Venezuela: Economics & Politics of Oil as on 2007
This is a report and partial analysis of the events in 2007 in Venezuela pertaining to the "re-conquest" of the oil industry by the Venezuelan Government from the hands of the foreign multinationals and imperialism. The aim of this article is to try to find out exactly what are the changes and events that have taken place in this regard in Venezuela this year and what it signifies for the anti-imperialist and world socialist movement.
The events that first made world news headlines was in May 2, 2007 when the Venezuelan Government took control over the installations of the petroleum companies (multinationals) in the Orinoco basin. Starting May 1st, PDVSA (Venezuela?s state oil company) started controlling a minimum 60% of the shares in all oil operations in the Orinoco river basin. So far four joint companies have been formed with multinational companies including Total, Sincor, Chevron-Texaco, Exxon-Mobil, British Petroleum and the German company Veba Oel. Conoco Phillips is the only company with operations in the Orinoco that has not yet signed an agreement with the Venezuelan state oil company.
However, to properly understand the significance of these moves we must look back to some facts and figures relating to the role of the Venezuelan Government, the multinational companies, the PDVSA etc in the oil industry in the past. Venezuelan oil is geo-politically very important to imperialism: Venezuela is the third largest petroleum producer in the western hemisphere next only to USA and Mexico; its PDVSA is now perhaps the third biggest petroleum company in the world; but Venezuela has the largest known-&-proven reserve of petroleum in the western hemisphere, and the third largest proven reserve in the world as a whole ? a world,which is leading to a supposed ?energy-crisis? within a couple of decades!
We are basing our facts on a document released by the Venezuelan Government viz. "A National, Popular, and Revolutionary Oil Policy for Venezuela" written by Minister Rafael Ramirezreleased by the Government on Thursday the 9th of June 2005 (http://www.venezuelanalysis.com/articles.php?artno=1474).
The first part of this document describes the process in which imperialism and the oil multinationals took control over the oil reserves in Venezuela. To quote the document: "?we have to say that in the present time the relationship between politics and oil has become even more closely knit than it used to be. The coup d??tat of April 11, 2002 and the sabotage of the oil industry which took place during December of the same year both provide ample proof of this. What is more, I dare say that the very collapse of the Fourth Republic, and the profound crisis into which it plunged the country, are both intimately related to oil. Indeed, during the decade of the 1990s, the policy of Apertura amounted to a veritable assault on Venezuelan oil, an assault coordinated by some international institutions in oil consuming countries together with the big multinationals of yesteryear, all of whom, with the complicity of the self?styled oil meritocracy, and the ruling oligarchy and its political representatives, conspired against the Venezuelan state, prompting the crumbling of the latter and bringing about an economic and social crisis for our country."
Venezuelan Oil ? 1980s & 1990s & Before
The history of the petroleum industry in Venezuela in the 1990s is one of blatant thievery by trans-national companies (TNC-s i.e., MNC-s, henceforth mentioned as MNC-s or ?multinationals? as these terms are generally employed here in the communist circle of India) and imperialist countries. What is of much more significance is the fact that in the process the very sovereignty and political independence of the country was thwarted.
However, one thing should be made clear: under the reign of ?bourgeoisie? of one?s own country, in a ?periphery? country, the terms ?sovereignty?, ?political independence? etc are not to be taken literally; ?sovereignty?, ?political independence? etc of such countries are very empty and fragile in this era of imperialism; the apparently ?nationalist? govt may somersault to taking totally opposite stances, as we shall see in the case of Venezuela. It would have been better if Minister Rafael Ramirezelaborated this point in hid long essay. To understand the course of history we must first look at the process by means of which the imperialists and oil TNC-s gained control over the oil industry.
The State of Affairs before the Advent of PDVSA ? 1960s
In 1960, the CVP (Corporaci?n Venezolana de Petr?leo), an autonomous institute with a Directive council presided by the Minister of Mines and Hydrocarbons and an executive Board presided by a Director General, was set up to look after the oil industry.
