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The political economy of the hydrocarbon sector:
Bolivia and Venezuela in comparative perspective
Liendo Paez, Jeanne
Liendo Paez, J. (2019). The political economy of the hydrocarbon sector: Bolivia and Venezuela in
comparative perspective (Unpublished master's thesis). University of Calgary, Calgary, AB.
http://hdl.handle.net/1880/110514
master thesis
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UNIVERSITY OF CALGARY
The political economy of the hydrocarbon sector: Bolivia and Venezuela in comparative
perspective
by
Jeanne Liendo Paez
A THESIS
SUBMITTED TO THE FACULTY OF GRADUATE STUDIES
IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE
DEGREE OF MASTER OF ARTS
GRADUATE PROGRAM IN POLITICAL SCIENCE
CALGARY, ALBERTA
JUNE, 2019
© Jeanne Liendo Paez 2019
ii
Abstract
In the early 2000s, the governments of Bolivia and Venezuela sought to reconstitute their states
and increase their role in the economy as a way to achieve economic and political inclusion. To
accomplish this goal, the initial political projects of both Evo Morales and Hugo Chávez required
a fundamental shift in the governance of the petroleum sector, as the economy of both countries
heavily relies on oil and gas revenues. Therefore, a central component of their agenda included
seizing control of oil and gas production and maximizing appropriation of its rents. Despite these
similarities and while enjoying a commodity price boom, the hydrocarbon sector performance
shows considerable variation in each country. While Bolivia’s gas production increased over 114%
between 2004 and 2014, Venezuela’s oil production declined 19% in the same period, with a
marked downward trend starting in 2008. Why did the hydrocarbon sector have such different
performances in these two, otherwise similar, left-wing governments? I argue that variations in the
hydrocarbon sector performance can be explained by the different constraints imposed on the
government by partisan and path-dependent variables stemming from each country development
model. In Bolivia, policymaking involved a complex interaction between organized social interests
and the MAS ruling party as well as salient trade offs given socio-structural constraints imposed
by its natural resource-led development model and the lack of operational and financial capacity
of the natural gas industry. By contrast, policymaking in Venezuela became a top-down process
due to comparatively weaker ties between the government and its social base, giving the president
a higher degree of autonomy in deciding energy policy.
iii
Acknowledgements
I would first like to thank the Social Sciences and Humanities Research Council and the
University of Calgary’s Department of Political Science for funding this project. I also want to
express my sincere gratitude to Dr. Pablo Policzer for his infinite patience and his constant
encouragement to cross the finish line in this writing marathon. Above all, thank you for
listening and believing in me, in my project and my abilities. Thank you to Dr. Sarah Jordaan for
her valuable feedback to my research proposal. To all members of the Department of Political
Science, especially Dr. Anthony Sayers, Dr. Joshua Goldstein, Dr. Susan Franceschet, and Judi
Powell, for your support throughout all these years.
This is arguably the most difficult task I have ever completed. I kept going for two main
reasons: Gabriel and Luis Andrés. I am sorry for my countless absences and the fast food, but I
very much appreciate your hugs and your pushing to finish. To my mom, Sonia Paez, for helping
me out every time she could make it to Calgary. Mami, I will always look up to you for teaching
me to smile while facing adversity. Elizabeth Pando thank you for your friendship. I am grateful
for having you by my side in the toughest times. The process of researching and writing a thesis
is of great loneliness. Fortunately, I have had an amazing group to enjoy the last portion -most
stressful one- of this academic journey. They are Latin America Research Centre (LARC) staff
members and visitors Monique Greenwood, Rogelio Velez, Adriana Rincón, María Cristina
Parra, David Barrios, Andrés Lalama, Danilo Borja, and Mariana Hipólito. ¡Gracias, amigos!
iv
To Juan Liendo, Teodoro Petkoff and Ramón Espinasa
In memoriam
v
Table of Contents
Abstract ii
Acknowledgements iii
Dedication iv
List of Figures vii
List of Abbreviations viii
1. Introduction 1
1.1. Governance of the Natural Resource Sector 6
1.2. The Resurgence of the Left in Latin America 11
1.3. A New Framework for Analysis 15
1.3.1. Dimensions of Analysis 18
1.4. Methodology and Thesis Outline 21
2. Hydrocarbon Sector Performance: The Dependent Variable 26
2.1. The Variable and Indicators of Performance 28
2.2. Market Signal: The Commodity Price Boom 31
2.3. The Performance of the Hydrocarbon Sector in Latin America 33
Venezuela’s Hydrocarbon Sector Performance 34
Bolivia’s Hydrocarbon Sector Performance 37
Argentina’s Hydrocarbon Sector Performance 41
Brazil’s Hydrocarbon Sector Performance 46
2.4 Conclusion 50
3. VENEZUELA’S OIL SECTOR: Discretionary State Monopoly 54
3.1. Endogenous Constraints 56
Party Institutionalization 56
Party Linkages 57
Centre of Political Authority 58
3.2. Exogenous Constraints 60
Organizational Capacity of the Opposition 60
Path Dependencies of Natural Resource-led Development 62
3.3. Discretionary Administration of the Resource Wealth 64
Petroleum Sector Organization and Governance 65
Oil Revenue Distribution 67
SOC Corporate Governance 70
SOC Commercial Behaviour 75
4. BOLIVIA’S GAS SECTOR: Distributive State Monopoly 79
4.1. Endogenous Constraints 81
Party Institutionalization 81
vi
Party Linkages 83
Centre of Political Authority 86
4.2. Exogenous Constraints 87
Organizational Capacity of the Opposition 87
Path Dependencies of Natural Resource-led Development 89
4.3. Implications of the Distributive Administration of the Resource Wealth 91
Petroleum Sector Organization and Governance 92
Oil Revenue Distribution 95
SOC Corporate Governance 97
SOC Commercial Behaviour 100
5. Conclusion 102
Appendix A – Variables and Indicators 113
Bibliography 116
vii
List of Figures
Figure 1. Typology of Governing Structures of the Hydrocarbon Sector 16
Figure 2. Performance of the Hydrocarbon Sector: Causal Model 28
Figure 3. Crude Oil Price: WTO Spot Price FOB Historical Trend 32
Figure 4. Latin America’s Hydrocarbon Sector Performance (2004-2014),
Selected Cases 34
Figure 5. Venezuela Drilling Activity 36
Figure 6. Venezuela Oil Production 36
Figure 7. Bolivia Drilling Activity 41
Figure 8. Bolivia Natural Gas Production 41
Figure 9. Argentina Drilling Activity 46
Figure 10. Argentina Gas Production 46
Figure 11. Brazil Drilling Activity 50
Figure 12. Brazil Oil Production 50
viii
List of Abbreviations
AD: Acción Democrática “Democratic Action”
ADN: Acción Democrática Nacionalista “
ANH: Agencia Nacional de Hidrocarburos “National Hydrocarbon Agency”
ANP: Agencia Nacional de Petróleo “National Petroleum Agency”
BCV: Banco Central de Venezuela “Central Bank of Venezuela”
BCF: Billion cubic feet
BOE: Barrels of Oil Equivalent
BPD: Barrels per day
COPEI: Comité para la Organización Política Independiente “Committee for Independent
Political Organization”
ENARSA: Energía Argentina S.A.
FONDEN: Fondo de Desarrollo Nacional “National Development Fund”
FPV: Frente para la Victoria “Front for Victory”
IDH: Impuesto Directo a los Hidrocarburos “Direct Tax on Hydrocarbons”
MAS: Movimiento al Socialismo “Movement Towards Socialism”
MHE: Ministerio de Hidrocarburos y Energía “Ministry of Hydrocarbon and Energy”
MINPET: Ministerio de Petróleo “Ministry of Petroleum”
MIR: Movimiento de Izquierda Revolucionaria “Left Revolutionary Movement”
MORENA: Movimiento Regeneración Nacional “National Regeneration Movement”
MNR: Movimiento Nacionalista Revolucionario “Nationalist Revolutionary Movement”
MVR: Movimiento V República “Movement Fifth Republic”
PCV: Partido Comunista de Venezuela “Communist Party of Venezuela”
PDVSA: Petróleos de Venezuela S.A.
