The Policy Process in a Petro-State

An Analysis of PDVSA's (Petróleos de Venezuela SA's) Internationalisation Strategy

César E. Baena

• Publisher: Routledge
• Year: 2019
• Topic: Economics
• eBook ISBN:
  9780429810657
• Subtopic: Political Economy
• Index: Economics

First published in 1999, this volume focuses on the impact of democratic bargaining on the process of oil policy-making in Venezuela, stressing the constraints posed by politics on PVDSA's efforts to expand its foreign operations. Venezuela offers a unique case and fertile ground for the study of oil policy-making processes. In the specialised literature, very little attention has been paid to the nature and operations of multinationals from developing countries. By analysing Petróleos de Venezuela, S.A. (PVDSA)'s international policy, this unique book explores the difficulties encountered by a major state oil enterprise in its efforts to grow beyond national borders.

Chapter 1
Introduction

1 Introduction

The mere mention of multinationals from developing countries (DCMNs) generates disbelief and outright scepticism. Multinationals (MNs) are believed by many solely to originate in industrialised countries. However, the internationalisation of companies from developing countries has become a significant phenomenon on the world economic scene, providing an interesting subject for the analysis of important policy-making issues (Khan, 1987; Riemens, 1989; Kumar, 1981; Wells, 1983; Agmon, ed., 1977). Although works on the activities of MNs from industrialised countries are abundant, multinationals from developing countries (DCMNs) have attracted little attention in the specialised literature. Most available works on the subject look at the foreign operations of DCMNs in lesser-developed countries (Khan, 1987; Wells, 1983), indirectly looking at cases where companies from developing countries have made inroads in OECD areas. With the exception of a few isolated studies (Kumar, 1981; Riemens, 1989; Díaz-Alejandro, 1977), little attention has been paid to the foreign operations of state-owned enterprises (SOEs) from developing countries. Furthermore, such works tend to exclude the study of cases from oil exporting countries, considering them atypical, due to their capital-intensive features, in contrast to more commonly labour-intensive enterprises from developing countries.

By analysing the internationalisation policy of Petróleos de Venezuela (PDVSA), a major state-owned oil industry from a developing country, this study attempts to fill the gaps and enlarge the limits of the existing literature on DCMNs. This study argues that the analysis of the policy-making process set in motion to adopt and implement the internationalisation of Venezuela’s state-owned oil industry in OECD areas offers a fertile ground for gaining insight into the balance between politics and corporate strategy in a developing country.

Loosely defined, a MN is any enterprise that possesses direct foreign investments (DFIs) -in the form of asset ownership, production or/and service facilities- in one or more countries other than its home one (Kumar, 1981: xv; Wells, 1983: 9¹). The rise of MNs has been commonly identified with the highest state of global capitalism, where free trade becomes an essential feature. However, it is the very absence of free trade that provides the basic rationale for MNs. Indeed, local market imperfections and trade restrictions both in the industrialised world as in the developing one have fostered the establishment and growth of MNs (Riemens, 1989: 3).

Wells (1983) was among the first to coin the term ‘new multinationals’ for companies from developing countries with DFIs. The recent appearance of MNs from developing areas -although still amounting to a small fraction when compared to the international activities of MNs from OECD countries- has called for a reassessment of the most common theoretical models used to explain the nature, operations and impact of traditional MNs. Among such theories the most commonly found in the academic literature are international trade, efficient markets, imperialism, product-cycle and cycle-related models, internalisation, and eclectic theory². It is beyond this study’s scope to dwell on the different paradigms of such models. It is sufficient to say that in the absence of any solid theoretical foundation to explain DCMNs, most existing works tend to rely on the theories used to explain traditional MNs, providing, as a result, partial explanations for phenomena stemming from developing contexts. Government policy-making processes are different in a developing context, and need to be given particular attention as determinant factors in the internationalisation efforts of a large firm, even more so in the case of a SOE operating in a key economic sector.

