The uncertain fate of Venezuela's black pearl: the petrostate and its ambiguous oil and gas legislation.

• Author: Cuervo, Luis E.

1. WHO OWNS THE PEARL? II. APERTURA PETROLERA: THE SEVEN SISTERS ARE INVITED TO FIND THE PEARL III. THE BOLIVARIAN REVOLUTION IV. THE 2001 HYDROCARBON LAW A. The law originated in the executive branch, not in the legislative branch B. The law was meant to universally apply C. The Venezuelan public owns Venezuela's oil and gas D. Oil and gas exploitation is a public policy concern E. Oil and gas activities are reserved to the state F. Greater power for the executive G. International conventions and treaties can affect domestic law H. The MEM is the regulatory agency I. A mixed bag in terms of access to foreign investment J. The government "take" was substantially increased V. FULL PERMANENT SOVEREIGNTY VI. THE 2006 HYDROCARBON LAW A. A "comprehensive legal regime" that is not so B. Public ownership of hydrocarbon resources C. The internal struggle to control Venezuela's pearl D. A monopoly that is not such VII. PRESIDENTIAL DECREE 5200 OF 2007: ENFORCING STATE OWNERSHIP VIII. PRESIDENTIAL DECREE 5796 OF 2008: CREATING A MACROECONOMIC STABILIZATION FUND IX. AN OIL-BASED FOREIGN POLICY X. ALBA XI. THE BOTTOM LINE John Steinbeck tells us that, one day, Kino, a poor fisherman who lived in the brush houses and was a member of the race that had been beaten, starved, and robbed for nearly four hundred years, found a pearl as large as a seagull's egg and as perfect as the moon; it was the greatest pearl in the world. (1)

   Similarly, Venezuelans recently learned that they inhabit a land under which a figurative black pearl lies: the largest hydrocarbon reserves in the Western Hemisphere. (2) Some have called Venezuela's black pearl the greatest in the world. (3) When Venezuela's extra heavy oil reserves are included, the country has the largest oil reserves in the world at an amount that would exceed 310 billion barrels. (4) Additionally, the largest market for the pearl is very close; for oil export purposes, Venezuela is located only five days away from the United States. (5) In 2006, it supplied 11% of U.S. petroleum imports and owned nine refineries in the United States that account for a refining capacity of 750,000 barrels per day. (6) The country owns Petroleos de Venezuela S.A. (PDVSA), (7) the fourth-largest oil company after Saudi Aramco, National Iran Oil Company, and Exxon Mobil. (8) Oil gives Venezuela a disproportionate level of international influence, leverage over global oil prices, and the "undue ability to impact U.S. security and economy." (9) Such is Venezuela's pearl and many are after it. (10)

   Like Kino, Venezuelans must consider what to do with the great pearl, the risks associated with sudden wealth, and the proper people to benefit from it. (11) Some want to share it with the oil industry's "seven sisters," and others want to distribute it to Venezuela's poor. (12) Venezuelans continue to consider whether such wealth is theirs, should be shared with others, or is reserved for a few in power. Also, as with other countries dependent on petroleum revenue, it is unclear whether such income is a blessing or a curse for Venezuela. (13)

   Venezuelan legislation is a model of what to avoid when structuring comprehensive and transparent oil and gas law. Instead of establishing clear guidelines that may be followed objectively, the system is ambiguous and full of loopholes and contradictions. After more than a century of oil and gas exploitation, Venezuela is still a poor country. (14) An analysis of its historical oil and gas legislation is useful to understand the struggle to control power--the eternal struggle between the haves and the have-nots.

   At a time when the United States advances the notion of "nation-building," (15) Venezuela is a country in need of a legal and political system that enables the best use of its extraordinary energy resources to benefit the majority of the population and a true improvement of its people's lives.

   Ideas about public ownership of oil and gas reserves and the nature and purpose of national oil companies must be revisited and adjusted for 21st-century realities.

   More than thirty years have passed since Venezuela's government celebrated assuming full state control of its oil and gas resources. (16) However, oil companies have profited from weak legal systems that create an appearance of state control while making only marginal progress in lifting Venezuela's population out of poverty. (17)

   This article reviews the most important changes in Venezuela's oil and gas legislation since 1971. In the intervening four decades, internal politics and legal technicalities have changed, but the true sovereignty of the Venezuelan people over Venezuala's natural resources remains unfulfilled.

