was also geared toward purchasing assets before liquid funds could be taxed and appropriated by the state. PDVSA's managers wanted to avoid further erosion of its funds for public spending and used different financial strategies to retain funds abroad in order to purchase assets in dollars.Footnote 38 In a bold move, the company decided to purchase 50 percent of VEBA Öel in Germany in 1983.Footnote 39 Luis Guisti, who would later become PDVSA's CEO, describes this step as the NOC's “realization of the need to have vertically integrated chains” to locate Venezuelan crude in international markets.Footnote 40 In practice, however, PDVSA sold light crude to its affiliate in Germany at discounted prices to leave a larger margin of profits abroad.Footnote 41 The plan that PDVSA advanced was to develop a network of refining, commercialization and transport firms. In 1986, the company purchased 50 percent of Citgo's holdings, even despite opposition from the government.Footnote 42 Throughout the decade, while the government supported OPEC policies of price protection, PDVSA saw it obstacles to its own plans. Internationalization could not expand as production and exports declined.
From the mid-1980s, the conflict that had traditionally occurred between the state and IOCs transferred to the state and its NOC. The tipping point of the conflict was the government's repatriation of PDVSA's investment fund, which propelled the company to seek vertical integration through internationalization. PDVSA sought to become closer to its natural markets, the US and Europe. Beyond motivations of shifting bargaining power, PDVSA's policies were influenced by its identity as a major oil producer, rather than an agent of a landlord state.
In 1988, Carlos Andrés Pérez was elected once more to the presidency. He promised a “great turnaround” in Venezuela's political economy. Pérez appointed a respected team of liberal-minded economists to the cabinet who executed bold economic restructuring.Footnote 43 The government was no longer interested in putting off an agreement with the IMF and pursued a package of structural adjustment policies to modernize the economy according to new international norms. In the midst of massive social unrest and state repression, Pérez's reforms became more contentious and gradual.Footnote 44 Yet, it has been scarcely acknowledged that Pérez's reformist turn did not extend to oil policy.
During the first years of the Pérez presidency, the Ministry of Energy decided to halt PDVSA's internationalization and ordered the company to cease its intentions of purchasing the other half of Citgo's assets in 1989.Footnote 45 The government continued to support its traditional role of a landlord state in its relation to oil, even despite the administration's broader embrace of neoliberalism. Despite the government's attempts, Arturo Sosa, PDVSA's CEO, became an ally of the company's executives and with his lead, the company refuted the government's decision and opted for the purchase. The process of internationalization continued even in spite of the government's opposition.Footnote 46
The company built up a strong network of nineteen refineries in the United States, Europe, and the Caribbean and up to 14,000 gas stations in the United States in the early 1990s.Footnote 47 By the end of the decade, the number of refineries had increased to thirty.Footnote 48 The aim was to turn PDVSA into a “global energy company” and it became a major force in refining and transport, one of the world's top oil firms.Footnote 49 PDVSA was, however, unable to make the Ministry of Energy allow its expansion in extraction, due to the restrictive OPEC quota. Sosa and PDVSA executives planned ways to open up Venezuela's upstream sector to foreign investors; their idea was to keep PDVSA's extraction within OPEC quotas while boosting extraction in alliance with foreign investors above that level.
