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Opinion and Analysis: Oil and Gas

Venezuela's and Canada's Very Different Approaches to Oil

With the recent surge in oil prices, long-standing debates about Canadian and Albertan oil policy have been infused with new vigour. Is Canada getting the most out of this precious natural resource? What are we doing with our wealth?

Canada and Venezuela represent the most important sources of oil outside the Middle East—and as heavy oil extraction methods improve, they may surpass even that black-gold mine. But their approaches to oil revenue could not be more different.

Venezuela's oil industry was very similar to Alberta's in the early- to mid-1990s, when US-promoted neo-liberalism—“free trade” and the privatization and deregulation of the oil industry—was implemented. But when the controversial yet popular Hugo Chávez was elected in 1998, Venezuela embarked on a transformative experiment, “re-nationalizing” the state oil company. With the country’s oil-based income increasing exponentially, Venezuela has invested heavily in social programs. According to the Venezuelan National Statistics Institute, poverty rates have declined from 49 to 37 per cent since Chávez assumed office. The Chávez administration has presented a serious challenge to neo-liberalism in Latin America by developing a social-democratic model with a sharp revolutionary edge. This process was made possible by Chávez's successful mobilization of poor Venezuelans into a mass movement.

Canada’s oil sector is highly regionalized, with royalty rates and the bulk of corporate taxes set and collected at the provincial level. Alberta Premier Ralph Klein has pursued diametrically different policies than Chávez. Despite its business-friendly approach, the Klein government has presided over huge surpluses over the past few years. Nevertheless, though social spending has increased marginally over this period, it remains below the level it reached in 1993 before being slashed by Klein.

Were Alberta to begin demanding a bigger piece of the oil-revenue pie, would it end up being invested in the public good? Would it inspire (or require) popular mobilization along the lines of the Venezuelan experience?

Two Models

From the birth of the Canadian and Venezuelan oil industries in the early 20th century to the late 1990s, the policies in both countries followed similar trajectories. Up until the 1973 OPEC oil shock, both oil industries were increasingly dominated by foreign corporations, most of them American.

As happened in many other OPEC countries as a result of the crisis, then-President of Venezuela Carlos Andrés Peréz nationalized the oil industry in 1975, creating state-run oil company Petroleos de Venezuela S. A. (PDVSA). Venezuela pursued a series of nationalist policies during the late seventies and early eighties, investing oil revenues in a a slew of ill-conceived development projects. Ultimately, these were doomed by poor planning, arrogance and the misconception that everlasting high oil rents would provide permanent subsidies.

Venezuela experienced a country-wide depression for much of the 1980s, as oil wealth was replaced by foreign debt. By 1989, at the behest of the International Monetary Fund (IMF) and the US Treasury Department, the government implemented the Apertura Petrolera—the “oil opening.” While PDVSA technically remained state-run, the industry was opened up to external investment under extremely generous conditions, quickly becoming dominated (once again) by foreign multinationals. PDVSA itself came under the control of a technocratic elite, eventually becoming known as a “state within a state” for its viciously defended autonomy from the Venezuelan government. It resisted government oversight through “internationalization”—investing oil rents in overseas ventures to avoid transferring the money to the government.

Though not an OPEC member, Canada also founded a state-run oil company, Petro-Canada, in 1975, during the first Trudeau government. In 1980 the federal government implemented the National Energy Program (NEP), despite fervent opposition from Western Canada. The NEP expanded the role of Petro-Canada, gave preferential treatment to Canadian oil producers, and by fixing domestic prices sought to brace Canada’s industrial east from the terrifying jumps in the international price of oil.

In 1984, however, Brian Mulroney won the federal election campaigning against the NEP, heralding the rise of an emboldened regionalism and the end of nationalist oil politics in Canada. The signing of the North American Free Trade Agreement (NAFTA) effectively enshrined Canada as an energy satellite of the US, making it exceedingly difficult for Albertan or Canadian governments to serve the province or the country’s energy needs until the US had been served first. In 1990, the Mulroney government declared its intention to privatize Petro-Canada, a process completed under Chrétien in 2004.

Bolivarian Venezuela: Renationalization and Rebirth

A former colonel who led a failed coup against a corrupt and repressive government in 1992, Hugo Chávez was democratically elected in 1998 with a mandate to overhaul Venezuelan society. Realizing his most important campaign promise, he called a Constituent Assembly to rewrite the Venezuelan Constitution. Over the past seven years, Venezuela has seen a truly impressive number of elections, plebiscites and referendums. All told, Venezuelans have voted 11 times since electing Chávez in 1998. Once key political reforms were passed through the ratification of the new Bolivarian Constitution (named after of Simón Bolívar, the 19th-century independence leader), the Chávez government proceeded with a series of more profound changes aimed at addressing the country’s most glaring contradiction: oil wealth has made Venezuela one of the region’s wealthiest countries, but poverty rates have been brought below 50 per cent only in the last two years.