PEMEX: Petróleos Mexicanos
PETROBRAS: Petróleo Brasileiro SA
PT: Partido de los Trabajadores “Workers’ Party”
PSUV: Partido Socialista Unido de Venezuela “United Socialist Party of Venezuela”
SOC: State Owned Company
TCF: Trillion Cubic Feet
ix
TGE: Tesoro General del Estado “General Treasury of the State”
UDP: Unión Democrática Popular “Popular Democratic Union”
WTI: West Texas Intermediate
YPF: Yacimientos Petrolíferos Fiscales
YPFB: Yacimientos Petrolíferos Fiscales Bolivianos
1
1. Introduction
“Out of every 10 Venezuelans, seven are poor. This is due to the mismanagement of the oil
industry,” said then President Hugo Chávez in November 2001 when he enacted the reform of
the Hydrocarbon Law. Chávez ‘passed’ the law along with a package of 48 other laws thanks to
his special powers to rule by decree for 12 months (‘Polémica nueva ley’ 2001). “It is positive
for the country, it is the sowing of oil1, the diversification of the economy, (and) it is to give
more strength to the oil industry,” Chávez added, in defense of the new legal instrument that
doubled royalties and increased state intervention in the administration and development of
hydrocarbon resources. Five years later, on May 1st, 2006, from the southern province of El Gran
Chaco, Chávez’ Bolivian counterpart, the indigenous, cocaleros movement’s leader Evo Morales
announced the nationalization of the hydrocarbon industry and the renegotiation of the contracts
with international oil companies (IOCs) that were operating in the country. “The plundering of
Bolivia’s natural resources is over,” Morales said, while claiming that resource ownership had
returned to the people (Ibaibarriaga 2006). Amid the militarization of oil and gas facilities,
Morales’ government called all the sectors to support the measure because it was supposed to lay
the “foundations of the national development.”
The reversal of privatization and the opening processes initiated in the 1990s were
amongst the most important anti-neoliberal manifestations of the first decade of the 2000s, when
the Left re-emerged in Latin America. The economic crisis of the 80s and 90s and the conflicts
caused by the distribution of resource wealth drove the policy changes. Indeed, resource
nationalism reflects the initial terms of Chávez’ and Morales’ political project. This required a
1 In 1936, Arturo Uslar Pietri, a Venezuelan writer and politician, coined the term ‘sowing the oil’ to refer to a policy aimed at
using the income generated by the oil industry to diversify the economy (Blake 1984, p. 66).
2
fundamental change in the way the two countries governed their oil and gas resources. The
control of the oil and gas industry was therefore a central component of their political agenda.
This anti-neoliberal agenda of the Latin American Left leveraged the commodity price
boom in the early 2000s, but not on the same terms. While the Chávez and Morales governments
shared common goals of re-founding the state and promoted statist plans in strategic sectors of
the economy through a radical approach (Beasley-Murray et al. 2010), other peers in the region
responded with pro-market policies or a neutral approach, maintaining the status quo of previous
administrations’ policies. For example, Luiz Inácio “Lula” da Silva, of the leftist Workers Party,
was inaugurated to the Brazilian presidency on January 1, 2003. His government halted Brazil’s
privatization impetus but did not nationalize any of the companies fully or partially privatized by
previous governments, including Petróleo Brasileiro or Petrobras (Flores-Macías 2012). In
contrast, in Argentina, the approach towards neoliberalism was more ambiguous. The left-wing
government of Néstor Kirchner and his wife, Cristina Fernández, who succeeded him in 2008,
imposed price controls and a cap on natural gas export quotas as well as dividend repatriation,
but did not nationalize the petroleum sector. “The model is not one of nationalization, which is
clear, but recovery of sovereignty and control of a fundamental instrument,” said Cristina
Fernández de Kirchner on April 16, 2012 when she declared Repsol YPF was now a public
utility subjected to the expropriation of 51% of its shares. Prior to that, the company was owned
by Spanish firm Repsol (Peregil 2012).
One could expect different results from different policy choices. Surprisingly, there were
different results among those who had similar reformist agendas. In fact, the petroleum sector in
Bolivia and Venezuela has taken different trajectories since the Left came to power, despite the
commonalities between these two new political movements, particularly in their radical approach
3
to break apart from neoliberal reforms amid the commodity price boom. Venezuela provides an
example of underperformance in the hydrocarbon sector. Oil prices increased nearly four times
from USD28.50 average per barrel in 2000 to an average of USD108.66 per barrel in 2013
before losing more than half its value in 2015 (BP 2018). Between 2000 and 2013, Venezuela
showed lower levels of investment in the oil sector, causing a significant decline in oil
production. While the number of active drilling rigs –industry standard proxy for investment–
dropped 15% (Baker Hughes 2016), production fell 13% (BP 2018). After recovering production
levels from a massive oil strike in 2002, crude oil output grew steadily to a 3.3 million barrel per
day (mbd) average in 2008, before starting to decline. In contrast, Bolivia’s gas sector showed a
positive trajectory. Expenditure in drilling activities translated to a 113% increase in rigs
operating in the gas industry (Baker Hughes 2016), leading to a 57% growth in natural gas
production between 2006 and 2013 (BP 2018, ECLAC 2012, World Energy Council 2013).
These divergent trajectories lead to the central question of this thesis: Why did the
hydrocarbon sector have such different performances under these, otherwise similar, left-wing
governments? I address this question by looking at the interplay between the current political-
economic system, path dependencies and institutions governing the petroleum sector to develop
a predictive model of how the sector will likely perform. Beyond the broad question of what
incentives led the government to adopt policy changes, I seek to explain the factors that have
made such changes possible.
I argue that variations in the trajectory of the hydrocarbon sector in Bolivia and
Venezuela are a function of the level of constraint imposed on government action by partisan and
non-partisan factors, which in turn sets the degree of government intervention in the oil and gas
industry. Both governments have implemented a radical agenda that pursued new institutional
4
arrangements to break from neoliberal policies implemented in the 1990s. However, the origins
of their individual political coalitions, the social base configurations, the level of
institutionalization in each party that brought their respective leader to power, and the type of
leadership as well as path dependencies inherited from long-term socio-economic structures of
development imposed varying restrictions on policymaking. Indeed, Morales’ leadership is
rooted in years of social mobilization; therefore, policy implementation is a complex interaction
between the organized social interests and the MAS ruling party. By contrast, policymaking in
Venezuela became a top-down process due to comparatively weaker ties between the
government and its atomized social base, so Chávez enjoyed a higher degree of autonomy in
deciding energy policy once he was in office.
I find that low-constraint cases are more likely to attain radical policy shifts that
ultimately alter the sector’s trajectory, whereas high-constraint systems are more likely to make
piecemeal reforms and preserve the status-quo in the hydrocarbon sector resulting in a better
performance. The following cases of Venezuela and Bolivia show that major institutional
reforms took place in countries in which the government was able to squeeze pro-market
regulations and, to a greater extent, alter property relations to favour the state. In contrast, those
governments that worked with pre-existing institutions governing the hydrocarbon sector were
those governments that lacked access to a state apparatus and were less autonomous from civil
society.
This thesis examines the extent to which governments are able to intervene and reshape
institutions governing the oil and gas sector and its implications on performance. It analyses two
cases: Bolivia and Venezuela under the first two terms in office of Evo Morales and Hugo
Chávez, respectively. These cases are useful for comparative analysis because although they
5
share many characteristics and had stated agendas that indicate similar goals each has a different
outcome. However, the thesis aims to also shed light beyond these two cases. After all, there are
more than a handful of current and emerging oil- and gas- producing countries in the region, and
the so-called Pink Tide is still strong in Latin America (Anria & Roberts 2019). Examples
include Brazil under the government of Luiz Inácio “Lula” da Silva (2003-2010) and Argentina
under the presidency of Néstor Kirchner (2003-2007) and Cristina Fernández de Kirchner (2007-
2015). This comparison highlights the heterogeneity of the Left and the complexities faced by
government coalitions once they come to power.
Before delving into the case studies some theoretical considerations must be addressed.
This thesis engages in a broad discussion of the implications of the quality of sector-specific
institutions and the political and policy divergences that occur within each type of Left to assess
the performance of the hydrocarbon sector. In other words, this study combines two main topics,
namely governance in the hydrocarbon sector and the resurgence of the Left in Latin America. It
advances our understanding of how the hydrocarbon sector performed following institutional
transformations after the Left came to power, as well as the causes of those transformations.
After this discussion, I will explain a new framework to analyze the political economy of the
hydrocarbon sector by introducing a political dimension within the discussion of the sectoral
institutions. In the next sections, I will describe the research methods and, finally, I will outline
how the thesis will proceed in the following chapters.