Opening
PDVSA sought a favorable interpretation of Article 5 of the nationalization law from the Supreme Court based on analyses from its own legal team.Footnote 50 A leading figure in this process was a top executive of the company, Luis Giusti, who later became CEO. The interpretation of Article 5 erased jurisprudence from previous laws, giving prevalence to the nationalization law. PDVSA had to follow three conditions in order to develop alliances with foreign investors.Footnote 51 As Giusti recalls, first the country or PDVSA “had to remain in control of all operations,” second, “agreements had to be signed for a limited period” and, third, “they had to be approved by the two chambers of Congress.”Footnote 52 PDVSA developed an aggressive lobbying strategy in Congress and simultaneously drafted contracts with ample room for establishing the conditions of “control” that it would exert on the new ventures. The mechanism devised was to create control committees, integrated by PDVSA and the foreign investor, wherein the former “always had the last word.” For Giusti, the company “always acted in strict compliance with the law.”Footnote 53
From 1992 onward, the government posed no resistance to the opening. PDVSA opened a first round of auctions for operating service agreements (OSA) in marginal fields, with low or no production. The bidding mechanism for the operations was not based on law, as the concessionary system was, but on a contractual model drafted by PDVSA. In these contracts, in order to minimize political risk, PDVSA was to compensate the investor in case of changing conditions by the state. Similar to other countries in the region opening their extractive sectors to foreign investment, controversies were to be settled through international arbitration, a clause heavily criticized by the Left in Congress.Footnote 54 Lastly, PDVSA's assets abroad served as a “shield” by means of guarantees of investors’ interests. A crucial point here is PDVSA's increased authority over other agencies, mainly the Ministry of Energy and Mines.Footnote 55 As bargaining models would suggest, the terms of the contracts were designed to be welcoming for new investors, due to the initiation of a new investment cycle and the context of low prices.
In this first round of auctions, three OSA were signed as service contracts. PDVSA would pay a service fee to the operator for the extracted crude, and the fee was to be calculated through a deflator of the consumer price index in the United States for crude oil. The implication of these contracts was that PDVSA absorbed the contractors’ commitments with the state, as they were considered service providers and not extractive companies. The royalty rate was paid by PDVSA. The corporate tax was calculated under the non-petroleum reference of 34 percent instead of the petroleum rate of 67 percent and the operator would be reimbursed its capital investment (see table 1 below).Footnote 56
Table 1: Evolution of the regulatory features under nationalization and apertura in Venezuela
The second round of auctions involved thirteen new service contracts for OSAs, and new association agreement contracts for crude enhancement and the development of new camps were also approved for the Orinoco river belt. Four joint-ventures were created with large IOCs. In all these ventures, PDVSA had minority shares. For the first ten years, the royalty rate was set at 1 percent and corporate tax was agreed under the non-oil reference (see table 1 below).Footnote 57 In a third round, eighteen new OSAs contracts were auctioned as well as risk exploration agreements under revenue-sharing schemes. The government auctioned ten camps but eight received worthy biddings.Footnote 58 Fourteen companies were awarded contracts for thirty-nine years, and three commercial viable discoveries were made and subsequent joint-ventures were created.Footnote 59
Regardless, the OSA contracts produced some 600,000 barrels per day (BPD) by the end of the 1990s. The other association agreements produced 200,000 BPD then and totaled 650,000 by the mid-2000s.Footnote 60 In terms of production, PDVSA waged an intense battle with the government and OPEC. Giusti recalls: “I had to fight in OPEC, despite the fact that I was not the Minister” to increase production. The logic of the operating company, rather than that of a landlord state, was clear in his reasoning. For him, “Venezuela had silently and gently accepted a quota of 2.15 million bpd, which did not correspond with the nation's reality, our population, our reserves.”Footnote 61 While the material justifications for this policy were clear from the perspective of the company (need of investments to increase production), the managerial discourse reveals the contrasting logics between the firm and the (rentier) state, even if the latter formally owned the former.Footnote 62 Venezuela's historic tradition of resource nationalism was rooted on ideas of resource conservation and rent maximization,Footnote 63 for that reason, the government accepted OPEC's low export quota.