Sowing the Oil

Coined in a 1936 editorial by the famous writer Arturo Uslar Pietri, to “sow the oil” is an expression with a long history in Venezuela.  As Venezuela made the transition from an agricultural to an oil-producing state, Pietri’s apt phrase captured people’s hope that oil wealth would be shared and bring rapid development.  Unfortunately, for the forty years that the social-democratic Acción Democrática and the Christian-democratic Copei alternated in power between 1958-98, oil wealth circulated almost exclusively in small elite circles.  But with the arrival of the “Bolivarian revolution,” the phrase has finally been put into practice.

Regaining control of PDVSA was the government’s first step in bridging oil wealth and poverty. In response, Venezuela’s traditional economic and political elites—business associations, traditional parties, corporatist union leadership, the private media—organized a military coup on April 11th, 2002. It was reversed a mere 48 hours later by loyal elements of the military, supported by massive popular mobilization demanding Chávez’s return.

In December 2002, Venezuela’s main trade-union confederation (CTV) formed an alliance with the country’s chamber of commerce Fedecamaras), calling for an industry-wide oil strike to demand Chávez’s resignation. Many blue-collar workers heeded their unions’ call and failed to show up to work, or actively picketed PDVSA installations. Many others did show up, but were prevented access to their job sites by other workers, or by white-collar management, who locked up PDVSA installations and went on extended vacation. The prevalence of the latter strategy, and the central role played by Fedecamaras, contributed to the impression of many Venezuelans that the strike was really a lockout. The conflict dragged on for two months. Finally the country went back to work. Chávez remained in power.

Many companies supporting the work stoppage had gone bankrupt, and many workers felt so betrayed by their own leadership that they left the CTV and formed a rival country-wide confederation. PDVSA estimates its losses as a direct result of the strike/sabotage at $14-billion dollars US. In retribution, PDVSA fired an estimated 18,000 workers—a move widely criticized by domestic and international labour groups. One result is a largely untapped reserve of skilled labourers in Venezuela. Many have recently begun emigrating to Canada as private oil companies in the tar sands look to foreign and domestic labour to undercut Canadian unions.

Since the failed shutdown and strike, the Venezuelan government has consolidated the “renationalization” of PDVSA. Royalties for conventional oil extraction were raised in 2001. Of greater long-term importance, however, was the increase in royalties on the extraction of Venezuela’s unconventional reserves from 1 to 33.3 per cent. A petroleum export tax, phased out in the early 1990s, has been reinstated, and the corporate tax rate for projects in the Orinoco tar belt have been raised from 34 to 50 per cent. Crucially, the government has actually begun collecting these taxes, and demanding payment of back taxes—for the Orinoco tar belt alone, back taxes currently owed are estimated at $2-billion US.

Venezuela’s share of oil extraction has also increased through the legislation of joint ventures. All operating agreements negotiated since 2001 limit private companies to a maximum total share of 49 per cent, and all operating agreements negotiated previously have been renegotiated. As a result, PDVSA projects savings of $3-billion for the fiscal year 2006.

The higher share of the profits has allowed the government to spend more on domestic social programs—mainly health care, education and subsidized markets. In theory, Venezuela had public health care and education before Chávez; in practice, the majority of the population received terribly inadequate services, and often none at all. At so-called “public” hospitals, for example, underfunding was so acute that patients were forced to purchase everything from rubber gloves to prescribed medicine. Similarly, access to supposedly free public universities was too often restricted to middle- and upper-class Venezuelans.

In response, the Bolivarian government created the health mission Barrio Adentro (“Inside the Neighbourhood”), educational missions and a subsidized-food mission called Misión Mercal. Barrio Adentro has placed primary-care clinics in all of the country’s poorest communities, giving many Venezuelans access to medical treatment for the first time in their lives. The educational missions also serve poor barrios, providing free adult education. Misión Mercal provides basic foodstuffs at a discount of 20 to 70 per cent to cooperatively-run community markets. These markets now reach nearly 50 per cent of the population.

In 2004, Venezuela invested $3.7-billion of its $6.5-billion net oil profits in social missions. In 2005 this figure increased to nearly $5-billion, providing medical services to over 17 million Venezuelans, teaching one million people to read, and granting 46 per cent of Venezuelans access to basic foodstuffs at significant discounts. Last year, Energy Minister Rafael Ramírez announced the industry’s plans for the period from 2005-2012 based on projected revenues, calling for a total social investment of $56-billion (nearly $10-billion per year).

