Joint Ventures: Venezuela’s Faustian Pact with Foreign Capital

PDVSA, the Venezuelan state oil company and renowned source of riches—riches that fund the famous social missions at that—has recently gone into partnership with the forces of imperialism. Why? And what does this mean for building socialism in Venezuela?

By Steven Mather – Venezuelanalysis.com
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The following statement may come as a bit of a shock to those who have listened to one of President Chávez’s anti-imperialist speeches: PDVSA, the Venezuelan state oil company and renowned source of riches—riches that fund the famous social missions at that—has recently gone into partnership with the forces of imperialism.  Shell, Chevron, BP, and other equally infamous trans-national oil corporations have formed joint ventures (empresas mixtas in Spanish) with PDVSA.  Even more shocking, this has been sold to the people as a radical recapture of national sovereignty and a victory against imperialism.  George Orwell and his novel 1984 spring to mind.  But the Minister of Energy and Oil, Rafael Ramírez, said so himself regarding the new joint ventures: “We have done nothing more than reclaim the biggest oil reserves in the world from the jaws of imperialism.”

Naturally, some on the left in Venezuela are not too keen on their government going into partnership with the forces of imperialism.  They say Chávez has sold out.  These very same companies are currently bullying Bolivia, stealing the resources from Iraq, Nigeria, and other impoverished countries and are exporting the wealth back into the capital markets of New York, London, and Tokyo, all with the collusion of corrupt local elites.  Sounds just like Venezuela before Chávez was elected.  The critics also bemoan the fact that the joint ventures were negotiated without much public debate or discussion with the workers of the petroleum industry.  And the government has the cheek to throw them in as one of the achievements of the Bolivarian Revolution, the trajectory of which supposedly ends in a 21st Century Socialist Paradise.  They wonder what foreign capital can have to do with any kind of socialism.

These companies have actually been operating in the fields to which the joint ventures apply since 1992 when Chávez was in jail so it’s not all his fault.  What the current government has done is changed the terms of how they operate rather than invited them in.  Before there were operating agreements now there are joint ventures.  But again it doesn’t sound too good.  Whereas before they were service contractors they are now full partners of the state.  Recaptured sovereignty?  And this is only the beginning.  There is going to be a substantial increase in agreements such as these as the oil and gas industries expand over the next six years.

The following is mainly a discussion of foreign capital’s relationship with Venezuela today.  Firstly, however, there will be a whistle stop tour of the history of the modern oil industry in Venezuela.  Then there is a look at the controversial changes the Chávez government has made in its dealings with foreign companies, why they occurred and what that means for those affected by the changes.

History

Foreign capital has had a long and fruitful history in accumulating capital from Venezuela’s oil.  The first oil well was drilled in 1912 and by 1914 Venezuelan oil was being sold in the international energy markets.  At this time, Venezuela had no technology or expertise of its own so foreign capital in the guise of companies such as Royal Dutch Shell and Standard Oil produced and exported the oil.  By 1928 Venezuela was the largest oil exporter and 2nd largest producer in the world but despite that most Venezuelans did not see any of the wealth from the bonanza.  Venezuelan governments merely taxed the foreign companies around 25% on profits.  The foreign companies and a small domestic elite, who either worked in the industry or within the Venezuelan state, kept the loot for themselves

Over the next 60 or so years political regimes came and went but the oil industry remained largely in the hands of foreign companies - even though increasingly Venezuelans themselves worked at the highest levels if these organisations.  But in 1976 the government of Carlos Andrés Pérez nationalised the oil industry buying up all of private capital’s control, giving birth to PDVSA. This occurred right in the middle of the 1970’s oil boom when prices soared as a result of the shortage due to the Arab countries’ oil embargo.  While the control of the industry remained in the hands of the elite, the government did begin spending a little of the money on social services that would benefit the poor majority.  However, the embargo and high prices didn’t last forever.  By the late 1980’s the price had dropped so oil revenue decreased.  Being over reliant on oil to finance its budget the Pérez government (his second term in office after a lapse of 10 years) became increasingly indebted as it borrowed to balance the fiscal shortfall.  To repay the debt it began implementing IMF directed neo-liberal economic policies, cutting public spending, freeing price controls etc., all measures that hit the poor the hardest.  Much political unrest followed which would play a large part in the demise of the then political elite.  For PDVSA, low oil prices meant it did not have the resources to invest in the industry.