By 1998, Venezuela had increased its output by 800,000 BPD. PDVSA argued that heavy and extra-heavy oil was not oil but bitumen and this move justified breaking the OPEC quotas, as the conventional fields’ production remained stable. For Philip, “it was possible to argue in 1994, when PDVSA was only modestly in breach of its OPEC quota, that Venezuela was simply becoming a more individualistic, less team-spirited, member of OPEC in recognition of the fact that its good behavior in the past had not been recognized.”Footnote 64
Alí Rodríguez Araque, head of the mines commission and congressman for the opposition left-wing party Causa R, developed a critique of the opening strategy. He stated that the apertura had the objective of “decreasing to the minimum the petroleum royalty.”Footnote 65 He argued that those who were subject to regulation (PDVSA and its partners) integrated the control committees instead of the state, creating a clear conflict of interest. For Rodríguez Araque, this amounted to a deliberate plan to privatize PDVSA. Most importantly, the apertura meant a move from PDVSA to replace the ministry in the regulation of the upstream level of the industry.
Beyond the initial investment cycle and market context marked by low prices, a broader ideological and material struggle between PDVSA and the state influenced the oil opening. This struggle not only translated into greater autonomy to operate abroad but also effectively imposed a new framework that governed investments. The company replaced the Ministry in its regulatory capacity, and it more broadly contradicted the government's foreign policy ideals by challenging OPEC's quotas. The logic of a global producer, seeking to maximize production, replaced that of the traditional rentier state, normally rooted on maximization of rents and keeping production low.
Chávez's new oil policy
Hugo Chávez rose to power in 1999 through free elections and promised to “re-found” the republic via the re-writing of Venezuela's constitution. The new constitution ratified the mandate of national ownership over hydrocarbons and minerals. In terms of the oil industry and its management, the 1999 constitution established that PDVSA would continue to be a holding company whose only shareholder was the Venezuelan state. Nevertheless, the wording of the constitution stipulated that this requirement did not pertain to its affiliates, including joint ventures and strategic associations. PDVSA was to remain a state-owned enterprise but all its affiliates could, in principle, be privatized. Mommer suggests that since “PDVSA does not produce a single barrel of oil,” the managers’ idea was to turn the company into a “licensing agency” with private companies operating on the oil fields.Footnote 66
Chávez new oil policy, however, centered around three main issues: strengthening OPEC and bringing Venezuela back to its traditional landlord position of defending prices; restoring the regulatory capacity of the Ministry of Energy and Mines over the industry in general and over PDVSA in particular, and in doing so maximizing rent acquisition via royalties.Footnote 67 Chávez first appointed Alí Rodríguez Araque, well-known oil nationalist who relentlessly opposed the apertur a, as Minister of Energy and Mines. General Guaicaipuro Lameda was asked to lead PDVSA in 2000 in order to carry out further reforms. Lameda had previously been in charge of the national budget office, and his appointment was initially seen with skepticism within the company, as he was not an oil expert.Footnote 68
The government approved in 2001 a new law of hydrocarbons via presidential decree. The law stipulated that “the state reserved activities of yield exploration, extraction, collection, transport and initial storage” all of which were denominated “primary activities” (upstream). The law also secured ownership over existing refineries and their potential expansion or improvement. Nevertheless, the law allowed mixed companies through joint-ventures, mandating a state company to own at least 50 percent of the assets. According to the law: “the state is obliged to intervene directly in the business, overcoming the role of simple rent collector that had until the time of nationalization; moreover, it allows the state to keep real control and it gives decision-making power in all businesses and operations in companies that take part in reserved activities.”Footnote 69
The law increased the extraction royalty to 30 percent, while reducing corporate tax to 50 percent. The corporate tax of the non-petroleum sector was reduced to 30 percent. While the law allowed the state to keep levying non-petroleum sector corporate tax to extra heavy crude projects, the state could never levy a royalty lower than one sixth.Footnote 70 The law sought to erode the oil opening, as it did not contemplate operating contracts henceforth. Yet, it still offered incentives that made investments more attractive in contrast to the conditions that ruled prior to the apertur a.Footnote 71 The government argued that these tax and royalty conditions were easily met by the ongoing projects as their extraction costs had already shrunk due to improved technologies and enhanced learning in the areas.