In 1967, to further strengthen state control over industry an amendment was carried out to Article 3 of the 1943 Hydrocarbons Law. According to it, the state might carry out all of the petroleum sector activities by means of Autonomous Institutes and Companies fully owned by the State, and also authorized these entities to celebrate "agreements and promote mixed enterprises in which they could take a share, so long as the terms and conditions stipulated in each contract are more favourable to the Nation than those set out for concessions in the present law." It was also stated that the approval of all contracts was to be done by the joint session of the Chambers of Congress. Also it was settled that Venezuelan Law would settle all disputes and there would be no international arbitrations. Further provision was there that all the agreements would be fully published in "Gaceta Oficial" ? the official gazette.
The intentions are clear: ?
1. Exercise state screening and control over terms and conditions of all contracts and agreements.
2. Do not allow any "international court" (= imperialist dominated agency) to pass any judgement on disputes between Venezuela and multinational companies. In other words, as the oil belongs to Venezuela, so multinationals will have to go by Venezuelan terms and conditions to use it.
3. Make the terms and conditions of all such treaties and agreements open to the public for review (publishing in the official gazette).
It is amply clear from this amendment that the then government of Venezuela had taken an apparently "nationalist" stance, at least in the matter of oil industry. This was in 1967.
Enters the PDVSA & the 1980s
However, the situation changed soon. The CVP was dissolved and nominally a new holding company, the PDVSA (Petr?leos de Venezuela SA, a state venture) was formed in 1977 and oil industry dealings were to be made through it. On the face of it, this should not have been too big or significant a change. But in fact, the whole top and middle management of PDVSA was taken from the former employees of oil multinationals. So, as has now become clear, the PDVSA, since its birth, acted as agent of foreign multinationals ? it undertook a process of changing the laws first, then taking advantage of the changed law it undertook a series of agreements and contracts with foreign multinationals whose terms and conditions virtually looted Venezuela of its oil wealth and bled the country dry. Birth of PDVSA was preceded by a change in the Article 5 of the Hydrocarbon Law in 1975; that changed law became operational from the beginning of 1976 and through this amendment, in the language of Minister Rafael Ramirez,"?the door was kept open for private investment in oil, albeit only in association with the state oil enterprise." It should also be noted that the western media, including the Internet, most of the times present this 1975 step as a ?nationalisation? measure, a measure that ?benefited? Venezuela, etc and never mention the 1960 or 1967 enactments/amendments.
Let us look into history of operations of the PDVSA.
State pricing of oil brought out of state control:
In the beginning of the 1980s, global oil demands fell due to very high oil prices then prevailing. Taking advantage of this plea, the PDVSA started pressurising the Govt to let the PDVSA control the sale price. It is to be remembered that hitherto the Ministry of Mines & Hydrocarbons fixed the sale price. However, under pressure from the PDVSA, from January 11, 1985, it was resolved by the Finance Ministry that all prices declared by the PDVSA would be accepted. As a result of this, all throughout the next 15 years, there would be no control over oil prices whatsoever! The PDVSA would sell oil to its favoured multinationals at a huge discount, thus virtually giving away Venezuelan wealth for peanuts.
Recent studies of the accounts of the year 1983 to 2004 revealed that the opportunity costs of the discount granted by PDVSA to all its overseas affiliates averaged $1.03/barrel totalling $7.5 billions; when each item was calculated in terms of 2004 dollars this sum becomes equal to $11.4 trillions!
The acquisition of CITGO:
After 1986, PDVSA started another strategy. It started partial acquisition of a U.S. petroleum company, Citgo?s refinery system, leading to a full takeover some years later. Between 1986and 1998, PDVSA invested $4.5 billions in USA in this way. This ?capital transfer? abroad took place when Venezuela was undergoing one of its worst economic crises!
It may be argued that capital investment abroad is not a bad thing for a country, as it would eventually lead to repatriation of profits back to Venezuela. But the actual plan was totally different. It went something like this.
1. PDVSA will sell oil at a discounted price to Citgo. So, by Venezuelan accounts of PDVSA, its profit would go down. So the net income of both PDVSA and Venezuelan Govt goes down sharply.