6
1.1. Governance of the Natural Resource Sector
For more than two decades, scholars have explored both economic and political factors to
determine whether resource wealth is a curse or a blessing. The empirical and theoretical
explanations suggest that there are several mechanisms that cause the resource curse; that is, the
negative association between resource abundance and overall country performance. There are
two prominent explanations for this. One of them is a phenomenon called Dutch Disease,2
according to which resource-rich countries have lower economic growth rates due to shrinking of
the manufacturing and agricultural sectors (Corden and Neary 1982; Sach and Warner 1995;
Sala-i-Martin and Subramanian 2003).
The second explanation is ‘rentierism,’ which affects institutional state capacity –its
ability to extract and deploy resources, enforce property rights, and resist demands from interest
groups and rent-seekers (Karl 1997, Ross 1999, Shafer 1994). Scholars contend that
governments are freed from levying domestic taxes due to oil rents which, in turn, grants them
financial autonomy and social immunity. The state is only concerned with its distributive
function as it is relieved from the political accountability that comes alongside taxation (Ross
1999).
More recently studies have provided evidence showing that oil rents prompt
authoritarianism, putting democracy at stake. This is, in part, due to the same rentier effect:
Governments are not only freed from accountability but, with vast windfalls, they also embark
on large spirals of public spending, facilitating patronage linkages and weakening opposition
groups (Corrales 2010, Ross 2001). Although different measures of natural resources and quality
of institutions have, arguably, prompted different results, there is an agreement that institutions
2 Dutch disease is a term coined in 1977 to refer to the impact of gas exports on the Dutch economy.
7
are crucial to determine the influence of oil revenues on economic development (Balza et al.
2015; Karebovic 2009).
Not surprisingly, the governance of the natural resource sector has become a major field
of inquiry in the burgeoning literature of international studies and political economy. Scholars
have engaged in developing an understanding of how the sector is governed, by whom and with
what consequences at both global and domestic levels to leverage economic and social
development (Bebbington 2018, Van de Graaf and Colgan 2016; Vieyra and Masson 2015),
particularly in the age of abundance.
Finding the proper balance between a government’s need to finance its development
model and meeting investors’ expectations is a challenge. Generally speaking, countries heavily
dependent on oil revenues tend to be less open to foreign investment. During the neoliberal
period, however, energy policy in Latin America evolved towards sector liberalization as
governments faced pressure to finance investment in the oil sector, which is capital intensive
(Palacios 2002). Nonetheless, in the first decade of the 2000s, commodities-exporting countries
in the region experienced a wave of resource nationalism; that is, states’ tendency to take control
over the natural resource sector, reneging property rights of private investors (Ward 2009). Latin
America led the trend of increasing state intervention in the hydrocarbon sector in Bolivia and
Venezuela, and also in Argentina and Ecuador. Other oil-exporting countries in the Caspian
region, Africa and the Middle East followed the same path (Monaldi 2014).
Nevertheless, policy changes in the region, as in the openness process of the 1990s, have
been far from uniform. Indeed, while the massive influx of windfalls exacerbated oil nationalism
in some hydrocarbon exporting countries, others, such as Brazil, Colombia and Peru, responded
8
differently to the commodity price boom, strengthening their institutional framework and the
property rights of private investors (Manzano, Monaldi & Sturzenegger 2008, Monaldi 2010).
Other studies have focused on government incentives for resource nationalism as a policy
choice, indirectly assessing the performance of the petroleum sector. The cycle of investment
and expropriation in the hydrocarbon sector over the last two decades in Latin American is
attributed to a complex interaction of specific features in the resource sector and the
effectiveness of the tax system to capture the rents. Manzano et al. (2008) suggest that the
sector’s unique characteristics3 along with the lack of progressive tax systems in the oil and gas
sector create incentives for governments to engage in contract renegotiation or asset
expropriation (p. 61). A government’s incentive for a determined policy choice is also shaped by
a country’s resource endowment. In fact, the evidence shows that expropriation tends to occur
during high-profit periods, in net hydrocarbon-exporting countries, after a successful period of
investment, when reserves and production are increasing, and the government has financial
resources to assume the capital expenditure of upstream activities (Monaldi 2014, Palacios
2002).
This perverse incentive structure affects the performance of the resource sector, but the
extent to which the State is able to intervene in the sector for rent appropriation and control of
production depends on the governance of the hydrocarbon sector and the country’s politico-
institutional framework (Monaldi 2010). Indeed, “expropriation is characteristic of states with
weak institutions” (Balza, Espinasa and Jiménez-Mori 2014, 355).
3 According to Manzano et al. (2008, p. 61) the hydrocarbon sector generates large rents, costs are sunk (impossible to mobilize
the assets after production of oil and gas has come on stream and before the investment is recovered), natural resources are
concentrated in the hands of a few countries politically unstable and institutionally weak, it is highly politicized due to massive
consumption of oil and gas in the domestic market, it involves technical risks (i.e. geological), and oil and gas prices are volatile.
9
Other scholarship focuses on the quality of institutions and how it directly affects the
performance of the oil sector. Balza et al. (2015) argue that broad indicators of institutional
quality, such as national institutional indices4, do not explain enough of the variations in the
performance of the oil sector. In this regard, they look at specific sectoral institutions to better
assess the sector’s performance and pay particular attention to transparency and information
disclosure as key factors in shaping the “relative quality” of these institutions. In fact, a
subsequent analysis of sector performance in seven Latin American oil countries indicates that
the divergent trajectory of the sector during the recent oil boom is strongly associated with the
characteristics of the institutional frameworks regulating investment and production, whether it is
direct state control of production through a state-owned company (SOC) or indirect control of
production (Balza and Espinasa 2015).
The contractual and tax systems, as well as the institutional setting of the hydrocarbon
sector, in a context of high oil prices, might have prompted a policy shift towards resource
nationalism. Indeed, these propositions offer a rationale for the poor performance of the sector
among oil-rich countries that have favoured policies such as rent appropriation and increasing
state intervention in the sector, compared with those countries which chose to secure investment
in order to meet domestic energy needs. However, it does not explain at all the different path that
the hydrocarbon sector has taken in countries that share the same programmatic agenda, that is,
those who nationalized the oil and gas industry such as Bolivia and Venezuela.
4 Scholars that have assessed the direct or indirect effect of institutional quality on economic growth in resource rich countries
used a variety of indicators including, but not limited to average of indices of efficiency of the judiciary, lack of red tape, and
lack of corruption (Sach and Warner 1995); rule of law, lack of violence, corruption and political instability (Isham et al. 2005,
Brunnschweiler and Bulte 2006), among others; or secondary data sets such as the International Country Risk Guide (Mehlum et
al. 2006b, Arezki and van der Ploeg 2007) and the World Competitiveness Report from the Economist Intelligence Unit (Ades
and Di Tella 1999).
10
So, if sectoral-institutions do not fully explain different outcomes in the oil and gas sector
following policy shifts, what does? The case of Venezuela, again, sheds some light. The
instability of Venezuelan energy policy after 2003 has also been explained by the low
competitiveness of the political system and high inclusiveness and risk acceptance of the leader.
In order words, although the legislative body remained under the control of a single constituency,
the ruling United Socialist Party of Venezuela (PSUV in Spanish), the political system was
highly inclusive of the social groups that supported the party in office. Also, the leader, president
Hugo Chávez, presented low risk aversion to introduce policy changes (Mares 2010). Mares
(2010) noted that “Chávez has since been free to move increasingly into a resource nationalism
and energy security direction by raising taxes, nationalizing the heavy oil projects and some
service company operations” (p. 22). This, however, raises other questions. Why was late
president Chávez free to move towards nationalization of the oil industry? To what extent does
the ability of the leader to carry out his programmatic agendas pave the way toward
implementing so-called reforms?
In spite of Mares’ assertions, conventional wisdom has often overlooked political factors
as explanatory variables for divergent trajectories of the resource sector. The intellectual debate
on resource nationalism and governance of the hydrocarbon sector often neglects the significance
of political variables, such as ideology, party organization, party leadership type and its social
dynamic within the constituencies and autonomy of the state apparatus on the basis of two
premises. First, political ideology is not among the primary determinants of energy policy and
sector performance (Monaldi 2010). And second, countries that did not expropriate or increase
state intervention in the sector, such as Brazil, Colombia, Peru and, arguably, Mexico, have had
either moderate-left or center-right parties in power (Monaldi 2014).
