The idea of nationalizing Venezuela’s oil industry had been in the wind for a few years leading up to 1976, and conditions in the global oil market lent considerable momentum to the popularity of the proposal. Weighed in the balance of 40 years of hindsight, though, nationalization has proven to be nothing short of tragic for the nation’s oil and gas sector.
The Road to Nationalization
Meeting in Caracas in December 1970, OPEC decided to cut oil production as necessary to defend oil prices.
Pressure for national control of the oil industry in producing countries increased to such an extent that, by early 1972, an editorial in the Washington Post warned U.S. readers about Venezuela’s preparations for a takeover of its petroleum assets.
In 1973, OPEC took a more dramatic step of actually cutting oil production to put pressure on Israel to retreat from occupied Arab territories. In addition, it posted a 70-percent increase in oil prices and imposed an embargo on oil exports to countries that were friends of Israel.
This geopolitical upheaval coincided with the landslide electoral win of Venezuelan presidential candidate Carlos Andrés Pérez, who had promised to nationalize the Venezuelan oil industry. After taking power in December 1973, he promoted an intense debate over the pros and cons of the idea.
At this point in time, and thanks to a combination of laws and government decrees, Venezuela was obtaining a very large percentage of the oil industry income without any risks, since all investments were the responsibility of the foreign oil companies acting as concessionaires.
Nevertheless, investments were very low, due to the political uncertainty surrounding the future course of the industry. At the end, however, the decision to take over the Venezuelan oil industry was driven more by political considerations than economic factors. Venezuelan leaders believed complete ownership of the oil industry was essential if the country wanted to enjoy true sovereignty over its petroleum resources.
As this political drama was developing, I was a middle manager working for Shell Venezuela.
For many years Venezuelan oil industry managers and technical staff had been a highly disciplined group who did their jobs efficiently, without getting involved in the country’s political give and take. But this time we felt it was different. The decision to nationalize the oil industry was a matter of the most critical national importance since oil accounted for almost all of our national income. We felt, as Peter Drucker once said about strategy, that the country “not only had to do the right thing but had to do it right.”
One morning in 1974, over a cup of coffee with my colleagues Odoardo León Ponte and Marcos Marín Marcano, we concluded that we had to participate in the debate. We knew more than the politicians did about the technical, operational, managerial and financial challenges involved in nationalizing the industry. Why should we allow them alone to make decisions of such importance without our input?
Deciding to act, we rented a conference room for 30 people in the Caracas Tamanaco Hotel and sent out an invitation to our colleagues. Half an hour before the meeting we had about 500 people at the door, struggling to enter! The owner of the hotel, Rafael Tudela, showed up and decided to lend us the Ballroom at no extra cost. That night we formed AGROPET, the Association of Oil Industry Employees, to participate in the nationalization debate, and I was named president.
Predictably, the political sectors, from left to right, accused us of being a front for the foreign oil companies. We had to endure the most vicious attacks in which terms like “traitors” and “mercenaries” were among the kindest.
However, after only two weeks, the association had 1,100 registered members and had begun to participate in the debate. We went to the radio, to the press, to television to talk about a subject we knew well, often debating live with representatives of the political parties.
These debates quickly brought to the surface the validity of our arguments and culminated in an invitation from President Carlos Andrés Pérez to meet with us at the presidential palace. This meeting was attended by 400 oil industry managers and technicians and several of us made presentations to the president and his cabinet about the different issues we believed had to be faced in nationalizing the industry.
I believe this meeting represented a turning point in the nationalization process.
The political decision to nationalize had already been taken but the manner in which it finally took place was largely the product of our input to the highest levels of government.
Many of us felt that the decision to nationalize had not been the right one, but we had to do it right, at least. The political sector wanted a takeover without compensation to the foreign companies, and a nationalized industry operating with a total self-sufficiency that was impossible to attain. We knew there would have to be a transition in which the former concessionaires would continue to play a subordinate support role.