Despite the allure of the petro-centric economy (fast cash and lots of it), Venezuela has already begun to diversify. An evolving “endogenous” development strategy encourages public, private, and co-operative agricultural production and manufacturing. Community co-operatives are being trained and subsidized. It’s a gradual process, and one in which the social component is at least equal to the economic.

The social programs are not just creating educational and health programs while the oil money lasts: they are mobilizing the populace. Education and health programs, subsidized basic foods, job training, co-operatives, land reform committees, participatory budgeting initiatives—all are possible because of high oil prices, but their legacy will outlast Venezuela’s oil reserves. This investment is building a society fundamentally inclusive of the 37 per cent of Venezuelans who live in poverty, and the much larger number who live within its shadow—the very people who have historically been the victims of a society designed to perpetuate the rights and privileges of a tiny minority. Those who previously would never have obtained university degrees or even learned to read are now both educated and invested in their own futures. The legacy of democratization will be hard to reverse, no matter what turns are taken by future oil policy or future governments.

In the same way, Venezuela’s solidaristic foreign policy—dubbed “oil diplomacy” by some—is building regional and international capacities. In an immediate sense, it is proving to the world the that there is an alternative to the neo-liberal model, which has billed itself as the only option for the past 25 years. Recently, Venezuela has created regional oil initiatives—including investment, assistance with development, and preferential pricing—for the Caribbean (PetroCaribe), the Andean region (PetroAndino), South America (PetroSur), and Latin America (PetroAmerica), along with a spectacularly successful oil-for-doctors agreement with Cuba, and oil-for-food-and-goods deals with Argentina, Brazil and Uruguay.

In late 2005, despite strong opposition from some Republican legislators, PDVSA subsidiary Citgo began to provide heating oil at a 40 per cent discount to poor communities in the US. Households in New York, Massachusetts, Maine (where recipients include four indigenous communities) and several other states have benefited from the deal. PetroCaribe and the Citgo deal are part of Venezuela’s proactive “Bolivarian Alternative” to the US-promoted Free Trade Area of the Americas and the economic hardship borne by the country’s poor that would result. According to Energy Minister Rafael Ramírez, “The Venezuelan proposal is based on economic complementarity, on co-operation and on solidarity, more than on competition.”

Auctioning Canada’s Future Under the Klein Government

While Venezuela has taken advantage of record oil prices to invest heavily in social spending, Alberta’s Klein government has moved steadily in the opposite direction. Private companies investing in Alberta’s tar sands pay just 1 per cent royalties until all capital costs are paid off. Because of incentives from the provincial and federal governments, corporate taxes are low on tar sands projects and declining in the oil and gas sector as a whole.

Nonetheless, Alberta government revenues have increased in tandem with rising global prices—from just $2.6-billion in 1998 to a whopping $9.74-billion in 2004-05. Yet this money has been spent largely on maintaining the country’s lowest income tax rate and paying off the deficit. Despite the oil-fuelled economic boom, Alberta continues to have the lowest minimum wage in the country. While social spending has increased slightly in recent years, it has not yet been restored to the levels it achieved before 1993, when the government cut social spending by 30–40 per cent.

Despite this enormous surplus, the Alberta government has pushed for an expansion of public-private partnerships in the health care sector. Critics argue that this is just a code word for privatization and that it violates the Canada Health Act. According to a recent report by the Edmonton-based Parkland Institute, the affordability of public health care is not at issue—the government has more than enough money from recent oil and gas windfalls. Rather, the report argues, funding social programs is contrary to the Klein government’s market-obsessed ideology.

Strategic Skeptics

Of course, there are those who argue that Alberta’s oil policy is preferable to Venezuela’s. They raise two main criticisms of the emerging Venezuelan model. The first is the fear that PDVSA’s newfound assertiveness will scare away foreign investment. “If competitive rules aren’t in place,” warns James Williams of WTRG Energy Economics, “they won’t be able to develop the heavy oil—unless Chávez does it himself. Foreign investors won’t be there.” British Petroleum (BP) CEO John Browne recently mused to an interviewer, “One has to question whether Venezuela wishes foreign oil companies really to be there in any big way.”

But the next day, not wanting to compromise his company’s substantial investments in Venezuela, Chevron’s Latin America director Ali Moshiri noted, “The name of our company is Chevron, and our Chairman is David O’Reilly. We have a different view [than BP] on Venezuela.” The fact is that despite raising the cost of investment for foreign companies, big oil remains in Venezuela—and, with prices surging, it’s not going anywhere.