From Operating Agreements to Joint Ventures

The strategy chosen in 1992 by the government and the management of PDVSA to resolve this problem was known as La Apertura (the Opening) when foreign capital was again invited to partake in oil production under the operating agreements.  The operating agreements ostensibly left the state as the owner of the reserves while the private company was service contractor.  As contractors they were responsible for 100% of the investment, technical analysis and for putting together a production plan.  Theoretically, sovereignty remained with the state because PDVSA had to approve the production plan but in practice the companies had a free rein as the corrupt state management served merely as a rubber stamp for the practices of the corrupt private management.  After production the oil was handed over to PDVSA for a “service fee”.   The state then sold the oil on the market.

The Chávez government claims the designation of trans-national oil corporations as service contractors was little more than a tax avoidance scam.  In Venezuela, business tax within the oil industry at that time was 66.6% but only 34% for non-oil related activity.  The old regime of the IV Republic allowed the oil giants, as mere service contractors, to be placed in the 34% bracket.  So, for 14 years they paid only half the tax they should have paid.

But the Chávez government has argued that the operating agreements were also costly for them aside from the tax issue.  The service fee was calculated using an estimate of the Modified Rate of Return (an economic method to assess the value of an investment) indexed to the price of oil.  This was agreed between the managers of PDVSA and the executives of the foreign companies.  But while production did rise under the operating agreements by 50% the costs of producing the oil rose by 175%.  Using the figures for 2005 it can be seen just how costly the operating agreements were:  In the first quarter of that year the market price for oil was $34.67 while the private companies charged the government $18.17 or 52% of the market value.  However, for the same period PDVSA was managing to produce oil at only $4 dollars a barrel or about 11% of market value.  And that was not the end of the story.  As mere service contractors the companies were not responsible for paying the royalties.  That fell to PDVSA.  Royalties were 30% of sales and given that PDVSA had additional administration costs it claims it made net losses while at the same time the private companies charged $18 per barrel, for 500,000 barrels per day (bpd).

Also, the operating agreements were never approved by parliament so ‘the people’ had not approved them.  For these reasons the current government argues that under the operating agreements there was no real sovereign control over the oil reserves at all.

The joint ventures, according to the Chávez government, have created a new relationship that puts a stop to corrupt practices, ensures most of the profits go to PDVSA and returns ‘effective’ control, that is, sovereignty, to the state.  A joint venture is simply a contract between two or more firms through which they form one single new enterprise for the purpose of a specific project.  Shell, Chevron, Repsol and many others have signed such contracts with PDVSA.  Each party to the contract invests in proportion to its share in the company and receives the same proportion of oil produced which they then sell at the market price.  Also, the government won’t give a return on costs that are higher than 66% of the market value for oil.  This gives companies an incentive to keep costs down.  PDVSA will always have a majority share in any given joint venture meaning they keep control over all investment and production decisions.  And given that PDVSA has about 60% stake and the government will receive 33% royalties and 50% tax (today’s oil related business tax rate) on the private companies 40% in total the government receives 87% of the profits.

There can be little argument that, in purely financial terms, the government has arrested a much higher proportion of the profits than they had previously, even though, with the current high oil price the companies still do quite well out of the agreements.  But, according to the critics, there is no reason why the financial adjustments could not have been made under the operating agreements avoiding getting their hands dirty by going into legal partnership with foreign capital.  The agreements could have worked differently given that there is a new management at PDVSA to “police” the actions of the companies. And they could have been ratified by the National Assembly to make them legal.

Sovereignty

The claim by Ramírez that, by PDVSA going into partnership with trans-national oil companies, the country’s oil has been rescued from imperialism is best put down to politician’s hyperbole.  And regarding sovereignty it does seem slightly Orwellian for him to assert that by doing this he is recapturing state sovereignty of the oil reserves.  But then it depends how you view sovereignty.

Left critics argue that the government is reneging sovereignty.  They see sovereignty as full democratic control over not just the resource but of the profits made from selling it, not to mention how they will be spent.  To ensure that, they believe, at the very least, that the resource and the means of producing it should be fully owned and operated by the state on behalf of a government that has a democratic mandate to reinvest the profits where they are needed most (full nationalization).  Better still, they think workers should be actively involved in the management of the industry.  Private capital, whose only interest is to itself, should not be allowed anywhere near the nation’s oil.  In other words, the oil industry should be run along broadly socialist principles.