2. Citgo makes higher profits due to input cost (oil bought at cheap rate from PDVSA). The US Govt taxed Citgo and gets a fat portion of the fattened profits as tax from Citgo. For example, in 2003, 193 MBD (million barrels per day) of crude were sent to Citgo?s refineries at an average unit price of $2 under the true market price, for a total discount of 394 million dollars per day! The total loss, as a result of this, to the Venezuelan Exchequer made up of forgone royalties and income tax came to $253 millions. On the other hand, the US govt got $0.89 million simply as income tax due to that additional profit!
3. THE MOST STARTLING FACT is this that, though Citgo made heavy profits, Citgo never pay any dividends at all to the PDVSA, or through it to the Venezuelan Exchequer, for the most part of the last 20 years!!!
Consider as an example what happened when, in 1999, president Ch?vez demanded that Citgo declare dividends for 1998 fiscal exercise. One could have supposed that finally some justice would prevail and profits derived from price discounts would be repatriated. BUT NO! Citgo declared dividends of $486 for that year, but according to the structures devised by the PDVSA, these funds were remitted to Citgo?s US parent firm PDV America. This company, in turn, declared dividends to its own parent, PDV Holdings Inc but not before reducing the amount from $468 millions to $268 millions. And this company further reduced this amount to ZERO! What happened was that the funds were simply recycled to various businesses of PDVSA in USA. So the net effect of "acquisition of Citgo" were:
1. High volume of Venezuelan capital is invested in USA.
2. By means of this commercial tie-up both Citgo and its US affiliates and the US Govt too make heavy profits solely derived from forcefully selling Venezuelan oil at very cheap prices.
3. But PDVSA and Venezuelan Govt do not earn a single dollar as dividends from above profit, in addition swallowed heavy losses incurred due to having sold oil at discount.
The dismantling of the 1967 Hydrocarbons Law was the next step devised and executed by the PDVSA. As we shall see now, the PDVSA, acting as the agent of foreign imperialists and multinationals, embarked on a path of systematically dismantling whatever little barriers (legal) were there to the open loot of Venezuelan oil. The main such legal obstacle was the 1967 Hydrocarbons Law, which, as seen before, stipulated control on the terms and conditions of the contracts of oil.
As we have told earlier: ?political independence? etc of such countries are very empty and fragile in this era of imperialism ? during the reign of the same Acci?n Democr?tica party led governments those 1960, 1967 and 1975 amendments were made, the same AD & COPEI parties filled the houses of representatives and they almost alternatively led the govt from 1958 to 1998.
PDVSA in the Period of Globalisation
This is how the PDVSA proceeded. In 1990 a ?Plea for Interpretation? was placed before the Supreme Court of Justice. To cut a long story short, the main aim of the Plea was the annulment of article 3 of 1967 Hydrocarbons Law. The president of the court, proving that he was also a stooge of foreign capital, gave the ruling whereby:
1. Article 3 of 1967 Hydrocarbons Law was annulled.
2. It was also clarified that "state control" would henceforth not mean majority shareholding stake, but a supposed legal control. This cleared the way for operations where the multinationals would have majority shareholding. In fact, in all association of contracts it was explicitly stipulated that under no circumstances PDVSA would be allowed to become a majority partner.
3. By the annulment of Article 3, the principle of International Arbitration was ratified for all contracts. This meant that disputes would be settled by International Courts (= imperialist courts) and not by Venezuelan Courts.
4. The most important effect of the annulment of Article 3 was that the Venezuelan Govt no longer had supreme authority to decide the terms and conditions of the contracts. They would be decided by the PDVSA and its multinational masters (obviously in a way so as to allow looting of Venezuelan oil reserves).
The eye-opener is that the National Congress of that time coolly accepted ALL OF THIS.
So, by the end of 1993 the Ministry of Energy and Mines was fully under control of the PDVSA and oil multinationals.
Taking advantage of an open legal field, the PDVSA embarked on two major sorts of agreements to rob Venezuela: (1) Operating Contracts, and (2) Association Agreements. Let us briefly review what it did.