1. WHO OWNS THE PEARL?

   On August 21, 1975 Venezuela approved the Ley Organica que Reserva al Estado la Industria y el Comercio de los Hidrocarburos [Organic Law (18) Reserving the Oil and Gas Industry for the State] (1975 Reserving Law). (19) The law was designed to make ordinary Venezuelans the true owners of their petroleum resources. (20) Venezuelan President Carlos Andres Perez understood the challenges before him: the oil and gas industry was not managed by Venezuelan citizens, his state lacked the necessary efficiency to conduct petroleum operations, and "Venezuelan people had no sense of the required public spirit to assume the reins of the national petroleum industry." (21)

   On January 1, 1976, President Perez, on behalf of the people of his country, celebrated the historic day in which Venezuela assumed full control of its valuable hydrocarbon resources. (22) The flag was raised and the national anthem was played. "The people of Venezuela decided to take control of their natural resources," and national sovereignty was vindicated. (23) Perez characterized the nationalization as an act of sovereignty--an act of "creative will." (24) Perez proclaimed a democratic and nationalistic revolution. (25) Venezuela's oil was recognized as an efficient foreign policy tool and an instrument to build a new-world economic order. (26) Perez declared the end of an economic order that allowed the exploitation of the natural resources of poor countries. (27) Like Kino, Venezuela seemed to be ready to rise out of poverty. The main consequences of the 1975 Reserving Law were:

   * All outstanding concession contracts were terminated. (28)

   * The state was granted a monopoly of oil and gas operations--both upstream and downstream. (29)

   * The formation of a National Oil Company was required. (30)

   * The National Oil Company would own and manage all assets reverted to the state upon the termination of the existing concessions. (31) PDVSA was formed in compliance with the law. (32)

   * Expropriation of all assets owned by concessionaries was allowed through prior payment. (33)

   * The law required compensation based on the asset's book value, but the 1961 constitution required only "fair compensation" ('justa indemnizacion"), raising questions as to the validity of this provision of the law. (34)

   * The state obtained exclusive control of all oil and gas exports. (35)

   Notwithstanding the above, the 1975 Reserving Law specifically allowed for "association contracts" with private companies. (36) Such contracts were only possible in special cases and if consistent with the national interest, as long as the state had controlling shares, and the contract included a limited term. (37) Therefore, while a monopoly was formally declared, in practice, the government could still enter into association contracts with private parties. (38)

   Interestingly, while the government preached nationalization, the law provided that National Oil Company employees would not be regarded as state employees. (39) Thus, the state is the owner but does not assume full responsibility as employer. (40)

   President Perez spent significant time explaining the acts: We Venezuelans hope that multinational companies and governments from the large industrialized countries do not view the nationalization of basic resources as hostile acts, but instead as the dynamic expression of a new world and expressions of the country's maturity which recovers what was until now only a theoretical right to manage its natural resources. Within the international legal order, Venezuela will nationalize iron and petroleum pursuant to pre-existing laws, without breaching the laws that insured the continued exploitation of said resources by multinational companies. We want you to understand us, and that the centers of world power, whether governments or board of directors of transnational corporations, or both, value our firm but respectful attitude totally adequate to the national interest. (41) However, public speeches declaring the law give the false impression of drastic changes. (42) In reality, the law only accelerated the contractual terms agreed to under existing concession contracts, even with some advantages for the concessionaires. (43) Since the 1961 constitution, Venezuelans had agreed to not grant new concession contracts. (44) Further, the 1961 constitution provided that the concessionaires would not be entitled to any compensation. (45) Thus, since 1971, through the approval of the 1971 Reversion Law, Venezuela was preparing itself for the termination of the existing concessions and the delivery of all their assets to the state. (46)

   Article 106 of the 1961 constitution required the adequate exploitation of natural resources for the collective benefit of all Venezuelans. (47)

   The 1975 Reserving Law, which appeared to favor indigenous interests and to be detrimental to the concessionaires, actually provided generous compensation to the latter. (48) Pursuant to article 103 of the 1961 constitution, the concessionaires were not entitled to any compensation at all, much less the charitable compensation they received. (49) Further, article 5 of the 1975 Reserving Law opened the door for the negotiation of new contracts with multinational companies. (50)

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