11
In contrast with the above-mentioned debate, Bebbington (2018) brings power and
politics to the core of the analysis of the governance of natural resources through the political
settlement approach. That is, “the ways in which natural resources are governed would be a
function of the political settlement” (p. 10). The latter is understood as “the ways in which
governing relations are negotiated among economic and political elites” (p. 7). Even though this
approach recognizes that main drivers of institutional changes are political, it broadly engages
with the governance of the natural resource and its implication for development. I am more
concerned about implications for the performance of the natural resource sector.
1.2. The Resurgence of the Left in Latin America
Although the Left resurged almost simultaneously throughout Latin America, it is a
heterogeneous political phenomenon which varies along a wide range of dimensions: type of
leadership, programmatic agenda, institutionalization of party organization, regimen orientation,
and state structures, among others (Beasley-Murray et al. 2010, Levitsky and Roberts 2011, Luna
2010, Weyland 2010). To understand their different governing approaches and divergent social
and economic outcomes, scholars have tended to create binary categories of the left such as good
vs bad, social democratic vs populist, contestatory or radical vs moderate, populist and neo-
populist, anti-liberal and social liberal (Beasley-Murray et. al 2010, Castañeda 2006, Petkoff
2005, Wayland 2009, Wayland 2010). On one hand, in short, the moderate or social democratic-
left seeks for social inclusion without rejecting the principles of the liberal democracy and
market economy. It is represented by left-wing governments that came to power in countries
such as Chile, Uruguay and Brazil. On the other hand, the radical or populist left lacks an
ideological platform, it is highly averse to capitalism and intervenes in the economy to achieve
12
socio-economic changes. The left-wing governments that came to power in Bolivia, Ecuador,
and Venezuela fall into this category.
Scholars have challenged these dichotomous interpretations of the Left. Luna (2010) and
Levitsky and Roberts (2011) discuss the drawbacks of clustering countries among these two
exclusive categories and contend that this dichotomy overlooks the diversity of Latin American
cases that do not necessarily fit into any of these two groups, such as Argentina and Uruguay;
therefore, failing to explain policy divergences within each type and even within the same leftist
group. Luna (2010) argues that to understand how they govern and the type of policymaking one
would expect from them, the analysis of governments on the left should not only consider the
programmatic orientation of the leftist project (radical or institutional), but also “the type of party
in power and its relative autonomy from civil society,”5 and structural factors from each
country’s long-term trajectory of development that create different levels of constraints to
government action (p. 26). In doing so, Luna offers a rationale to explain why “two leftist
governments sharing similar programmatic agendas might govern differently and might seek
different policy outcomes” (p. 27). Levitsky and Roberts (2011) develop a typology that looks at
“party organizational characteristics” (p. 12). It assesses two main factors: level of
institutionalization of the party in office -established or new- and the center of political authority,
whether it is dispersed or in the hands of a dominant personality.
Like Luna, Levitsky and Roberts analytical framework highlights the heterogeneity of the
Latin American Left and the distinctiveness of cases that are often considered equal, such as
Venezuela and Ecuador. These studies, like those previously mentioned, focus on how the Left
has governed in different policy spheres. However, they fall short of pursuing a systematic
5 Steven Levitsky and Kenneth Roberts (2011) advanced a taxonomy of the left that includes these two dimensions, namely locus
of political authority and level of institutionalization of the leftist party (p. 13).
13
analysis of how this way of governing has impacted the performance of the hydrocarbon sector
in Latin America.
Analysts agree that “commodities are at the heart of Latin America’s economic
development” (Ocampo 2017). In Venezuela, for example, oil provides 96% of export revenues
(BCV 2015), while in Bolivia, the gas sector plays a significant role for budget allocations.
Between 2000 and 2013, Bolivian fiscal dependence on natural resource revenues averaged 30%,
while Venezuela averaged 49% (Ocampo 2017). Despite its inequalities, Latin America
significantly lowered inequality over the past two decades thanks to the boom in commodity
prices. The IMF’s Regional Economic Outlook for Latin America (IMF 2018) reported that
poverty decreased from about 27 to 12 percent across the region between 2000-2014, when the
price of commodities like oil, and metals, steadily increased thanks to growing demand from
emerging market economies like China and India. In this period, some countries such as
Venezuela sped up spending at the central government level, while “several commodity-
exporting countries such as Bolivia, Brazil, and Peru redistributed large parts of their earnings
from natural resource extraction back to municipalities and regions where resource extraction is
located” (Balakrishnan & Toscani 2018). One of the drawbacks of natural resource-led
development is that economies are vulnerable to external shocks; that is, when the oil price falls
the economy is severely affected. In the end, economic growth proves unsustainable in the long-
run, public spending shrinks as a result of lower export revenues, and redistributive conflicts
spread out. Latin American governments seem to have failed to fully capture the benefits of their
natural resource wealth and provide adequate policy responses to address these macroeconomic
volatilities (Bacha & Fishlow 2011, Ocampo 2017). This requires our special attention.
14
Before I address this issue, it is important to point out that the discussion above
mentioned is consistent with the Weberian-Marxist debate about the Capitalist state (the nature
of political and economic organization) and the allocation and distribution of power. Max Weber
defined the state by its means, that is, the state has the monopoly of the legitimate use of force in
a given territory (Míguez 2010, O’Neil 2007). This legitimacy derives from the fact that the state
issues general norms accepted by the individuals of the society (Mazzuca 2012). Therefore, “the
state is not simply an armed body (…) It is a set of institutions that society deems necessary to
achieve basic goals regarding freedom and equality” (O’Neil 2007, p. 21). To compare state
power, the contemporary debate includes two other variables, the state’s capacity and autonomy,
aside from legitimacy (Jessop 1990, O’Neil 2007). While autonomy is the power of the State to
define without interference its own agenda of preferences, capacity is the power to carry that
agenda out, to execute its preferences (Mazzuca 2012).
The thesis is partially anti-Marxist as, on one hand, it denies the universal principal that
the state is dominated by the economic power. On the other hand, it accepts that autonomy can
disappear in certain countries at certain times. Indeed, the autonomy of the state implies not only
independence from the dominant economic classes, but independence from governments and
administrations. In other words, the absence of capture by the relevant candidates: economic
groups, foreign powers and governments and national bureaucracies. The Latin American Left
turn, in its most radical version, and the growing concentration of power in the hands of the
executive branch suggests that there has been greater autonomy of government at the expense of
a degradation of the autonomy of the state. The scarcity of state policies indicates that the state
has been captured by radical governments, which have a tendency towards a policy-making
process that systematically evades public deliberation and excludes party opposition (ibid.).
15
1.3. A New Framework for Analysis
In light of this, this thesis proposes an alternative account to analyze the performance in the oil
and gas sector by bridging these two ostensibly dissimilar scholarly perspectives.
I aim to explain the sector’s trajectory through a methodology that complements the
institutional approach by capturing key political aspects that counterbalance the political power
of governments in which leftist parties take office. By adding another dimension to the
institutional-based classification of international models governing the oil sector, the resulting
analytical framework has two dimensions: (1) level of constraints to government action and (2)
degree of openness in the petroleum sector. Drawing on Luna’s “anatomy of the Left” (2010),
the second dimension is based on two main variables: partisan and non-partisan factors that
regulate leaders’ ability to control the policy making process. These factors will help to identify
high or low levels of constraints by looking at indicators such as locus of political authority,
party institutionalization, party linkages, organizational capacity of the opposition and inherited
path dependency. The second dimension applies to sector organization according to the state’s
principles of development of its natural resources. It distinguishes between direct control of
production and indirect control of production, as portrayed by Balza & Espinasa (2015) on the
basis of four variables: petroleum sector organization and governance, redistribution of the
resource wealth, state-owned company (SOC) corporate governance, and commercial behaviour
of the SOC.
Combining these two dimensions produces four new governance structures of the
hydrocarbon sector as shown in Figure 1. The first category, labeled Institutionalized State
Participation, is located in the upper right quadrant. This category is characterized by high
constraints to government action and a low level of government intervention in the oil and gas
16
sector. In the absence of doctrinal rigidity but with well-institutionalized parties with dispersed
power, the policy making in this sector tends to be a participatory, bottom-up process that along
with a marked continuity of inherited economic policies pose high levels of limitations to
government actions. The hydrocarbon sector is overseen by an independent regulatory agency,
while the state-owned company competes in the market with other private firms under the same
rules.