The second critique is that Venezuela’s excessive social spending will doom the industry by ignoring crucial reinvestment. In late 2004, the IMF called on oil-producing countries to save profits from high oil prices rather than spend them. Oil industry analysts in the US make the same argument: Jenalio Moreno warns, “Windfalls from higher oil prices are enabling nations such as Ecuador, Mexico and Venezuela to mask the mounting urgency for reforms and investments needed in the region's energy sector.” Moreno cites Ricardo Amorim, head of Latin America research for WestLB in New York City: “One of the effects that you have when you have high oil prices is you can temporarily solve structural problems. Those countries are not investing as much as they should in the future and that could create bottlenecks.” Funding social programs with high oil rents is all well and good, say these analysts, but if maintenance of industry infrastructure (wells, pumps, roads) isn’t kept up, these oil-funded programs will be unsustainable.

But, according to the Venezuelan government, the future is precisely what Venezuela is investing in. In the same year that PDVSA invested US$3.7-billion in social programs, it reinvested almost twice that amount back into the company. The conflict at root of the “re-nationalization” process occurring under the Chávez government is between the “old PDVSA”—a profitable multinational that gave highly generous terms to private companies but transferred little profit back to the Venezuelan government—and the “new PDVSA,” managed efficiently and professionally in the interests of Venezuelan citizens.

Bolívar North?

A better deal for Alberta depends on the involvement of the rest of the country. This can come about only as the result of a collective decision by citizens to force it onto both provincial and federal agendas. But nationalist politics are probably not enough.

Canada has been riven by conflict over Alberta’s oil wealth for decades. During the days of the National Energy Program, Alberta fumed as the rest of Canada ate up their profits during boom-time. Since the death of the NEP, and despite relatively small surpluses in a few other provinces, the rest of Canada has come to resent what they perceive to be Alberta’s greed in hoarding a national patrimony as a provincial right.

This tension is, perhaps, less potentially divisive than it first appears. When we consider the potential rents that the provincial and federal governments are handing out in incentives to private companies, it becomes clear that there is enough money to go around—it’s just kept to a very small circle. A higher proportion of windfall profits would permit Alberta to reinvigorate and expand the Alberta Heritage Fund (a rainy day fund to protect Albertans in case of future price drops, the fund has been stagnant since the 1980s), bring funding for social-programs at least up to pre-1993 levels, begin serious restoration and mitigation of ecological damage resulting from oil extraction, and share a significant amount of money with its poorer brethren in the rest of Canada. As we have seen with Venezuela, the claim is preposterous that big oil would no longer find the tar sands profitable with royalties at such a rate. Oil-producing countries have the upper hand.

Alberta is not just missing out on the windfall profits currently enjoyed by private companies; it is squandering Canada’s reimbursement for the exhaustion of a non-renewable resource. The extraction of tar sands and extra-heavy crude is more than three times as ecologically damaging as conventional oil extraction. The resultant increase in greenhouse gas emissions is already encouraging the Harper government to renege on our responsibilities to Kyoto.

The impact is arguably even greater in Venezuela, where environmental regulations have historically been less stringent. Indigenous communities in both countries may be the worst losers in the race to the dirty-energy throne: both Canada and Venezuela are currently negotiating pipelines through indigenous territories, threatening to displace whole communities, with little compensation, if any, on offer.

Why isn’t Alberta investing a portion of current oil profits in developing an alternative energy industry that could establish itself as a leader once fossil fuels are exhausted, or once we decide that the cost is just too high? By taking the lead in alternative energy, protection of the environment and equitable partnership with indigenous communities, Canada could establish itself as model for constructive, socially just development.

The Alberta model depends on the assumption that private profits will be reinvested back in the industry, with resulting job creation. But oil companies are having difficulty finding projects in which to invest; their record profits are currently being passed on to shareholders. The distinction seems relatively straight-forward; but, at root, separating the Albertan and Venezuelan models are questions of power, and ultimately of ideology.

Prior to Chávez, Venezuela was pursuing an oil policy very similar to that of the Klein government. The transition was only possible by organizing and involving the populace while simultaneously implementing progressive policies from above. Similar changes in the Albertan context would depend on a corresponding mobilization of Canadian citizens—both here and in the rest of the country.

At present, this question isn't on the agenda in Canada—in 2005 it wasn't even an election issue. Making it one will require an ideological challenge to neo-liberalism, including a serious rethinking of our relationships with corporations at the provincial and national levels. It will also demand revisiting the relationship between natural resources located in Alberta and the broader Canadian social and political context. The popular mobilization needed in Alberta to develop a progressive oil strategy cannot occur in isolation from the rest of Canadian society. We must overcome the individualistic chauvinism that so often drowns out progressive voices in Alberta.

Jonah Gindin is an independent journalist and researcher living between Toronto and Caracas.  He has written for Venezuelanalysis.com, ZNet, and NACLA Report on the Americas, among other publications.