Together with the hydrocarbons law, Chávez approved a package of forty-nine laws that varied from land reform and banking to elementary education oversight. All of these were approved in absence of significant debate within society at large. Once enacted, however, the reforms attracted considerable public attention (both in favor and against their implementation), provoking protests that intensified over time. In December 2001, FEDECAMARAS, the largest business confederation, called for a national strike in protest against the package of laws.Footnote 72 The government's position remained firm, defended by fiery speeches given by Chávez, rallying against the “oligarchy” and party elites. Both the reforms and government's discourse in turn spurred opposition from civil society activists associated with the political opposition and the members of the PDVSA managerial elite who feared further government intervention over their autonomy. In February 2002, PDVSA's president, Guaicaipuro Lameda, backing other managers of the company, publicly criticized the hydrocarbons law and was subsequently removed from his post.Footnote 73
Deteriorating state-company relations: the unraveling of an oil coup
Chávez appointed Gastón Parra Luzardo as PDVSA's president, after firing Lameda. Parra Luzardo was a dependency theory scholar, having no managerial experience in oil.Footnote 74 Moreover, Chávez promoted a group of revolutionary supporters to managerial positions of the company in breach of the meritocratic procedures that had been traditional to the governance structure of the company. The corporate leadership of PDVSA opposed this move publicly. The managerial elite of the company, wary of political interference, became increasingly politically active, and developed a militant movement that rallied support from various sectors of society, mostly represented in FEDECAMARAS, and the Confederación de Trabajadores de Venezuela (CTV)—the country's largest workers’ confederation.
The corporate leadership of PDVSA asked the President to restore meritocracy by removing the newly appointed managers. Chávez, instead, dismissed the entire body of dissident managers at PDVSA on live television during his Sunday show Al ó Presidente.Footnote 75 Due to the dismissal, PDVSA's top managers called to strike against the government. A one-day strike was followed by a general strike from the business corporation and the workers’ confederation and street protests on April 11. Hundreds of thousand protesters gathered outside one of the corporate buildings of PDVSA and it was transformed into a march to the presidential palace to demand the president's resignation.Footnote 76 A coup d’état was underway. In the midst of killings by snipers, top generals of the army ousted the president for just over a day.
The short-lived government of Pedro Carmona, former head of FEDECAMARAS, summarily dissolved the parliament, members of the Supreme Court, governors, and electoral council and nullified Chávez's forty-nine executive decrees. Carmona renamed Lameda as PDVSA's president. Within hours, PDVSA decided to stop oil shipments to Cuba and initiate an aggressive campaign to recuperate markets. PDVSA was located as the center of oil policy once more, sidestepping the Ministry of Energy.Footnote 77 Nevertheless, equally strong street demonstrations calling to reinstate Chávez to power fueled a military operation from loyal garrisons that brought him back on April 14.
The dynamic of street demonstrations and institutional rupture continued in the months ahead, demanding the withdrawal of Chavez's laws. Nevertheless, Chávez never withdrew the forty-nine laws. In December 2002, FEDECAMARAS called for a general strike that the workers’ confederation and the media supported calling for Chávez's resignation. The strike lasted for two months and PDVSA's managers soon joined, this time with the support of thousands of workers in several of the company's installations.Footnote 78 Oil production stopped, oil shipments stalled and economic activity came to a standstill. The strike leaders thought the government could not withstand this pressure and the President would resign. Rodríguez Araque claims that PDVSA “was not only a state within the state, it sought to overcome the state and the nation.”Footnote 79 Throughout these struggles, however, the battles between government and opposition had a strong subjective weight. These struggles included the oil company, as the government sought to impose a renewed notion of social justice associated with ownership over oil, while PDVSA defended its own image of a global oil corporation.