Evidently, the government sees sovereignty with respect to the oil industry in a more flexible manner.  In its definition a government with a democratic mandate to do so can allow the privatization of a natural resource provided it is carried out under a legal regulatory framework controlled by the state.  Through that framework the state can tax profits, set minimum labor standards, decide production rates, etc. and provided it remains in control it doesn’t reduce sovereignty.  This is the basic function of a liberal democratic state that regulates a capitalist economy is the basis upon which the joint ventures operate.  The clever part of the joint ventures from the government’s perspective is that, as the private company is always a minority partner, the state remains, theoretically, the strategic decision maker in terms of investment and production.  In that sense sovereignty has been reinstated.  And when it is only a relatively small part of the oil industry, the government’s argument, in terms of sovereignty as ‘control’, is compelling.  But that doesn’t answer the bigger question that the critics ask and which the government ignores: why allow foreign capital at all?

And there is another concern.  The joint ventures currently only involve 550,000bpd of oil (about one sixth of daily production) but in the government’s Plan Siembra Petrolera (the strategic plan for the oil industry for 2006-2012) production is expected to increase from 3 to over 5 billion bpd.  In the gas industry, too, large scale development is planned.  Trans-national companies are already being asked to partake in the plan and the state will hold only 51% in many of the new agreements.  This will substantially increase foreign investment in Venezuela’s oil industry.  If one takes each agreement in isolation this looks unthreatening given the nature of the joint ventures.  But foreign capital could have the potential to exert substantial leverage over the economy if it threatened to pull out en masse.

A Step Towards 21st Century Socialism?

If the government is serious when it speaks of 21st century socialism and a new kind of economy, why is it working with the big oil companies at all?  Do they think trans-nationals such as ExxonMobil could be major economic actors in this new politics, a politics that has solidarity and justice as fundamental components of its philosophy?

A private capitalist firm’s raison d´être is to accumulate capital which, in turn, is either siphoned off for consumption or reinvested in the quest to accumulate yet more capital.  And so on.  They compete to do this in a market with other such firms.  This leads to a logic of profit maximization that means costs must be kept to a minimum with the result that there will always be pressure to reduce labor costs by squeezing salaries and cutting jobs.  These firms are also rigidly hierarchical with decisions made by a few that affect the many.  In fact, they are the antithesis of the principals espoused by the Bolivarian Revolution.

But, given the Bolivarian Revolution is supposed to be a process, there is one rationale for inviting foreign capital into the country, at least for a limited period: it brings investment and expertise to parts of a national economy where they are lacking.  In doing so, local industry, through working with the foreign company, learns from the process in a managerial and technological sense and in time the foreign capital becomes unnecessary as the local economy develops and diversifies.  This is sometimes called national developmentalism or import substitution industrialisation.  Heinz Dieterich, an advisor to President Chávez, did say recently, “The objective conditions for socialism don’t exist today. We must develop them alongside our democratic developmentalism [which he said was a more democratic form of national developmentalism].”

Opposition critics of the government point precisely to the lack of expertise as to why continued foreign investment is necessary.  In 2002 the management of PDVSA, in cahoots with oil union leaders, tried to bring down the government by closing down the oil industry – in effect a boss’s lockout.  Ultimately, this failed and 20,000 managers, engineers, technicians and workers were sacked for their involvement.  This gap in ‘expertise’ needs to be filled they say.

However, left critics of the joint ventures are skeptical about this.  They point out that after the bosses lock-out the workers managed to get the industry up and running from scratch while the 20,000 so-called ‘strikers’ were intent on sabotage and worse.   They also allude to the fact that the joint ventures are for already proven reserves.  This means that the more risky stage for investors, exploration, has already been completed.  Investment in production alone is low risk.  Why not have foreign capital invest in exploration projects?  From this angle the joint ventures seem like a gift to those same companies the government says have been ripping of Venezuelan’s for the last 14 years.

The Prospects for Workers: Conflict Ahead?

The government has already designated the oil industry a strategic industry beyond the reaches of worker/state or worker/private capital co-management.  So while state/private co-management is hailed as a progressive move in the joint ventures, co-management with workers is strictly off limits.  Obviously, oil is strategic for Venezuela.  It provides a large chunk of the wealth of the country and therefore should be under democratic control.  Minister of Defense,Raúl Isaías Baduel, has said that oil is a matter of national security.  For this reason the state has natural fears about being held to ransom by anyone, including the workers, and one only need to mention the boss’s lockout of 2002 to understand this.  But then again the workers will say they helped the government get the oil industry going again, and anyway, giving the workers a role in the management of the industry doesn’t amount to outright workers control.

The consequence for Venezuela is a dual economy.  To work in one sphere means co-management and co-operatives where the accountancy books are open for the workers to inspect, where they are involved in decision making and where they even elect their own supervisors.  But in the other, where, ironically, the wealth that subsidizes the first sphere is actually generated, traditional capitalist structures of exploitation prevail.  Trans-national oil companies’ involvement in the joint ventures can only exacerbate the negative consequences for workers.  It is very difficult to foresee them agreeing to Venezuelan workers’ participation in any decision making.