Most available works often attempt to study the existence of DCMNs by assessing how similar or dissimilar they are in their motivations and behaviour from the more typical MNs from industrialised countries. Some authors, Riemens (1989: ii) and Kumar (1981) for instance, argue that there is no fundamental difference between DCMNs and industrialised country MNs: the main difference is one of nature and not of motives. Wells (1983: 3), on the contrary, argues that the foreign investment from DCMNs behaves quite differently from that of traditional MNs from industrialised countries, largely due to their competitive advantages resulting from their experience in developing country contexts. Among the competitive advantages commonly attributed to DCMNs in their operations in developing contexts are their capacity to adapt their technological know-how to a smaller scale (‘descaling’), their usually smaller size, their labour-intensive operations, trade mark exposure and lower pricing. Nevertheless, the capacity of companies from industrialised countries to adapt to the specifics of the home environment has rendered these features less distinctively advantageous of companies from developing countries (Lall, 1983; Riemens, 1989). Moreover, such alleged competitive features only prove really competitive when applied in a developing country context, and not in a more industrialised economy. For capital intensive, large size, high-risk companies such as oil industries needing state-of-the-art technology and operating in both industrialised and developing country contexts (Mikdashi, 1986) those features do not represent any secure advantage in comparison to companies from industrialised countries.

Another useful way of assessing the behaviour of DCMNs is looking at the factors and motivations that prompted their expansion. Often, companies decide to expand abroad in order to preserve export markets and penetrate new ones, to exploit raw materials, to minimise market risks, to assert competitive advantages, to bypass quota restrictions, to search for lower costs, to strengthen contact with kin groups, and to diversify operations. This study will assess to what extent these motivations apply to PDVSA in its efforts to become a vertically integrated MN.

A preferred form of DFI by DCMNs is the joint venture. DFIs can be undertaken in the form of exports, licensing, totally or partly owned subsidiaries, and minority or majority equity joint ventures. Mainly due to their low set-up costs, joint ventures are a preferred option for companies seeking to expand internationally, especially for those of developing countries (Wells, 1983: 3). Joint ventures provide an option between licensing and wholly owned subsidiaries. In many cases, joint ventures are the only form allowed by the host country, whose legislation may require the foreign company to join a local one in order to operate. Usually, the local partner will contribute toward asset formation, technological expertise, risk sharing, and access to markets; it will also provide the foreign company with useful knowledge about the local market, the country’s legislation and domestic politics. Often, non-economic factors contribute to the adoption of a joint venture as a form of investment (Riemens, 1989: 13). When the joint venture involves a SOE, non-economic factors take an even greater significance, due to the strategic importance in which the joint venture will operate and to the complex political arrangements that shape policy-making in that sector.

PDVSA’s internationalisation policy

The high degree of vertical integration achieved by PDVSA has placed it among the most important world oil companies. PDVSA is one of the world’s largest refiners. In 1997, PDVSA had a total installed refining capacity of 3.77 million b/d, that is 1.28 million b/d in Venezuela and 2.49 million b/d abroad (including Refinería Isla in neighbouring Curaçao). In 1995, it ranked third as the world’s largest refiner, preceded by Royal Dutch Shell (4.2 million b/d) and Exxon (3.9 million b/d)³. Among OPEC members, PDVSA possesses by far the largest DFIs in the form of refinery assets. After the oil industry was nationalised in 1975, decision-makers of the newly created oil SOE set out to create channels for the distribution of crude oil, independent from those until then offered by the vertically-integrated oil MNs operating in the country. The policy of creating PDVSA’s independent downstream outlets through the acquisition of refinery assets in order to enlarge market share and create independent means of reaching the final consumer was termed ‘internationalisation’. As formulated by PDVSA, the internationalisation policy took the form of the acquisition of refinery assets abroad through the creation of joint-venture associations, usually with 50% equity ownership. Besides enabling PDVSA to expand market share and gain access to technical know-how, the internationalisation policy allowed industry policy-makers to maximise their freedom to decide over corporate strategies and to create an international network of operations, farther away from the government’s unexpected fiscal demands and from Congress’ meddling.

The antecedents to the internationalisation policy can be traced to the transition to nationalisation, when the first policy steps were taken by government decision-makers for the creation of distribution channels for the soon-to-be nationalised oil industry. Even before concessions were written off by the end of 1974, executives from the state CVP (Corporación Venezolana de Petróleo) had begun negotiating some of the terms that led to the establishment of working agreements between the oil MNs and the nationalised oil industry. The need to reproduce the vertically integrated branches of the foreign companies continued to be a major concern for oil policy-makers following nationalisation. The nationalisation of the oil industry in Venezuela would have been only partially complete had the nationalised oil industry kept relying on the distribution outlets belonging to the oil MNs.