Figure 1. Typology of Governing Structures of the Hydrocarbon Sector
Source: Author’s own elaboration
The second category, labeled State control in Disarray, is located in the lower right
quadrant. This group combines low constraints that affect government’s ability for policy
(+)
(+)
(-)
(-)
LE
VE
L O
F C
ON
ST
RA
INT
S T
O G
OV
ER
NM
EN
T A
CT
ION
DEGREE OF OPENESS IN THE HIDROCARBON SECTOR
Institutionalized
State Participation
(Brazil)
State Control
in Disarray
(Argentina)
Distributive
State Monopoly
(Bolivia)
Discretionary State
Monopoly
(Venezuela)
17
making and a low degree of government intervention in the hydrocarbon sector. Party
organizations are well established in the political arena, but power is concentrated in the hands of
a dominant personality who cements loyalties with popular constituencies on the basis of
patronage. In spite of this, policy orientation is flexible and pragmatic and may change according
to the economic and political context. Consequently, policy choices may vary according to the
circumstances, leading to different degrees of government intervention within the hydrocarbon
sector, but to a lesser extent in upstream activities (e.g. expropriation or nationalization of
property rights).
A third type of governance structure, the Discretionary State Monopoly, in the lower left
quadrant, combines low restrictions to government actions with a high degree of government
intervention within the sector. In this category, a party organization is created as a vehicle to
compete in elections and to channel people’s disillusionment with traditional parties through a
radical programmatic agenda aimed at breaking with neoliberal policies. As a result, the
grassroots is an atomized group that lacks organic ties with the political movement and relies
more on a charismatic personality that enjoys a high degree of autonomy to intervene in the state
apparatus. Therefore, policymaking is a top-down process that enables the leader to rule the SOC
at their convenience, including the management of the company and oil revenue distribution.
The final category of governance structure of the energy sector is the result of a high level
of constraints to government action and a high degree of government intervention. This category,
which I call Distributive State Monopoly, is found in the upper left quadrant of the typology.
Like the Discretionary SOC Monopoly, in this category, the party organization is willing to seek
alternatives to achieve political and economic inclusion in a radical way. However, unlike the
Discretionary SOC Monopoly, the newly created political movement is rooted in years of social
18
mobilization outside the electoral arena. As a consequence, the social base is capable of
organizing itself autonomously and it has institutionalized ties with the governing party. This,
along with strong partisan organizations, constrains the leader in government action. It also
forces the leader to remain accountable to these autonomous popular movements that brought
him/her to power, while managing to balance the demands from different social groups. This
may translate into expropriation and tax spikes in the hydrocarbon sector, but with the necessary
moderation and institutional arrangements to keep the sector afloat.
For the reasons argued above, one would expect that state-owned companies that operate in
a highly constrained politico-institutional context will perform better than state-owned
companies that operate under low-constraint governance mechanisms.
A caveat is worth noting here regarding the typology and the case studies. These categories
best describe current models of international oil and gas sectors and cases approximate to the
typology in different degrees. In addition, cases evolve over time and move both within a
classification and potentially change classification. For example, during the first years of
Chavismo, Venezuela’s oil sector, could have been deemed as a Distributive State Monopoly, but
it shifted to the lower left quadrant in more recent years as the discretionary management of the
sector increased.
1.3.1. Dimensions of Analysis
This section describes the independent variables that will be used to analyze the governance
structure of the hydrocarbon sector along the two dimensions of the framework previously
proposed. The indicators to operationalize each variable are in Appendix A.
19
Variables that Measure Constraints to Government Action
Partisan Constraints: Constraints and opportunities to government action introduced by party
organizational characteristics such as level of institutionalization, type of leadership and party
linkages: that is, its autonomy from civil society, and programmatic and distributive conflicts
within a party's social base configurations.
Non-partisan Constraints: State institutions and socio-structural configurations flowing from
each country's long-term trajectory and the country's specific ways to integrate into the global
economy. This includes socioeconomic and state structures in which these regimes operate.
Variables that Measure Openness in the Hydrocarbon Sector
Hydrocarbon Sector Organization and Governance: Oil reservoirs, including US federal
lands, are state-owned. As owner of the resource, the state has the sovereign right and obligation
to decide how, at what pace, and by whom resources should be developed, thus defining the role
of the market and the level of direct intervention. Monopoly ownership of oil reservoirs can be
exercised in two different ways: by maintaining direct control of production through a state-
owned company (SOC); or by maintaining indirect control through a ministry or a non-operating
regulatory agency that administers the development of the reservoirs. Reality is still more
complex as the state not only has a monitoring role but it also acts as a participant. Therefore, we
need to know who administrates the resource development and how. This includes: The roles
and responsibilities of different ministries and agencies, and the openness of the production
activities to non-SOC participants. Standards of transparency and accountability are needed for
successful administration.
20
Revenue distribution: As owner of the oil- and gas-bearing lands, the government has the right
to claim the rent generated by the development of these resources. The government might follow
pre-set distributional rules (low intervention) or distort them for the appropriation of the rent
(high intervention). Pre-set rules (contractually-fixed) are fees, specific oil taxes, royalties and
down payments. Fixed terms of the regulations or changes are indicators of the stability of the
fiscal framework. Distortion might happen when the government creates mechanisms for rent
appropriation or forces the company to allocate revenues to other activities in a discretionary
way.
SOC Commercial Behaviour: That is, a company's behaviour as a commercial firm whether the
company is a profit maximizer or not. Like other oil companies, SOCs must make investments in
capital to preserve future production capabilities. However, SOCs are usually forced to carry out
non-commercial activities and they have very little control over their country’s policy choices.
A monopoly has a non-commercial character.
SOC Corporate Governance: From a corporate governance perspective, adequate oversight
and control exercised by the owners seems to be of primary importance in order to reduce
information asymmetries and the potential for managerial rent-seeking. This variable deals with
internal and external governance of the SOC. External governance arrangements relate to the
relationship between the SOC and the state as its owner—that is, the ownership structure of the
SOC and the organization of state ownership. Internal governance includes institutional
arrangements, such as the composition, structure, functioning and authority of the Board of
21
Directors, and the SOC’s management processes, such as recruitment, oversight and replacement
of key executives, decision-making process, sources of capital, the degree of budgetary
autonomy, disclosure and transparency standards, the skill base, and human resources policies.
1.4. Methodology and Thesis Outline
Political Scientists have debated the Left turn in Latin America in the last two decades, just as
dependence on natural resources for economic growth has been the subject of great debate for
over 20 years. The left-right divide, personalistic politics, populism and lack of checks and
balances occupy much of the space in the political discussion on the current Latin American
context and at a global scale as well. Moreover, the complexities of the oil and gas industry and
its specific characteristics, impose new challenges on policymakers all the time. Therefore, the
cases of Venezuela and Bolivia have proven to be a fertile ground in the subfield of comparative
political economy. As has been mentioned before, I rely on these cases because, despite their
similarities in political agenda, they have different outcomes. Yet, there are other two reasons
that make these case selections timely.
First, Bolivia and Venezuela play a significant role in the regional and global energy
context. Latin America has vast energy resources, both renewable and non-renewable. Venezuela
has the largest oil reserves in the world, more than 300 million barrels (BP 2018). Brazil and
Colombia are also important oil producers in the region. Venezuela has the largest gas reserves
in Latin America (198 trillion cubic feet of gas, or TCF), followed by Brazil (15 TCF), Peru
(14.6 TCF), Argentina (11.7 TCF) and Bolivia (9.9 TCF). Due to their vast resources, Bolivia
and Venezuela are important exporters of oil and gas, so the management of resources and
orientation of their energy policies have significant implications for the local economy, and
22
geopolitics at a regional and global level. With respect to the economy, in Bolivia, natural
resources, primarily natural gas, account for 8% of the country's Gross Domestic Product (GDP)
while natural gas exports accounted for 54% of total export revenue in 2014 (INE Bolivia 2015).
In Venezuela, petroleum activities accounted for 10.79% of GDP, while oil exports represented
96% of total export revenues in 2014 (BCV 2015).
Second, as regime change could be expected in Bolivia and Venezuela in the short term,
geopolitical implications should be considered. Bolivia is the largest gas exporter in the region,
being a key supplier to Brazil and Argentina. In 2014, Bolivia exported 1.5 bcf /d to these two
countries, more than two-thirds to Brazil and the rest to Argentina via the GASBOL and
YABOG gas pipelines (EIA 2015, MHE 2016). Over the years, Morales has largely based his
support on the gas-driven economic prosperity but as his seek to extend his presidency for an
unprecedent fourth term, the government needs to show more progress on the gas corridor.
