Caracas Chronicles

Nicolás Maduro’s government has been searching for new investors to feed the national oil industry for years. In the last few weeks these tactics have garnered more strength, according to reports that go into detail on the government’s recent attempt at alluring foreign investments.

The oil industry, main engine of the Venezuelan economy, has collapsed after years of disinvestment, foreign exchange currency policies that caused perverse incentives and huge costs, as well as the arbitrary State’s control of investments and the administration of joint ventures. Recent U.S. sanctions, which stop the national oil company Petróleos de Venezuela  (PDVSA) have blocked the company from renegotiating its debt, acquiring new loans, and selling oil to its U.S. affiliate, CITGO.

This courtship to investment shouldn’t come as a surprise, since it’s partially the result of the regulation policies pendulum of control-relaxation around the hydrocarbon industry.

The Control-Liberalization Pendulum

For many years, both Hugo Chávez and Nicolás Maduro, have held their oil policy in a hybrid form of resource nationalism. On one hand, it held a firm grasp over PDVSA, the oil company that would provide enormous amounts of resources to carry out important social policies without much institutional control or any of the traditional accountability mechanisms. On the other hand, the government held alliances with foreign companies in different investment projects which originally came from the Apertura Petrolera—with an attractive tax system for those investments, under the aegis of the “neoliberal” era—but were then transformed into joint ventures where the State held majority  shares and were subject to more taxes and royalties. In other words, the Bolivarian oil model moved the regulation pendulum to the more controlled side, still taking advantage of the private investments established during the more flexible era of the Apertura. This Bolivarian oil model was mostly supported by the investment of the partnering companies and high oil prices, benefitting from the worldwide rise in demand of hydrocarbons, boosted by the emerging economies of China and India.

Once the joint ventures decreased their extracting capabilities, PDVSA’s shortcomings and the national industry’s extraordinary dependency on foreign capital became evident.

But these external factors weren’t sustainable in time. Prices, as it’s well known, are subject to the vulnerabilities of international markets, while investments also change according to the local and global long term profit conditions. These conditions often force cycles in oil policies in producing countries which, like a pendulum, can go from increasing pressure over the industry’s profits, to relaxing their legal framework in order to attract or maintain investments. Once the joint ventures decreased their extracting capabilities, PDVSA’s shortcomings and the national industry’s extraordinary dependency on foreign capital became evident.

And so the year 2017 came, when Maduro tried to change the rules for the first time and soften regulations to move on to a new form of opening, forced by low oil prices and growing foreign hostility. It was a turning point in our history, again linked to those riches always hidden underground, but always at the center of our struggles. In one way or the other, many waves of protest are related to oil: it happened in April 2002 and again in March 2017, when two controversial rulings by the Supreme Tribunal of Justice (TSJ) sparked an intense round of protests because they intended to unconstitutionally shut down the National Assembly as well as transfer its attributions to another institution, and also because it included a clause allowing the Executive to change the shareholding balance of joint ventures at will, without the approval of the National Assembly and going against the Ley Orgánica de Hidrocarburos (Hydrocarbon Constitutional Law).

This has been the government’s main objective during its madurista era: to replace popular representation in deliberative institutions which generate checks and balances and, furthermore, take hold of hydrocarbons without the minimal institutional objection required by a law passed by Hugo Chávez himself. Using the sanctions imposed by the U.S. as an excuse, the government achieved its goal in 2020 with the so-called Ley Antibloqueo (Anti-Blockade Law), passed by the supra-constitutional National Constituent Assembly.

This law is probably the summit of madurismo policy: with it, the Executive can privatize State companies and transform the shareholding capital of joint ventures, all without having to go through public bidding processes or the legislative approval.

This law is probably the summit of madurismo policy: with it, the Executive can privatize State companies and transform the shareholding capital of joint ventures, all without having to go through public bidding processes or the legislative approval, which is a must, according to the Constitution and laws. Furthermore, these changes are “protected” under a State secrecy clause, with the excuse of “not playing along” with the enemy. In two decades, the government has taken advantage of formidable external conditions—high oil prices and investment availability—as well as a nationalist ideological support, to increase controls over the state-owned company without entirely closing the door on investments in the industry. But now, in completely different circumstances, Maduro seeks to take the pendulum back to the flexible side, to attract urgent investments.

The question is: will it be possible in an authoritarian national context and a fluctuating worldwide reality?

How to Move the Pendulum Towards Liberalization

While the industry’s historic cycles indicate that attitude changes aren’t unusual, even within the Bolivarian government, there are some new features or better yet, features which we thought had been overcome in the current strategy, and measures that are so disconnected from national and global reality that suggest that those who are taking them refuse to ask themselves some essential questions. First of all, can a trustworthy investing atmosphere be generated by the current Venezuelan political context? We have a completely sabotaged control over oil businesses by the State and its replacement by the figure of presidential power. The State’s arbitrariness and secrecy go hand in hand to protect the distribution of the country’s resources among those in control of the government and unknown investors. It’s a regrettable historical flashback to the gomecista pillage of the early 20th century. Already during the Chávez era, the National Assembly looked the other way when it came to its oversight role, but now, it has completely stopped doing it altogether. 

Secondly, can Venezuela attract substantial investments without solving its political crisis and being subject to sectoral sanctions? Maduro’s government is still under sanctions which won’t end until the political crisis is solved. In other words, lifting the imposed sanctions depends on substantial compromises which the government isn’t willing to concede, because in one way or another, it means giving in to a possible political change in the horizon. This reality limits the willingness of major investments.

Lifting the imposed sanctions depends on substantial compromises which the government isn’t willing to concede, because in one way or another, it means giving in to a possible political change in the horizon.

Besides, what’s the amount of resources needed by the oil industry? Are the global industry’s conditions favorable in a way that makes the Venezuelan market attractive? The investment needed by the industry is very high, over 100 billion dollars in the next few years to increase production levels to close to 2 million barrels per day. Investments like that require a profit possibility which is cast in serious doubt. We’re living in a very different time to those before the legal apparatus regarding hydrocarbon laws were changed. Climate change is a reality that few can deny and even the world’s largest oil corporations are preparing for a transition which has already begun. Energy transitions in large economies in the global north point to oil not being attractive anymore and suggest a drop in demand, which to some it has already arrived with the effects of the COVID-19 pandemic and, for others, it will occur before the end of the decade.

These questions bring up the remarkable difficulties the national oil industry is facing, even under the intended possibility of opening up to investments again, in a context of uncertainty, amid increased authoritarianism, and changes in the global market which are pointing to a post-oil world. Based on this, it’s fundamental to put oil and the industry at the center of major discussions about the country and its future. Venezuela has to commit to a serious debate about its role in a post-oil global economy. A debate of this sort can’t be held in a political atmosphere marked by authoritarianism and persecution, the promotion of plurality and real political representation is of utmost importance, so that Venezuelans are the ones who decide how much of the oil industry is to be “recovered”, what will be the State and the private sector’s roles in that recovery, and how we’ll head towards a sustainable energy matrix that won’t only contribute to alleviate the effects of climate change, but will also provide energy for our citizens, who are impoverished and lack basic energy sources for their development and wellbeing today.