Conflict-ridden nationalisation actions such as the ones that took place in Mexico (1938) and Iran (1951) had hampered future collaboration between the nationalised oil industry and the expelled oil MNs. On the contrary, in Venezuela the virtual absence of conflict during the nationalisation process allowed the nationalised oil industry to develop a successful and convenient working relationship with the foreign concessionaires, whose technical know-how and distribution channels were badly needed by the nascent oil SOE.

Many observers of the oil industry and especially the decision-makers who conceived it often say that PDVSA’s internationalisation policy was a success story. With low initial set-up costs, the benefits of creating a refinery network abroad were appealing: the industry could expand market share and gain access to key consumer markets. By establishing a network of DFIs in the form of refinery assets, the industry could diversify its financial sources and its freedom to operate, beyond the dynamics of domestic public policy-making and government fiscal demands.

As a result of government’s excessive dependence on revenues from the oil sector, the political leadership in Venezuela is particularly sensitive to oil policy issues. Oil is the government’s main source of revenues for creating public goods, both material and political. Any attempts by the oil industry to limit government controls over its actions are likely to generate conflict with the executive and Congress. Traditionally, PDVSA’s policy-makers have increasingly sought to assert their policy-making freedom from the executive and the legislature.

Initially, PDVSA’s efforts to become a vertically integrated oil MN met the opposition of Congress. The decision-making process that shaped the policy’s adoption, formulation, and implementation phase was neither a straightforward nor an easy one. During the first phase of policy implementation, industry policy-makers struggled to minimise the adverse reaction of political actors in Congress. It was the first time since nationalisation that Congress and the industry confronted each other in such a vehement way over a policy choice. Congress felt threatened by the freedom of action exerted by the industry’s policy-makers who were asserting their role as main actors in the process of oil policy-making. With the implementation of the policy, some of the industry’s decision-making powers would be transferred outside the country’s boundaries. By establishing joint-venture associations, the industry was bound to negotiate many policy issues with a foreign partner, a formula that inevitably met the opposition of the most nationalistic members of Congress.

PDVSA’s internationalisation strategy soon became entangled in the highly politicised process of public policy-making. Opponents of the government’s performance used the industry’s policy as an instrument to advance in the political game. In turn, industry policy-makers partly underestimated the political implications of the implementation of PDVSA’s first internationalisation contract with Germany’s Veba Oel in 1983. However, the contract was a pioneering one, the first of its kind signed by the nationalised oil company. Not only did the contract entail a joint-venture association with a foreign partner, but it also implied the international operation of the state oil company. During the first phase of policy implementation, besides Congress attacks, industry policy-makers also had to grapple with unexpected cash demands from the treasury and with a low barrel price which sharply affected the company’s finances.

During the impasse that resulted from the signing of the contract with Veba Oel, the controversial Article 5 of the Nationalisation Law, determining PDVSA’s freedom to associate with foreign oil companies, was put to the test for the first time. Created as part of the Nationalisation Law of 1975, this Article was devised to regulate the industry’s association with foreign companies. The Article reflects two distinctive and often irreconcilable ideological stances. That of those who wanted to preserve the industry’s freedom to associate with foreign capital for its operations and those who thought that this was unnecessary. In any case, Congress legitimacy was considered a prerequisite for association with foreign capital. At the root of the ideological debate around Article 5 lay the tension that has characterised most of the issues concerning PDVSA’s international expansion: the persistence of opposite sets of values in oil policy-making. This study builds upon this assumption and, by looking at the process of policy-making behind PDVSA’s efforts to expand its operations abroad, shows the balance between politics and corporate strategy in practice.

During the negotiations leading to the establishment of the joint-venture agreement with Veba Oel, PDVSA and the Ministry of Energy had consulted the Procurador General de la República (Republic’s Solicitor General) on the matter of whether the contract needed legislative approval prior to its implementation. Based on an interpretation of Article 5, the Solicitor General’s opinion was that gaining Congress legitimacy was not necessary. However, most Congress representatives thought otherwise. Bypassing Congress triggered a major decision-making conflict among the actors involved in oil policy. Congressional debates evolved around themes such as the executive’s autonomy to dispose of the natural resource, the oil industry’s accountability to the legislature, the unchecked freedom of its policy-makers, and the industry’s association with foreign partners.

The main political obstacle to policy implementation was finally removed when an arrangement at the highest political level was achieved, after the main opposition party (AD) won the 1983 national elections and secured a majority representation in Congress. Further criticism of government policy had thus lost justification. Despite early attacks from the opposition in Congress during the first phase of policy implementation, PDVSA’s decision-makers succeeded in the medium term in implementing the internationalisation policy, accomplishing the objectives laid down from the outset.