The government eventually took over the company through military action. After billions of dollars in losses, the strike lost strength and its leaders formally abandoned it in February 2003 with a mobilization to collect signatures to recall Chávez's government in referendum. The government fired all PDVSA workers who joined the strike. Through these dismissals, the government purged the company of more than half its total payroll, a truly radical corporate restructuring.Footnote 80 The battle over the oil company ended with government control.Footnote 81 The government centralized PDVSA's management and, because of the strike, it opted to privilege loyalty over technical capacity in the management of the industry. Since then, the government has exerted different mechanisms of political control over PDVSA. While the initial recovery of the company was remarkable after the strike, it has never reached pre-strike levels.
Oil production remained below three million BPD in the following years which, even discounting OPEC quota restrictions, was significantly below Venezuela's capacity. The loss of human capital meant “a real and sustained setback to PDVSA's productive potential.”Footnote 82 The government sacrificed the technical expertise of the company for the expediency of having a compliant company, which has deep reverberations until today. Ultimately, the goal of advancing a renewed form of rentierism, now under socialist principles, prevailed while PDVSA's image of an outward oriented oil company was curtailed.
A new, hybrid model
Much after assuring control over PDVSA did the government start to develop mechanisms to implement the changes it sought in oil policy. This process of implementation was gradual and it materialized with the full oil sovereignty campaign. After the new hydrocarbons law was approved in 2001, government officials assumed that the new legal framework would be applied only to new investments, and that the contracts already underway would remain in place until they expired.Footnote 83
Once the government assumed control over PDVSA and in the context of rising oil prices, it had new incentives to change the terms of the ongoing contracts. As the OBM argument explains, the initial investments in the operating OSA contracts were already set and production was flowing reasonably well, shifting the bargaining power to the host state. The association contracts and four joint ventures at the Orinoco belt already committed investments and production was flowing. The new oil price was significantly higher than the reference price when the contracts were signed. As Philip and Panizza argue “the desire to renegotiate the contracts, in itself, was understandable […] it could well be argued that the general increase in international prices after 2000 might have made it irresponsible to do anything else.”Footnote 84 Francisco Monaldi asserts that it was a prototypical scenario where the sunk costs of the industry made investors “prisoners of the changing conditions” of international prices and government bargain.Footnote 85
The government increased all royalties from 1 percent to 16.3 percent, concerning projects that were already producing at full capacity. Later, the government increased income tax of the Orinoco investments. In March 2006, Rafael Ramírez, PDVSA CEO and minister, declared before the National Assembly the executive's desire to migrate all contracts to joint-ventures, asking the parliament to approve a model for new contracts, while forcing investing companies to migrate to the new framework. Ramírez argued that the rationale for the change was rooted in the notions of national sovereignty over natural resources. Ramírez stressed that all operating contracts violated the principles of sovereignty. For him, the state, “captured by PDVSA's technocratic and transnationalized elite” gave up on the rights of the landlord to levy royalties over extraction and relinquished its capacity to regulate the business.Footnote 86
The parliament approved the draft contract unanimously, given that the assembly had virtually no opposition members. The contract model stated that an integrated joint-venture had to be created with majority shares for the state operating firm. The new contract was to last for twenty years, while it regulated an immediate return of regular royalty and corporate tax levels (33 percent and 50 percent, respectively, see table 1 above), in some cases where the production of extra heavy crudes was determined, a royalty of 20 percent or 16 2/3 percent could be levied.Footnote 87 The parliament also approved a law of “regularization” that determined the associations approved during the oil opening to have been illegal.Footnote 88 As this process was ongoing, companies were charged with compensation to the state for the foregone fiscal burdens that the now illegal framework allowed. Notwithstanding, in 2008 imposed a new tax that “operates as a surcharge royalty” and is imposed any time the basket of oil increases above the USD $70 mark. If the price is above USD $70, a 50 percent tax is imposed on the differential between the actual price and USD $70 and when the price goes above USD $100 the tax imposed is 60 percent.Footnote 89