Although Bolivia and Argentina have recently renegotiated its gas supply agreement (‘Argentina
renegotiates key’ 2019), its plan to become a gas hub in the region has just fallen short (Parker
2018).
Until 2017, Venezuela's crude oil exports were mainly destined for the US, China, India
and Russia. Since then, the administration of US President Donald Trump has imposed a wave of
individual sanctions against government officials and economic sanctions on state-owned
companies, including Petróleos de Venezuela SA (PDVSA in Spanish). These sanctions sought
to promote regime change in Venezuela. Although the pieces on this chessboard are still moving
around and the consequences of these measures are yet to be analyzed in the long term, an
eventual change in Venezuela’s political leadership should lead to a reconsideration of how the
State manages its natural resources, including to what extent the State plays a role in the
23
administration and development of the sector, and rents that it aspires to capture from it. More
importantly, to what extent institutional mechanisms for popular participation in the
policymaking process will be established.
I have made the case for the importance of introducing the political dimension to
understand the trajectory of the hydrocarbon sector through a combination of small-N qualitative
cases. I use qualitative methodology because it allows a deeper and more robust analysis to
explain different outcomes via causal mechanisms. Causal mechanisms are crucial to
understanding causation or how causality operates. Mechanisms, according to Jon Elster (1998),
are “frequently occurring and easily recognizable causal patterns that are triggered under
generally unknown conditions or with indeterminate consequences” (p. 45). Identifying those
mechanisms, that is, specify how causality effects are exerted, “(…) builds support for a theory
and it is a very useful operational procedure” (King, Keohane & Verba (1994, p. 86). I use
narrative, empirical analysis to explain how events unfold over time. I rely on secondary sources
such as books, academic papers and news articles to reconstruct the order of events and support
my findings. I also use different data sets. As far as possible, I use data issued from official
authorities. However, access to official data constitutes a limitation for this research work. First,
the data is not always available and up to date, such as the financial statements of the Bolivian
state oil company Yacimientos Fiscales Petrolíferos Bolivianos (YPFB in Spanish) or central
banks reports on natural resource revenues, to name some examples. Second, the indicators are
not measured in the same way, which makes comparison troublesome at a times. To mitigate
these limitations, I used secondary data sets from international and/or multilateral organizations
such as the BP Statistical Review, OPEC, the World Bank, Baker Hughes’ statistics of active
drilling, among others.
24
After advancing a new typology to nuance the analysis of the petroleum sector among
leftist governments, in the following chapter I document the performance of the hydrocarbon
sector in Latin America, which constitutes the dependent variable of this thesis. I make
conceptual clarifications regarding performance in the petroleum sector and the indicators I rely
on to operationalize this variable, namely oil price, investment and production. A brief
assessment of the oil price trend follows as I assess different policy responses during the
commodity price boom. Finally, I evaluate the performance of the hydrocarbon sector at a cross-
national level. As selected cases of Latin America show, the response to the market signal
triggered by increasing oil prices was far from uniform. While natural resource production
dropped in Argentina and Venezuela, Bolivia shows mixed results in terms of investment and
gas production, while Brazil seems to have fully take advantage of the price cycle to increase
production.
In the following two chapters, I further explore the relationship between partisan and
nonpartisan factors that constrain government actions and the institutional variables governing
the petroleum sector through cases of study.
Chapter 3 examines the case of Venezuela. The government of Hugo Chávez in
Venezuela carried out his ‘Socialism of the 21st Century’ plan, advancing a series of
unprecedented statist reforms, including the reform of the 1961 Constitution. This represents an
opportunity to study the factors that allowed him to carry out these transformations practically
without any obstacles. This chapter explains that his ability to carry out his statist agenda is due
to the autonomy he enjoyed not only from the ruling party, but from the lack of an institutional
opposition.
25
Chapter 4 examines the case of Bolivia. The government of Evo Morales in Bolivia also
conducted deep transformations in the country, first with the nationalization of hydrocarbons in
2006 and then with the Constitutional reform of 2009. Unlike Chávez, Morales came to power to
fulfill the mandate emanating from the 2004 referendum on the nationalization of natural
resources and the state-owned company YPFB. The delay in satisfying these social demands had
already forced the departure of two presidents - Gonzalo Sánchez de Lozada and Carlos Mesa.
The Morales government enjoyed less autonomy due to the organic ties it had woven with the
social base of the MAS ruling party ─ a broad coalition of radical leftists, moderate Indians and
the urban middle class─ during the years of mobilization that brought him to power. Among
other challenges Morales faced an organized opposition not only from the Congress but also the
Constituent Assembly, who were willing to disrupt Bolivia’s political stability. This complex
interaction between the party and its constituencies explains, on the one hand, the
implementation of statist policies, and on the other hand, the difficulty to carry out a radical
agenda as some MAS supporters expected given Morales’ anti-neoliberal stands.
Finally, in Chapter 5, I address the main findings of the thesis, discussing the two case
studies in light of the two dimensions of analysis outlined in the typology developed: level of
constraints to government actions and degree of openness in the petroleum sector. I discuss how
these variables played out in reshaping sectoral-institutions, which after all, alter the trajectory of
the hydrocarbon sector. For the sake of theoretical significance and validity of the new analytical
framework, a brief comparative sketch of the cases of Argentina and Brazil is addressed.
26
2. Hydrocarbon Sector Performance: The Dependent Variable
On November 30, 2001, from the western side of the country, in Falcón state, Venezuelan
President Hugo Chávez enacted a new Hydrocarbon Law, replacing the regulatory framework
that had governed the sector since 1943. “We are giving it a strategic turn to the management of
the Venezuelan oil industry,” he said. On that day, Chávez also slammed those who criticized the
new law. “(...) These are laws that have caused controversy within some sectors of the country,
some of them do not understand at the end, they do not understand that here there is a revolution
in progress and that (this revolution) will not turn back and that Venezuela has to transform
definitively” (‘Chávez promulgó ley’ 2016).
Before that day, the new Hydrocarbon Law had already made headlines as a presage of
further bad news as the nationalism of resources tends to discourage foreign investment much
needed to increase oil production. “Venezuela endangers the country's growth,” said the New
York Times (Forero, 2001). An analysis by the Financial Times foreshadowed that the
Hydrocarbon Law, which increased the State's control over the oil sector, would scare off
Venezuela's investments (‘Ley de Hidrocarburos ahuyentará’ 2001). The Venezuelan-American
Chamber of Commerce estimated an increase in poverty (Camel 2001), while foreign investors
assured that the projects of the Orinoco belt, Venezuela’s largest oil reserve, would be unfeasible
with a royalty of 30% instead of the 16.66% established in the previous legislation (Vasquez
2001).
Bolivia and Ecuador also implemented new energy policies in 2006 and 2007,
respectively, soon after leftist candidates Evo Morales and Rafael Correa came to power. The
policy agenda aimed at increasing oil revenues and state control in the upstream sector
(exploration and production). The main partners of Bolivia, Brazil and Argentina, feared that the
27
decision of President Evo Morales would follow the path of Venezuela. After all, both Presidents
Chávez and Morales were allies and with the most radical rhetoric when it came to
nationalization plans. “Morales is Chavez's protege, after a fashion, and figured that if it was
good for Hugo, then it was good for Evo,” wrote consultancy firm Stratfor in a Global Market
Brief in August 18, 2006.
In sum, as Latin America’s political landscape turned to the left, actors within the oil and
gas industry faced increasing levels of uncertainty generated by the boom in resource
nationalism.
Would these concerns prove to be warranted? After nationalization, did the petroleum
industry underperform as was expected? Has the hydrocarbon sector followed the same path or a
different one among left-wing governments? Lastly, how did the hydrocarbon sector perform in
Latin America amid the commodity price boom?
In answering these questions, this chapter documents and analyses the trajectory of the
hydrocarbon sector in Latin America, with emphasis on the leftist governments that had the most
radical transformative agenda. This is important because the electoral platforms with which
many presidents came to power, not only openly criticized capitalism and free market reforms,
but also openly rejected the policies of openness and privatization of the hydrocarbon sector that
were implemented during the 1990s.
To achieve that goal, the chapter is divided into three sections. First, I define variables
and indicators of performance of the oil and gas industry. Second, I describe historical oil prices
during the commodity price boom. Third, I analyze the performance of the oil sector in Latin
America according to market signals; that is, how investment and production varied in relation to
28
oil prices. This variation is measured empirically and presented graphically, according to the
annual growth rate of hydrocarbon production.