(1) Operating Contract: The original intent of the Venezuelan state regarding Operating Contracts was: (1) they were to be mere service providers, to aid State companies in production and managements of oilfields; (2) they were to be restricted to producing and managing marginal fields. However, in actual practice what was done by the PDVSA were: (1) Virtually the whole production was turned over to contractors ? they even began to show oil supplies in their U.S. Balance Sheets (as if they owned them); (2) by the time of the 2nd and 3rd round of operating contracts, both active and inactive fields were turned over to them ? by the end of this period (from 1995 onwards) some contracts handed over rich and highly productive fields to contractors (as for example the Bosc?n Field in 1995); (3) each time the Congress or National Assembly requested copies of agreements, the PDVSA replied that they contained privileged information and so could not be handed over; and (4) the real reason for this evasion is clearly shown to be illegal terms of contracts, which practically looted Venezuela?s oil wealth.
For example, in 3 contracts undertaken around 1992-93, invoices raised by the contracts were 80% of the value of oil produced! This means Venezuela, through PDVSA, was turning over 80% of the value of oil wealth to the contractors! Total loss was estimated at $9.7 millions in a single small field producing only 34 thousand barrels a day. The nature of overpricing of services by the contractors can be understood when we see that whereas contractors charged lifting cost of $19.17 per barrel, PDVSA in its own operated oil fields calculated a lifting cost of only $4 per barrel!! (The contractors extracted almost 380% more charge!)
In the Second Bidding Round, eleven Operating Contracts were made and the service charge rated by the contractors was 66% of the value of oil. This seems slightly better ? but the catch was elsewhere! Within some of the contracts, there were clauses that if production reaches a certain volume, further ?incentive? will be paid to the contractors. All these provisions triggered in 2003-04 a bizarre thing: service charge shot up to 93% of the price of oil!!!
Then, in the Third Bidding Round, the PDVSA tried with all its might to scrap royalties payable by it to the state. The main target was ? the service charge payable to contractors was determined based on the value of a barrel of oil less royalty paid to the state. Hence if royalties were eliminated then service charges would shot up.
To sum up, the Operating Contracts turned out to be another means of robbing the Venezuelan state by higher service charges.
(2) Association Agreements: The best of methods employed by multinationals to rob Venezuela was by means of Association Agreement. The stated purpose was to form joint ventures with oil multinationals with the aim to produce upgraded extra-heavy crude oil, which is more profitable. But here too, the terms and contracts of the Agreements were designed in a manner so as to rob Venezuela of its oil wealth. Witness the following facts:
(A) They were liable to pay only 1% royalty. This was an illegal application of a clause in Venezuelan Law that stated that ? mature projects which had paid 16-and-two-third% (i.e., one-sixth of their total value) interest all their lives, would, in their mature phase, be allowed to reduce royalty payment to 1%.
(B) The income tax was fixed at only 34% of profits, which was non-oil tax-rate. It is to be remembered that in Venezuelan Law the rate of income tax on oil production would be (supposed to be) one-sixth or half of the income depending on certain factors.
(C) It goes without saying that in all these projects PDVSA has a minority stake.
(D) In at least one of the Association Agreements (SIMCOR), the foreign multinational involved in the project illegally extracted more oil (110% more, in this case 110 thousand barrels more) per day than it was authorized to do (0.1MBD). It was originally assigned 250 sq. km of oilfields, but it illegally extended its operation to 324 sq. km and further illegally "reserved" for it another 170 sq. km.
(E) Finally, even though it does not have any right to sell natural gas produced in the wells, it has illegally usurped this right.
(F) And in order to cover up the gross illegalities they were performing, the multinationals arranged for the "disappearance" of all documents pertaining to the technical terms of the contract. Finally, after a lot of effort on the part of Ch?vez Govt, some of the documents could be retrieved using international sources and that is how the original terms of the contracts were made public.
The Fight Back ? Imperialist Sponsored Coup & Aftermath
The Administrative and Political Events of the Fight Back
The fight back against the imperialists started early in 2002. Ch?vez started to take steps to bring the PDVSA under state control ? and the management fought back.
In April 2002 the fight reached a peak ? Ch?vez sacked seven top-level managers and some other officials.
Immediately the stooges of multinationals struck back ? within a few days Ch?vez was ousted by a military coup supported by the pro-imperialist oligarchy.