ExxonMobil and ConocoPhillips did not settle with the government and opted to use file cases of arbitration against the state, though most other companies decided to accept the new terms of engagement, or settled an expropriation of assets. With the exit of these major IOCs, the government promoted the entry of China's SOEs Sinopec and CNPC just as Venezuela's relations with China became more dynamic, with Chinese companies and financial institutions becoming crucial for Venezuela's development plans. Investments around in the form of commodity-backed commitments from Chinese banks were agreed for around USD $14 billion.Footnote 90 Despite the reputational damages the legislation changes may have caused the government, most companies complied with the new framework. For a corporate attorney “it was a matter of costs, many companies preferred to keep the business going rather than engage in a long and expensive arbitration process.” In this context, a senior official in the ministry of oil also claimed that “companies did not want to lose out from the riches of Orinoco.”Footnote 91 The Venezuelan government strategically used access to the largest world crude reservoir as bargaining chip to force renegotiation.Footnote 92
Red, very red: controlling PDVSA
The Venezuelan government had many reasons to keep foreign investors in the Orinoco belt. The obvious one was to keep the capital and technology it needed to develop these fields. In a strategic sense, a PDVSA spokesperson noted that, “these are largely empty territories that need vast investments.” Thus, the state sought to share risks and costs with third party partners in a generally costly business. The government, however, also sought to accomplish other goals with involving foreign actors in its oil industry. It terms of its business strategy, the government wanted to diversify its investment portfolio, while at the same time develop new markets abroad. For a PDVSA manager, “opening investments to new markets was a crucial step, as the oil industry is characterized for being a global industry.”Footnote 93
The most important objective of the new arrangement was to assert control over PDVSA. In charge of the oil company and the ministry in 2006, Rafael Ramírez gave a speech to PDVSA high managers and other workers, serving twin roles as an important announcement and a threat. It stated unambiguously that PDVSA's political partiality should not be disguised and that the company ought to be, in his own words, “red, very red.” It was clear that the government's control over PDVSA and its use as a political tool was a state policy. It was also a threat to potential dissenting forces within the company that may have attempted to reinstall autonomy from within. With Ramírez the duality of shareholder and agent blurred further as he remained in both posts for a decade. Traditional checks and balances between state and company that nationalist actors advocated for in previous decades were downplayed or eliminated.Footnote 94 The president relied personally on the company and PDVSA satisfied government demands, becoming a bankroll agency.Footnote 95
The creation of joint-ventures supports the goal of control over the industry, via controlling PDVSA and allowing the government to pursue its own developmental policy. Mommer, who was then deputy minister of oil and according to many architect of the new oil policy, said that “100 percent state ownership does not secure control; PDVSA belongs to the state but if something is true, we were not able to control PDVSA.” Partial nationalization included bringing in foreign companies as associates that actually owned assets as minority partners in joint-ventures. Mommer stated that “a partner can help the state control its national company and make sure PDVSA is focused doing what it is supposed to do.”Footnote 96 When asked what nationalization meant for the Venezuelan government, Mommer said “in politics there is usually an inflation of words. For Chávez nationalization really meant having majority partnership in investments.”Footnote 97 A PDVSA manager supports this notion: “when there is no foreign counterpart, the state guards down as the NOC supposedly represents its own interests, but it does not have to be the case.”Footnote 98 This suggests that the government conceived foreign partnerships as one mechanism to ensure its control over PDVSA.
This view of nationalization differs greatly from the ideas left-wing nationalists held in the 1970s. At the time, the actors who opposed Article 5 of the nationalization law made sure joint-ventures would not be considered as a policy option. Yet somewhat surprisingly, in the current moment joint-ventures represent the preferred policy option by these very same actors. Monaldi asserted in an interview that “while the government wanted to exercise clear operational control, it also sought the technical know-how and the potential expansion of business with foreign investors.”Footnote 99 Ironically, nationalization in the era of the Bolivarian revolution has been more pragmatic and open to foreign investment than what nationalist were willing or allowed to advocate in the 1970s. The current version of nationalism focuses on controlling the resource and maximizing rents. Most importantly, it centers on exercising direct control over PDVSA, even at the expense of the monopoly over the upstream level of the industry. The result of this course of action is a government that seeks to centralize decision-making and enhance statist action in the economy but not in complete contradiction with foreign investment.