I find that the response of the hydrocarbon sector to market signals is far from uniform.
Not only are there different responses, from positive performances such as in Brazil to poor
performance as in the case of Venezuela, but there is considerable variation within the same
current of governments on the Left as it is in the cases of Bolivia and Venezuela.
2.1. The Variable and Indicators of Performance
To operationalize the dependent variable, I present the indicators and their correspondent
definitions. Drawing on previous studies on the Latin American oil sector, I measure
performance through a set of indicators related to operations of the hydrocarbon sector. In
rational economic terms, there should be a causal link between price and production via
investment, assuming there are not barriers for investment (Balza & Espinasa 2015). Therefore,
sector performance depends on how these last two variables respond to market signals (ibid) –
that is, if price increases, investment and production should move in the same direction, leading
the sector to perform well. A poor performance occurs when production and investment move in
the opposite direction to price trends.
Figure 2. Performance of the Hydrocarbon Sector: Causal Model
Source: Author’s own elaboration based on Balza and Espinasa (2015)
29
The performance of the sector is then measured in terms of three indicators: oil prices, oil
and/or gas production and investment. Oil prices are the benchmark for market signal. As several
factors determine the price of oil (grade, location, content of sulfur, geopolitics, weather, among
others) and this is a commodity traded globally, market crudes serve as reference of regional oil
markets. For this thesis, I use the West Texas Intermediate (WTI) as it is the leading oil price
marker for trading in the Atlantic Basin as well as the reference to determine gas prices.
Production of oil and/or gas refers to the volume of resources extracted from the ground. For
comparison purposes, the output volumes are measured in barrels of oil equivalent (boe) during
the commodity price boom, the 2004-2014 period. The third indicator is the investment flow in
the upstream oil and gas operations and it is measured during the same period, 2004-2014. The
proxy for investment is the number of active drilling rigs. It is industry standard that “the cost of
rotatory equipment for well-drilling and completion represents two-thirds of non-wage oil
production expenditures” (Balza and Espinasa 2015, p. 3).
There are advantages in the use of this concept and these indicators. First, the definition
of performance is narrow enough to allow assessing oil and gas producing countries evenly.
From the methodological point of view, it makes possible the comparison at a regional scale in a
systematic way. Second, when using indicators strictly related to the oil sector, changes
occurring within the sector can be observed exclusively, without the interference of other aspects
related to the development of the national economy. This is also consistent with the use of
sectoral institutions as one of the explanatory variables of the divergent trajectories of the
hydrocarbon sector.
A different set of indicators could be used to measure the performance of the
hydrocarbon sector. For example, operational performance could be assessed by looking at the
30
rate of oil and gas reserves are replaced, or production per employee. There are also financial
indicators to measure performance. In those cases where the role of the state-owned company in
the oil and gas sector is salient, income generation and the creation of value are indicators of
performance. Foreign direct investment (FDI) also serves as a measure for investment. However,
metrics before mentioned do not fit for the purpose of this study for at least four reasons. First, I
focus on the upstream area of the oil and gas value chain; that is, the area where hydrocarbon
resources are monetized to generate the necessary income to advance the political agenda.
Second, the financial solvency indicators are applicable to companies rather than to the sector as
a whole. Moreover, quantitative data is often incomplete as state-owned companies lack
transparency standards. Third, income generation and value creation are metrics of policy
effectiveness at the national level rather than indicators of sector performance. Finally, FDI is
also problematic because central banks break down capital flows differently, making it difficult
to isolate FDI in the oil sector, which would be necessary for comparative purposes. As far as I
am concerned, policy decisions by host governments appear to have a huge impact on sector
performance and quantitative metrics such as oil production and investment are well-suited to the
comparison at cross-country levels.
Two clarifications are worth noting. First, changes in investment levels and oil/gas output
do not occur immediately, or in parallel with the price hike; neither is the equipment to drill oil
and gas wells available immediately. There is a time lag between when the change in the price
trend is perceived to be permanent and the requirement of new equipment, and when its
installation and operation actually occur (Balza & Espinasa 2015). Second, in terms of the
number of rigs, all active rigs─for both the oil and gas sector─are used in the investment metric.
This is because a portion of the gas production is associated with oil. There is no data available
31
to accurately quantify the portion of gas associated with oil that is produced in the country each
year.
2.2. Market Signal: The Commodity Price Boom
There have been three booms in commodity prices ─metals, energy, food and agricultural
products─ in history (Radetzki 2006, World Bank 2009). In this section, I will refer to the third
cycle, which starts in 2004 and extends until 2014, with an emphasis on the oil market.
At the end of the 1990s, the era of the neoliberal reforms, foreign currencies in the Asian
emerging markets collapsed and weakened the demand for oil (Aghevli 1999). In the face of
oversupply oil prices fell to historic lows. The situation required the intervention of oil-
producing countries in and out of the Organization of Petroleum Exporting Countries (OPEC) to
stabilize the oil market (Liendo 2009). Following these actions prices started a moderate
recovery path.
Several studies assert that the upward break in price trend occurred in 2004 (Balza and
Espinasa 2015; Espinasa, Guerra, Manzano & Rigobón 2017; Radetzki 2006; Balke, Jin & Yucel
2012). The change in the real value of the oil price was largely triggered by a demand shock as
the global demand for oil in 2004 increased at record levels compared with the previous 30
years. This demand shock was driven by the expansion of the emerging economies of China and
India (Radetzki 2006).
Figure 3 shows the WTI annual average prices in both real and nominal terms since 1986.
Between 1994 and 2014, oil prices more than tripled in real terms; that is, adjusted by the
inflation rate. The spot price of the West Texas Intermediate (WTI), a benchmark price that
serves as a price reference in the US market, went from 26.51 dollars per barrel in 1994 to 93.28
32
dollars per barrel in 2014 (EIA 2017). Since then prices have fallen, driven by a slowdown in
demand in Asian countries and an oversupply of oil and gas. The oil and gas glut originates from
the shale boom revolution led by the United States.
I only assess the trend of oil prices. This is because the leading pricing mechanism for
gas contracts is still oil-indexation (Kamal 2015). The same premise holds true for the gas sector
in Bolivia (‘Bolivia, Brazil start talks’ 2015). Bolivia's price formula for exports to Argentina
and Brazil are set in relation to a basket of fuel oils that are sensitive to fluctuation of the oil
price in the international market (Aguilar & Valdivia 2011, Schipani 2014). The next section
discusses responses of the hydrocarbon sector to the price signal in countries where the Left
governs.
Figure 3. Crude Oil Price: WTO Spot Price FOB Historical Trend
Source: EIA 2017, US Bureau of Labour Statistics, author’s own elaboration
0
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33
2.3. The Performance of the Hydrocarbon Sector in Latin America
This section analyses the evolution of the hydrocarbon sector along the two dimensions:
production and investment as discussed in section 2.1; that is, how they reacted to the price hike
measured by the levels of investment and production. The analysis focuses on the two leftist
countries with the more radical agenda, namely Bolivia and Venezuela. A short comparative
sketch of Argentina and Brazil, which are also important producers of oil and gas in the region,
is also offered to further assess whether the type of reaction to the price signal is consistent with
a government’s ideology. Moreover, this will be helpful in arguing the use of political factors,
partisan and non-partisan constraints to government action, and to nuance the analysis of the
sector’s trajectory in comparative perspective in the following chapters.
The assessment of the performance of the hydrocarbon sector is summarised in Figure 4.
I use the Compound Annual Growth Rate (CAGR) to calculate growth over time. The analysis of
the data reveals that the oil and gas sector’s response to price increase has been far from uniform
among leftist governments, ranging from declining production levels in Venezuela despite
investment levels slightly increasing, to consistent growth of investment and production in
Brazil. Argentina and Bolivia lie somewhat between these two extremes. Argentina’s gas
production remained stagnant despite a certain level of investment, whereas Bolivia’s gas output
increased despite a lower number of rigs working.
34
Figure 4. Latin America’s Hydrocarbon Sector Performance (2004-2014), Selected Cases
Source: BP (2016), Baker Hughes (2016), author’s own elaboration
Venezuela’s Hydrocarbon Sector Performance
In 1975, the Venezuelan government issued Decree No. 1,123 that ordered the creation of the
state-owned company Petróleos de Venezuela (PDVSA in Spanish) under private law (Rousseau
2017). The successes of the oil sector in the 25 years after nationalisation is largely attributed to
this factor. Although the State monopolized oil production via PDVSA, there was little
government intervention in the management of the company. During the 1990s, the government
implemented a new policy to open up the oil sector to foreign investors, allowing the expansion
of oil production by 40% (BP 2018). Venezuela’s oil output reached a peak of 3.4 million barrels
per day (bpd) in 1998, just before oil prices fell and the growth path came to a halt. After prices
began to recover, following an agreement between OPEC and non-OPEC countries to cut oil
output (Liendo 2009), a series of political-institutional transformations ended PDVSA's success
story.