Labor unions and the workers involved are not blind to the contradictions of the dual economy.  When agreements are signed for 25 years with trans-nationals but all the workers in the industry get from the government are speeches about socialism and imperialism it sows the seeds of future conflict.  In a dispute between foreign capital and themselves Venezuelan workers wonder which side their government would take.

International Limits: The Realities of International Oil Politics and Chávez’ Quest for a Multi-Polar World

However, there could be one explanation that would justify the presence of foreign capital in the country.  The international system imposes limits on all countries’ freedom to act within their own borders and it is especially tough on the national policies of a small country like Venezuela.  Also, while being a major oil exporter can be advantageous, like now, for example, when the oil price is high meaning the country is awash with cash.  It also means, however, that relationships with countries much more powerful than itself tend to be more troublesome.

The most important relationship Venezuela has is with the US.  The US elite in power in Washington does not look too kindly when a normally obedient foreign government veers off the neo-liberal economic policy track, especially if the alternative path they take has some success.  That new path may spread beyond the country’s borders causing ‘instability’ in its region.  That is exactly what has happened in Venezuela’s case and is why the US elite can’t stand Chávez and why they supported a coup against him in 2002.  The US is not shy about using gunboat diplomacy when necessary.  Probably the only reason why Venezuela has escaped more serious action thus far is that US armed forces are struggling to combat the resistance to their presence in the Middle East.  They can’t afford to rock the boat too much in South America where, from Venezuela, oil continues to flow.  But there are limits to their toleration of governments they don’t like. 

And this is where the presence of foreign capital through the joint ventures may have helped.  12% of the oil the US consumes is purchased from Venezuela; that 12% is actually about half of Venezuela’s total production.  The two countries need each other.  But in terms of power it is a very unequal relationship and the all powerful US government prefer compliant foreign leaders that will secure their oil supplies (normally from impoverished unruly natives) and allow trans-nationals (preferably US based) to operate the oil fields.  So maybe the joint ventures are sending out contradictory signals that go some way towards keeping the lions at bay.

The Venezuelan government also has a strategy they hope will not only reduce their reliance on the US market for their oil but will also result in the US having a weaker grip on Latin America.  For this reason, they are trying to sell oil elsewhere.  China in particular is seen as a potential market for the future and they hope to be exporting up to 1 million bpd there by 2012.  Also, countries like China, India, and Russia are already growing in strength on the international stage   Venezuela is inviting companies from these countries to invest in the petroleum industry and elsewhere in the economy.  They will also be involved in the continental gas pipeline project that will run from Venezuela down to Argentina, bypassing several other countries on the way.  While they will be capitalist firms like any other and will seek to exploit their workers and squeeze what they can from the state, the government thinks the benefits will outweigh the costs in the long term if the US’s hold on the region is diminished.  These companies must be able to see that it is safe to invest in Venezuela.

What Next?

The joint ventures provide a reality check to those used to only a diet of Chávez speeches.  Like elsewhere, the rhetoric of politicians in Venezuela doesn’t always correspond to reality.  The forces of imperialism in the guise of foreign capital are actually going to increase their presence in Venezuela and wherever there is foreign capital there is going to be less space for socialist like policies, at least in the short term and this may be unpalatable for some.  This goes beyond the oil industry, actually.  There are other heavy industries like the docks and the steel industry where the situation is similar.  But in the current circumstances, paradoxically, a Faustian pact with foreign capital may be necessary to keep the forces of imperialism off Venezuela’s back.  It may also be necessary if the oil and gas industry is to be expanded.

Anyway, this is far from being the whole story. The income from oil is generating much good elsewhere in the economy.  It is not only reducing poverty but creating spaces where communities are developing a political consciousness and where they increasingly understand the nature of the system. And these communities are already battling with the state bureaucracy as they would rather make decisions that affect them for themselves.  And the other parts of the economy will remain a shining light for workers and communities in Venezuela.  Through the UNT, the National Union of Workers, there are links across all sectors of the economy and they are battling and arguing for a greater say in running the country’s main source of wealth.

In discussing the path to 21st century socialism it is useful to look at how far things have gone.  And there are many positive and hopeful signs.  But it is also important to look from the other side too.  How far there is still to go and the battles ahead.  The joint ventures highlight some of the contradictions and limits to the process and the forces popular movements will have to counter.