There are material motivations to pursue partial nationalization around 2006 and 2007, such as the maturity of investments and increase in oil prices. Moreover, the desire to control PDVSA and a general mistrust of local autonomous actors due to the recent past of political confrontation was an important driving force scarcely acknowledged. Further, the Venezuelan government has engaged in a model of redistributive or redemptory development, which it calls Bolivarian socialism, that requires constant and ever-growing rent appropriation for redistributive purposes.Footnote 100 In short, the capacity for Venezuela to continue extracting and exporting oil becomes paramount for this model. The Venezuelan oil company, however, has compromised part of its productive capacity due to the loss of important skilled labor as result of the early company-government confrontations and to the ever-increasing commitments it has acquired as a source of government discretionary income.
Conclusions
International relations and IPE scholarship has long studied state-IOC relations through the lens of bargaining theories. In the case of resource nationalism, bargaining models have proved to be useful not only in the original versions of the theory that explained the 1970s wave of nationalizations but also newer trends in state-IOC relations.Footnote 101 Similarly, the growing literature on neo-extractivism in Latin America has referred to the experience of progressive state's increasing dependence on foreign investment but a systematic study on Venezuela has remained absent.Footnote 102 The imperative of control over PDVSA is a fundamental factor that has not been explored in sufficient detail when discussing the hybrid model that the Chávez regime pursued.Footnote 103 The Venezuelan government's ideas of socialist rentierism prevailed over the identity of PDVSA's managerial elite who wanted to keep autonomy of the company, mirroring large global oil producers. Moreover, the impact of changes in the global energy market of the past few years, especially the rise of China in the global economy offered the Venezuelan state the possibility to enhance this hybrid model at least until the collapse in oil prices in 2014.
In this article, I demonstrate the importance of highlighting a broader diversity of actors beyond the dyad explored in OBM models, especially within the state, to explain the shifts in state-foreign companies’ relations, while also stressing ideational contestations. I demonstrate the Bolivarian government strategic need for and use of foreign investment in Venezuela's oil sector. In an historical perspective, this study underscores that foreign investment has been far more important for revolutionary nationalists in the 2000s than it was in the 1970s when nationalists pursued full nationalization as an ultimate goal. In this case, the state's alliance with foreign companies in order to advance its political goal of controlling PDVSA, proves the relevance of the agency of Venezuela's state and, paradoxically, its own vulnerability.
Venezuela's relationship between the state and foreign companies under Chávez was a hybrid model that incorporates important mechanisms of state control but where foreign investment was crucial to achieve the state's objectives. The joint-venture framework approved by law in 2001 was only applied in full force from 2007 onward when the Chávez administration shifted its relations with foreign companies. The government forced the complete migration of contracts signed under the oil opening to joint-ventures with state majority shares. This partial nationalization began once investments in the Orinoco belt had been producing considerable results and with a sustained increase in international oil prices, as bargaining theories suggest. Investors’ costs were considerably sunk and the government used the largest world oil reservoir as a bargaining chip for companies to accept the new terms. The government simultaneously pursued increased state control and enhanced diversification of investors, potentially exerting control over a less concentrated industry. The rise of China in this case became instrumental for state objectives as Chinese SOEs offered better investment and cooperation conditions to the state, which leveraged advantageous deals with investors. The ideas that prevailed in this period were centered on a socialist project, which featured prominently direct government control over the distribution of rents as a mechanism of political control and legitimation. Exerting control over PDVSA was a foundational element of Chávez's socialist project. Yet, this project was possible through continuing association with foreign investment.