The Difference a Day Can Make
The day before nationalization – Dec. 31, 1975 – all was as it had always been. On Jan. 1, as if by magic, the names, logos and colors of the well-known international oil companies had been replaced by those of the new state companies.
In a decision that deviated from other examples of nationalization, the organizational model adopted by the Venezuelan state-owned oil industry was not that of a single state company, but a financial and coordinating holding company, Petróleos de Venezuela, and four integrated operating companies, which would allow the holding company to compare their relative efficiencies.
The company would be totally owned by the state, reporting to the Ministry of Petroleum as the representative of the shareholders and was designed, by law, to be a commercial enterprise.
In a surprising move for me, my family and almost everyone in the industry, I was chosen as a member of the first board of directors of Petróleos de Venezuela, PDVSA, doubtless as a result of having led the association of employees who participated in the debate.
During a presentation to the president, I had said that an essential prerequisite to become a member of the board of the new company was “not to be a politician.” This made the president laugh heartily and his ministers grimace. The president probably felt that naming me to the board would guarantee the new company would not become politicized.
When I notified Alberto Quirós, my company’s president, of my new job he told me: “Gustavo, congratulations and you are fired!” and proceeded to give me a big hug.
A few days later, when meeting with the new board for the first time, President Pérez said to us, “If you ever receive from me a request to employ anyone or assign a contract to anyone, do this …” and he threw a wrinkled piece of paper into the wastebasket.
Getting to Work
The new holding company and its operational affiliates had a tough job ahead: exploration was at a standstill, production levels were reasonable but needed to be increased, refineries were bordering obsolescence, plus technological and marketing contracts had to be negotiated and signed with former concessionaires.
And, to top it all, we had inherited 14 operating concessionaires that had to be fused into four integrated companies. This process of “rationalization” was not a simple elimination of some of the companies but involved a study of the existing operations and of the best potential synergies to be found among the different companies.
This task was to be supervised by a committee of the holding company and coordinated by one of the members of the board. I was chosen to coordinate this process, which proved to be very complex, as are all tasks that involve people.
We had 14 companies, some small, some medium-sized, some large and, predictably, each organization wanted to survive, which was not possible. We worked systematically, meeting with the top management of all the companies, listening to their arguments.
This was a very intense, emotional process, rich in personal and even political conflict but also in demonstrations of true professionalism and intellectual honesty. Our work, done in combination with international management consultants, clearly indicated there were three main companies into which the others should be incorporated: the original Exxon (Creole), now called Lagoven; the original Shell, now called Maraven; and the original Gulf, now called Meneven.
Combined, they accounted for about 85 percent of total oil production. Months of discussions and analyses finally concluded in the structuring of four main companies: Lagoven (the previous Exxon/Creole + Amoco); Maraven (the previous Shell + Phillips + Chevron + Sun Oil); Meneven (the previous Gulf + four smaller companies); and, finally, Corpoven, an amalgam of CVP, the original state oil company, plus the assets of Mobil, Texaco and Sinclair.
This type of organization allowed Venezuela to escape from the single state oil company model that had proven unsuccessful all over the world: in Indonesia, Argentina, Mexico, Nigeria, Brazil, Bolivia and Peru. It was more costly, yes, but it preserved the spirit of competition among the operating companies and allowed for comparison of relative efficiencies.
As one of the members of the board most up-to-date with operational facts, also known for having a gift for writing, I was chosen by the president of PDVSA, General Rafael Alfonzo Ravard, to write his speeches. He gave three or more speeches per week to the most diverse audiences and would give me the specific points he wanted to include in each, while the rest was essentially up to me. His main guidelines, which I would have to repeat as a mantra in every speech, were about PDVSA’s need to always:
- Have professional management.
- Be free from politicization.
- Enjoy financial self-sufficiency.
- Keep normal, uninterrupted operations.
- Possess a meritocratic organization.
