1 The politics of oil in Venezuela: a decision-making analysis of PDVSA’s internationalisation policy A PhD thesis by C&sar E. Baena London School of Economics and Political Science Department of Government 1 9 9 7 UMI Number: U615175 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. Dissertation Publishing UMI U615175 Published by ProQuest LLC 2014. Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code. ProQuest LLC 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106-1346 7m £ .s £ S f 7^S7 5%uUl^> 2 ABSTRACT The high degree of international vertical integration achieved by the Venezuelan state oil enterprise, Petr6leos de Venezuela S.A. (PDVSA), has placed it among the most important oil multinationals (MNs). The policy of creating downstream outlets through the establishment of foreign direct investments (FDIs) in the form of refinery assets was given the term of ‘internationalisation’. Besides enabling PDVSA to expand market share and gain access to specific know-how, the internationalisation policy provided industry policy-makers with a way of maximising corporate decision-making freedom, farther away from the government's financial demands and Congress meddling. Venezuela offers a unique case and thus a fertile ground for the study of oil policymaking processes. This is mainly due to three factors. First, the dominant role played by the oil industry in the economy, a situation which finds no parallel in any other Latin American country. Second, the special status of PDVSA as having both a tradition as private company and its position as the country’s most important state- owned enterprise (SOE). Third, unlike the rest of OPEC members, Venezuela’s political system functions as a democracy, where political parties and Congress are strong and play a significant role in public policymaking processes. By analysing PDVSA's internationalisation policy, the thesis explores the difficulties encountered by a major SOE from a developing country in its efforts to grow beyond national borders. The study focuses on the impact of democratic bargaining on the process of oil policymaking in Venezuela, stressing the constraints posed by politics on PDVSA’s efforts to expand its foreign operations. Specifically, the study examines the intricate policymaking process that shaped the origins and the development of PDVSA’s internationalisation policy, underlying the events and factors that influenced each one of its three distinguishable phases: adoption, formulation, and implementation. The tensions between politics and corporate strategy are highlighted at the core of the policymaking process. The study also looks at the relationship between the oil industry and the other two key decision-making centres involved in the oil policymaking process: the executive and Congress. In exploring the ways in which each one of them sought to influence policy outcome, the study attempts to gain insight into the main factors that prompted the tensions among the policy actors involved. Three environments, or pressure-generating centres, constantly exert influence on the oil industry: the oil market, the political context and the government’s financial situation. By seeking to determine the industry’s response to their pervasive influence on policy formulation and implementation, this research ascertains the extent to which these variables influenced the decision-making process that characterised PDVSA's internationalisation policy. 3 Being too powerful a company in a developing country context where the executive and the legislature find it increasingly difficult to exert their means of control over it had the effect of minimising some of PDVSA's characteristics as SOE: accountability to Congress and subordination to the executive. The thesis argues that as a result of its role as oil MN PDVSA has minimised some of its attributes as SOE. In turn, the more PDVSA has diminished its status as SOE, the more the government has increased its dependence over it. The successful accomplishment of PDVSA’s internationalisation policy has stressed this equation, highlighting the contentious interaction between an excessively dependent government and a company struggling to reconcile its roles as both a SOE and a MN. By examining the policy process that brought about the international expansion of a large SOE from a developing country, the findings of the thesis contribute significantly to the political science and public administration literatures and suggests new paths for further research in the area of public policymaking processes. 