La Apertura: The Opening of Venezuela's Oil Industry

By Giusti, Luis | Journal of International Affairs, Fall 1999 | Go to article overview

La Apertura: The Opening of Venezuela's Oil Industry


Giusti, Luis, Journal of International Affairs


Between 1994 and 1999 Venezuela's entire oil and natural gas sector underwent the largest transformation in its contemporary history. Everything from gas and oil production to transportation, processing, refining and marketing was reformed to face the challenges of a more decentralized, competitive energy sector. This transformation included an important redefinition of the role of oil in the economy and within Venezuelan society, as well as a complete overhaul of the national oil corporation, Petroleos de Venezuela (PDVSA).

PDVSA's journey from an entirely state-owned enterprise to a partially privatized one is in many ways unique. The 1975 law that created the company clearly established it as a commercial entity, meaning that it should operate solely by corporate principles and not, for example, undertake the social employment programs that had fared so poorly at other state-owned oil companies. While initially adequate, this concept alone was not enough to allow PDVSA to be competitive in today's globalized economy. A new strategy was necessary to strengthen PDVSA's position in the global arena, and in 1995 such a strategy was implemented: the opening up, or apertura, of both the "upstream" and "downstream" segments of the oil industry.(1) This groundbreaking shift deepened PDVSA's presence in international markets while transforming the corporation from within.

The 1997 apertura called for the partial privatization of PDVSA's activities, allowing private individuals and firms to form strategic associations (equivalent to joint ventures but requiring congressional approval) and undertake operational agreements with PDVSA. In addition, reforms included the outsourcing of non-core activities and the first steps toward privatization of the domestic distribution and retailing of oil products. As a result of these changes, PDVSA has experienced an increase in upstream joint ventures--especially profit sharing agreements (PSAs) and operational agreements--and an expansion of new markets, primarily in the United States.

Most importantly, PDVSA's modernization process has required an overhaul of the company itself, with the objectives of increasing productivity, reducing costs, improving technology, increasing efficiency and, most significantly, putting in place a new internal compensation system that would demand and reward performance. Internal reforms have included eliminating an obsolete and burdensome system of severance payments and instituting performance-related pay schemes. This article will examine PDVSA's transformation in the context of Venezuela's changing political economy and the globalization of the world economy.

OIL AND ITS EVOLVING ROLE IN THE VENEZUELAN ECONOMY

Oil plays a significnat economic and social role in Venezuela. The country earns $15 to $20 billion per year in oil revenues, constituting between 75 and 80 percent of Venezuela's total exports. Taxes, royalties and dividends from PDVSA represent roughly 50 percent of all government revenues. In all, oil activity directly and indirectly generates around 40 percent of national economic activity.

The breakdown of oil's impact on Venezuela can be shown by three concentric circles, each representing a less direct relationship between the industry and the country. The inner circle consists of PDVSA's expenditures on operations such as production, transport, refining, marine shipment and petrochemicals, as well as the company's various project investments. These activities represent 14 percent of gross domestic product (GDP). The second circle includes the activities of other companies and contractors working for PDVSA, including construction, engineering and the purchase and supply of goods and materials. This represents another 14 percent of GDP. Finally, the third circle corresponds to the economic activities stemming from government expenditures financed with revenues from PDVSA--equivalent to 12 percent of GDP. …

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