He would tell me, “Gustavo, these are the main concepts we have to hammer into the political minds if we want to win this fight.”
For almost a decade from 1976 the nationalized PDVSA won that fight. The company enjoyed the respect of the political world. It gained international credibility and improved in almost every aspect. Proven reserves increased. Production was kept at about 2.3 million barrels per day. The refineries underwent a dramatic transformation, from producing 62 percent of residual fuel oils to producing 65 percent of gasoline and distillates, while accepting a diet of heavier oils. International marketing was progressively done in-house.
In 1977 I was temporarily assigned as general manager of the Cardón Refinery, to start planning for the change in the refining pattern of this plant. This task required complicated logistics and additional human resources since we did not have enough engineers in the country. I sent a team to India where we recruited a group of (mostly) excellent professionals who helped us during this stage.
By 1986 the job in the four big Venezuelan refineries had been essentially completed.
The End of the Honeymoon
At first imperceptibly, later in a more pronounced manner, the honeymoon between PDVSA and the political sector weakened.
As the government grew familiar with the operations of the industry, they started to see real or imaginary warts in PDVSA’s face. Increasing friction appeared between the company and the Ministry of Energy and Petroleum since the ministry staff wanted to assert their authority at operational and planning levels and had never been quite satisfied with letting the managers trained by the multinationals do the job.
Many influential members of the political sector felt that Venezuelan managers, trained by the multinationals, were not patriotic enough.
In 1979, the Venezuelan Society of Engineers demanded the Venezuelan oil industry employ “all newly graduated engineers” to replace the technical assistance contracted with the former concessionaires.
Also that year, the naming of the new board of PDVSA had a political flavor not present before. The board would now be replaced every two years, increasing the tendency to politicize the organization. From then on the government would have the final decision about the size and contents of the budget of the company and could assign responsibilities to members of the board – clear signs of political interference.
Hugo Pérez La Salvia, the new minister of Energy and Petroleum, said, “With the advent of nationalization we inherited the management of the multinationals and I think these managers already had a mentality derived from their work with the concessionaires. This situation must change!”
Although PDVSA would still work in an acceptable manner for some more years, the changes represented the “writing on the wall” for the nationalized oil industry. Instead of public administration adopting the good habits brought by professional management to public business, the bad habits of public bureaucracy began to invade the oil industry.
For me and many of my colleagues, this was the end of a dream. As we had feared when the decision to nationalize was taken, keeping the oil industry free from politicization was impossible.
Today, 40 years after nationalization took place, Petróleos de Venezuela has been run into the ground. The government that came in power in 1999 ended all pretenses of autonomy for PDVSA. Oil income started being diverted into the hands of the executive without providing PDVSA the required funds for reinvestment and proper maintenance.
The company was redefined as a social company in charge of multiple activities that had little to do with oil, such as importing and distributing subsidized food. Production levels went down about 600,000 barrels per day as compared to 1998 levels. The number of employees quintupled. Company debt went from $2 billion in 1998 to about $70 billion today.
Currently refineries are running at 65 percent capacity. Much of the oil exported is going into the hands of ideologically-friendly governments at non-commercial prices. Worst of all, the ratio of production to proven reserves is the lowest among all oil producing countries.
In particular, the huge deposits of heavy oil in the Orinoco Belt area have remained essentially undeveloped for the last 16 years while the most capable foreign companies have left the country.
The negative results of nationalization have been seen in other countries as illustrated by the examples of Pertamina in Indonesia, PEMEX in Mexico, YPF in Argentina and PETROBRAS in Brazil. But the case of PDVSA is, in my opinion, the most tragic illustration of what can happen to a nationalized oil industry.
I knew all along that, in 1976, Venezuela made a wrong decision but, together with a large group of professional managers, did my best to implement it well. We nationalized all the risks for the sake of nationalistic pride.
It could have ended differently, but … we are not Norwegian!