Despite Congress’ decision not to veto the implementation of the contract with Veba Oel, no other joint-venture associations for the purchase of refinery assets abroad were signed during the three years following the policy-making impasse between PDVSA and Congress. Some of the negotiations that had been under way for the establishment of other internationalisation contracts were postponed. The impact of the policy making impasse created as a result of the contract with Veba Oel had been felt both by the industry and by its potential partners, who showed apprehension and reluctance in partnering with a company that had negotiated and implemented a major contract without due Congress approval.

In 1986, the political obstacle was finally overcome and a second, more aggressive phase of policy implementation took place as PDVSA established further joint-venture contracts abroad. This new phase in the internationalisation policy stemmed from the pressing need to enlarge market share as a way to minimise the dramatic effects of the 1986 price fall in the oil barrel. Contracts to establish joint-venture associations in refinery complexes were then signed with Swedish Axel Johnson, Southland Petroleum Corporation, and Union Pacific Corporation. The leasing of the Curaçao refinery in the Caribbean was also achieved during this phase.

The beginning of a third phase of policy implementation can be identified in 1989, when PDVSA became Citgo’s sole owner after acquiring 50% shares from its partner Southland Petroleum. During the Pérez (1989-93) and Caldera (1994-99) administrations, decision-makers’ concerns shifted towards the implementation of the policy named Apertura, consisting of associations with foreign companies to carry out upstream activities in the country. However, attempts to continue expansion of the network of refineries abroad were not abandoned. Especially during the Caldera administration, a new élan was given to the policy of internationalisation.

The study

Venezuela offers a unique case and thus a fertile ground for the study of oil policy-making processes. This is mainly due to three factors. First, the dominant role played by the oil sector 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 the evident international character of its operations. The need to assert corporate strategies in order to be competitive in the international oil market, and at the same time be able to satisfy the demands of an excessively dependent government, reflects the dual private-SOE character of the company. Third, unlike the rest of OPEC’s members, Venezuela’s political system functions as a democracy, where political parties are strong and Congress, as representative of people’s pluralist choices, plays a decisive role in public policy-making. In general, the existence of democratic bargaining as the core of public policy-making processes sets Venezuela apart from its counterparts in OPEC, where democratic institutions are either weak or non-existent.

It was stated earlier how little attention has been paid in the academic literature to the study of the significant phenomenon of MNs from developing countries with DFIs in OECD areas. In Venezuela, the absence of public policy-making studies is even more glaring. With the exception of a handful of works dealing with selected government policy decisions (Clark, 1968; Bond, 1975; Martz and Myers, eds, 1986; Arroyo, 1983; Gil, 1978; Torres and Salcedo, 1988; Nairn, 1993), policy studies about government policy-making processes in Venezuela have occupied limited space in the political science literature. Some studies have concentrated on the analysis of specific economic policy decisions (Hausmann, 1985; Rodríguez, 1987; Palma, 1989; Toro Hardy, 1992) and others on the performance of SOEs, only partially discussing government policy-making issues (Kelly, ed., 1985). A salient neglect is found in the specific area of government-SOE interaction in Venezuela. This study attempts to cover some aspects of this unexplored field.

Due to its great importance for the Venezuelan economy, the oil industry has attracted particular attention from social scientists (Tugwell, 1974; Vallenilla, 1975; Philip, 1982; Coronel, 1983; Villalba, 1985; Randall, 1987; Mommer, 1990; Boué, 1993; Giordani, 1995). One study (Johnson, 1987) looked at the oil industry from the perspective of the managers’ adaptability to the new post-nationalisation context; although not analysed fro...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of Tables
• Preface
• List of Abbreviations
• 1 Introduction
• 2 The Nationalisation Policy: A Combination of Political and Strategic Motives
• 3 PDVSA’s Early Objectives: The Process of Corporate Consolidation
• 4 The First Phase of Policy Implementation: The Veba Oel Contract
• 5 The Veba Oel Case: The Impact of Politics Over Oil Policy-Making
• 6 The Second Phase of Policy Implementation: Corporate Strategy Unhindered
• 7 The Third Phase of Policy Implementation: PDVSA’s Consolidation as a Multinational
• 8 Conclusion. The International Expansion of an Oil SOE: The Balance Between Politics and Corporate Strategy
• Bibliography
• Index