4 ACKNOWLEDGEMENTS A journey into the unknown is the best way to describe the writing of a PhD thesis. Destination was a far away point; arriving there was anything but a straight line. Many feelings sprang up during this time, ranging from the darkest to the brightest. This journey was not only mental, but physical. Many situations were encountered along the way; many people as well. I express my most sincere gratitude to those who helped me reach, in one way or another, my destination. I am thankful to my supervisor, George Philip, who was able to zero in on the main arguments within sargassos of information. To Celina Sousa who gave me great intellectual and moral support. Also, to all those who agreed to be interviewed; their insightful and anecdotal conversations revealed the fascinating world of the oil industry, until them largely unknown to me. My highest appreciation to Maria Concha G6mez who encouraged me even in the most turbulent paths of the journey. And above all to my mother, a silent but ever present figure. This work could have never been carried out without the financial and institutional help of The British Council, Fundaci6n Gran Mariscal de Ayacucho, and CONICIT, which made possible my stay in London and at the LSE. The people of PDVSA’s library kindly assisted me in gathering some of the data for this research. The Institute for Superior Studies in Administration (IESA) provided me for a short while with a space and a stimulating environment while undertaking my field work in Caracas. One journey leads to another. And the time has come to undertake others which had been postponed during the accomplishment of the one that now has reached its destination. 5 TABLE OF CONTENTS Page TITLE 1 ABSTRACT 2 ACKNOWLEDGEMENTS 4 LIST OF CONTENTS 5 UST OF TABLES 6 ABBREVIATIONS 8 CHAPTER I: INTRODUCTION 9 CHAPTER II: THE NATIONALISATION POLICY: A COMBINATION OF POLITICAL AND STRATEGIC MOTIVES 3 9 CHAPTER III: PDVSA’s EARLY OBJECTIVES: THE PROCESS OF CORPORATE CONSOLIDATION 67 CHAPTER IV: THE FIRST PHASE OF POLICY IMPLEMENTATION: THE VEBA OEL CONTRACT 92 CHAPTER V: THE VEBA OEL CASE: THE IMPACT OF POLITICS OVER OIL POLICYMAKING 127 CHAPTER VI: THE SECOND PHASE OF POLICY IMPLEMENTATION: CORPORATE STRATEGY UNHINDERED 161 CHAPTER VII: THE THIRD PHASE OF POLICY IMPLEMENTATION: PDVSA’S CONSOLIDATION AS A MULTINATIONAL 210 CHAPTER VIII: CONCLUSION. THE INTERNATIONAL EXPANSION OF AN OIL SOE: THE BALANCE BETWEEN POLITICS AND CORPORATE STRATEGY 255 BIBLIOGRAPHY 268 LIST OF TABLES Table 2.1 Crude oil production by ownership, 1950-1979 2.2 Posted prices of OPEC members. Selected dates and countries 2.3 Oil production in Venezuela, 1970-1974 3.1 The organisational rationalisation of the petroleum industry from 1975 to 1976 3.2 The process of organisational rationalisation of PDVSA's affiliates, 1976-1986 3.3 Oil industry operations. Capital spending, 1976-1980 4.1 Barrel price and income from PDVSA, 1978-1983 4.2 Oil sector net investment, 1978-1983 4.3 Fiscal performance of the consolidated public sector, 1979-1983 4.4 Public external debt, 1979-1983 6.1 OPEC’s data, 1980 and 1985 6.2 Non-OPEC production, 1981-1986. Selected countries 6.3 Average barrel prices for selected crudes, 1985 and 1986 6.4 Oil production and revenues in Venezuela, 1984-1988 6.5 Selected balance of payments' account, 1984-1988 6.6 Oil sector accounts, 1983-1985 6.7 PDVSA's interests in Nynas' refinery production, 1990-1992 6.8 NynSs' refining capacity 6.9 Citgo's Lake Charles refinery production, 1990-1992 6.10 Corpus Christi refinery production, 1990-1992 7.1 PDVSA's downstream acquisitions, 1983-1991 7.2 Profits from PDVSA’s refineries abroad, 1986-1991 7.3 OPEC’s refining capacity abroad, 1993 7.4 PDVSA's refinery assets abroad Growth of Citgo’s operations, 1986, 1992 and 1993 Uno-Ven's Lemont refinery production, 1990-1992 Uno-Ven's refined product sales 8 SELECTED ABBREVIATIONS AD Accion Democratica. Social Democratic party AGROPET Agrupacion de Orientation Democratica BCV Central Bank of Venezuela b/d Barrels per day COPEI Comite para la Organization Pofitica y la Election Independiente. Social Christian party CEN Comite Ejecutivo Nacional. AD’s highest decision-making assembly CVP Corporaci6n Venezolana de Petroleo DI Direct investment DCMN Developing-country multinational DCSOE Developing-country state-owned enterprise FI V Venezuelan Investment Fund FDI Foreign direct investment ISI Import-substitution industrialisation MAS Movimiento al Socialismo MEM Ministry of Energy and Mines MEP Movimiento de Emancipaci6n del Pueblo MN Multinational