But amidst mass popular protests and mass movement against the coup, in a few days the coup was crushed and Ch?vez was reinstated in power. His steps were continued, and that led to another climax in December 2002, when owners (capitalists) and imperialist stooges struck again ? a "strike" was called. It had minimal impact on other sectors but crippled the oil industry where the full top layer (managers, executives and supervisors) struck work and started sabotaging production. Ch?vez responded by mobilising the rank and file. Countrywide, communities kept vigil on thousands of kilometres of oil & gas pipelines. And workers did almost a miracle ? despite the highly sophisticated and computerised nature of the production and distribution process that needed supposedly highly educated and trained manpower of top level management and technical experts, with the help of retired workers coming in, thousands of PDVSA workers slowly restored production. Workers in the electric company CADAFE also succeeded in similar efforts. By January 2003 oil sector production reached 50% of pre-strike level, and soon thereafter that came to almost normal. This was a decisive battle in which poor communities of the country and more strikingly the workers played a major role. How the workers actually managed PDVSA and CADAFE production-distribution that time, and later showed their ability to ?run? the state owned Aluminium Giant ALCASA led by former guerrilla fighter and respected leader Carlos Lanz, is a very significant thing to be investigated and understood (but then Michael A Lebowitz has cited the problem of ?thwarting? of "workers? control" in PDVSA and its dearth in all state sector firms except ALCASA and CADELA in his recent article in Monthly Review July-August 2007 issue) ? and that needs an urgent and separate treatment.
This anti-imperialist crusade was progressing since then and culminated in the takeover of the Orinoco oilfields. The shareholding of each project has been set at at-least-60% for the PDVSA ? the new, restructured, anti-imperialist PDVSA ? and all illegal terms and conditions annulled.
During the course of this political battle, the following are some of the steps taken by the Ch?vez administration in the oil sphere:
(1) The illegal terms of the Operating Contracts have been annulled.
(2) No service charge greater than two-third will be paid in any Operating Contract.
(3) Mixed enterprises will be constituted with at least 51% state shareholding.
(4) In September 2004 the royalty in the Orinoco basin Association Agreements was made one-sixth from one-hundredth of the value produced (a gain of at least $2.5 millions per day).
(5) In the Sincor case, steps have been taken to restart operations limited to 250 sq. km.
In brief, though multinationals still hold a large stake in Venezuelan oil industry, the past 4-5 years? anti-imperialist drive has succeeded in smashing the inner enemy ? the old PDVSA was smashed and reconstituted in a thoroughly national, anti-imperialist fashion, automatically resulting in usurpation of the almost political control that the multinationals and imperialism were exerting.
In Lieu of Conclusions
In the present day scenario of unbounded attacks by US imperialism, will it be too much if we call this a strong anti-imperialist step? This question needs to be clarified a little. It is true that the Venezuelan government has not fully expropriated the imperialist ownership of the oilfields. Then what has it done? In retrospect we find that: (1) Forcibly the percentage shareholding of the imperialists has been reduced to 40%. (2) The control exercised by the imperialists and their stooges over policies of the state, as well as total liberty in framing the terms and conditions of oil contracts, have been smashed. And a new control is now exercised by the state via the reconstituted PDVSA, anti-imperialist in nature. (3) The oil-income of Venezuela has gone up sharply.
Based on this summary and keeping in mind that all this is happening when there is no super-power to challenge the USA from whom Venezuela can draw help, it can and should be asserted that this was a prolonged anti-imperialist battle by the Venezuelan workers and poor toilers led by Ch?vez, which has succeeded in striking a blow to imperialism.
A last thought on these events: It is also a striking feature of these events that the US imperialists did not perform armed invasion of Venezuela. What conjuncture of forces stopped it from doing so? Keeping in mind the psychic (self-defeating) "victory" of imperialists in Iraq, followed by the bumbling (if not volte-face) in case of North Korea, Iran, and then finally these Venezuelan events? ? the question, which now demands serious attention, is ? is US imperialism weakening? Is it in the decline?
These are the questions and propositions, which the world proletarian movement will have to urgently address.
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