In December 1998, Hugo Chávez won the presidential elections with a landslide victory
and supported by a coalition of old-left parties and his own electoral vehicle, the Fifth Republic
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
Argentina Bolivia Brazil Venezuela
CA
GR
(%
)
Investment Production
35
Movement (MVR in Spanish) seized control. After coming to power, he convened a National
Constituent Assembly that rewrote the Constitution, granted greater powers to the Executive,
increased the presidential term and allowed consecutive re-election. Since then, Chávez was re-
elected in 2000, 2006 and in 2013 after another constitutional amendment.
Chávez’s political agenda was contrary to neoliberal policies. It contemplated state
intervention in several economic sectors, including the oil sector. State intervention in the oil
sector was evident in several areas. First, Chávez chose to halt “La Apertura”, the program aimed
at opening the oil sector to foreign investment to develop the Orinoco Oil Belt reservoir and
boost production in mature fields via strategic partnership with private investors.
Second, the regulatory framework was amended. In 2001, President Chávez enforced a new
Hydrocarbons Law using his powers to rule by decree to increase the role of the State in the oil
industry. The new regulatory framework increased royalties and taxes. Successive reforms
occurred in 2006 and 2008, when the Windfall Tax was introduced for the first time. The
Windfall Tax was also reformed in 2011 and 2013, in order to increase State appropriation of the
oil rent. The legislation also mandates that PDVSA is the majority shareholder of new strategic
partnerships, a new business model known as “empresas mixtas”. The government, however,
reneged on its contract obligations and renegotiated the existing agreements with international oil
companies. Those companies that were unable to reach an agreement with the government filed
lawsuits before arbitration tribunals, such as the World Bank’s International Centre for
Settlement of Investment Disputes (ICSID) and the International Chamber of Commerce,
seeking compensation over the expropriation of their assets.
Chávez’s political agenda relied extensively on oil revenues, through which he financed
numerous social programs, known as “Misiones,” aimed at alleviating poverty. The state-run oil
36
company PDVSA took direct responsibility for some of these social programs, such as Misión
Vivienda for housing and Barrio Adentro, a primary network of health care. Chávez’s
administration also leveraged on PDVSA's capabilities to serve the agricultural sector, being
responsible for food distribution, and funding infrastructure and road projects.
The lower available cash flow as a result of these policy choices diminished PDVSA’s
ability to invest in its core business. Observers suggest that Venezuela’s oil sector’s reaction to
the price signal is the result of these political and institutional transformations.
In fact, Venezuela did not respond to the price boom. The investment levels show a
modest increase of 3% per year on average. The oil rig count recorded 74 units in 2014, up by 19
units compared with 2004, but still far from levels of activity shown in 1997 when there were
110 oil rigs operating in the country. As shown in Figure 5, drilling activity seemed to remain
stagnant following the break in the price trend. Because of lower investment levels, oil output
decreased by 3% per year on average over the 10-year period. The evidence suggests that the
modest increase in drilling activity after 2004 was not enough to offset the natural decline of oil
wells. Figure 6 shows how Venezuela’s oil sector underperformed amid the commodity oil
boom.
Figure 5 Figure 6
Source: Baker Hughes, Author’s own elaboration Source: BP, Author’s own elaboration
0
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37
Bolivia’s Hydrocarbon Sector Performance
Bolivia’s hydrocarbon sector is smaller than Venezuela’s hydrocarbon sector if we compare oil
and gas reserves. The state-owned company, Yacimientos Petrolíferos Fiscales Bolivianos
(YPFB in Spanish), was created in 1936 and the control of the sector has alternated between the
State and the private sector. Although gas exports to Argentina started in 1970, it was not until
1999 when Bolivia assumed a more significant role in the regional energy market by exporting
gas to Brazil.
In the 1990s, YPFB was not exempted from the neoliberal reforms that took place in the
energy sector. In 1996, Hydrocarbon Law No. 1,689 privatized the oil and gas industry and
YPFB was divided into three companies and 50 percent of the shares were auctioned to the
private sector, so YPFB's major assets were now under private control. As part of the
privatization process, pension funds were also capitalized. Other key changes to the regulatory
framework to attract foreign investment were the reduction of royalties from 50% to 18% and
“international companies were allowed to take possession of any hydrocarbons they extracted,
except for a small amount for domestic consumption in Bolivia” (Lefebvre and Bonifaz 2014).
Bolivia’s gas sector became a “successful story”: natural gas reserves, production and exports
increased. The plan was to turn Bolivia into a gas hub in the 1990s, supplying countries in the
southern cone. After a decade of investments, Bolivia's gas reserves increased significantly.
Production increased by 300%, from 3 billion cubic meters (bcm) in 1990 to 12 bcm in 2005,
and exports quadrupled (BP 2018, Monaldi 2010).
However, while the performance of the gas sector was shining, redistributive conflicts
flourished with the price boom. In Bolivia, the Windfall Tax─a tax levied on the oil and gas
industry amid a price increase to maximize rent appropriation─was set at the dividend level of
38
the companies. This incentivized private companies to borrow money from their parent
companies instead of presenting dividends. Under the guise of loans, companies could send the
income to the parent companies and by doing so they avoided generating additional tax (Monaldi
2010).
The government, overwhelmed by a high fiscal deficit, chose to create a tax on workers’
income despite their low income, high unemployment rate and poverty levels (Crespo 2003,
Lefebvre and Bonifaz 2014). It also announced plans to increase revenues through the export of
gas to Mexico and the United States via Chile. This triggered high levels of civil unrest and an
unprecedented political crisis, known as the Gas War, as Bolivians demanded more gas volumes
to be allocated to the domestic market, a higher gas export rate and, ultimately, a referendum
aimed at producing a new social consensus regarding the management of the energy resources.
In 2004, 92 percent of voters supported the nationalisation of Bolivia’s gas sector while
87 percent supported repealing the 1996 Privatization Law. However, the mandate was not fully
implemented, raising a new wave of civil unrest. This unrest was, however, fully capitalized on
by the Aymaran leader of the coca growers’ union, Evo Morales, the candidate of the Movement
Towards Socialism (MAS in Spanish).
In December 2005, Evo Morales won the elections and was sworn in as President of
Bolivia in January 2006, the first Native Bolivian to reach the presidency, after successfully
assembling an electoral coalition comprised of all those who had been marginalized by
neoliberal policies, most of them Native Bolivians, who comprise about two-thirds of the
country's population (Anria 2010). In effect, Morales came to power with the promise of
empowering the poor and transforming the traditional political model through a new Constitution
(Flores-Macías, 2012).
39
As in Venezuela, the institutional transformation resulted in a greater role of the State in
the economy, including the end of the era of privatizations, nationalizations, tax increases and
the creation of social programs aimed at reducing poverty. President Evo Morales nationalized
the industry on May 1, 2006, re-created the national company YPFB and established additional
taxes and royalties for private operators (Flores-Macias 2012, Tissot 2012).
Morales reversed the privatization program by reducing the role of private companies in
the operation of the gas fields and the ownership of the natural gas resources went back to the
State, which also began to control refining activities as well as the transportation and distribution
activities of the hydrocarbon sector. Private companies were forced to renegotiate contracts. In
October 2006, the companies signed 44 new operations contracts (Vargas, n.d.). Between 2008
and 2009, the wave of nationalizations continued, with expropriations in up-, mid- and
downstream activities; that is, production, transportation and gas storage.
Resource nationalism in Bolivia, however, focused on gaining control over the ownership
of its natural resources and distribution, control of YPFB assets, and greater appropriation of the
rent instead of closing the sector to foreign investment (Tissot 2012). In fact, in September 2006,
just months after the nationalization, the Bolivian government temporarily halted the measures
aimed at taking control of the trading of oil and oil derivatives to facilitate a dialogue with
Brazilian Petrobras, until then in charge of the business (‘Bolivia suspende las’ 2006).
Morales’ government also continued subsidising fuels in the domestic market6 and social
programs aimed at alleviating poverty, such as Renta Dignidad (formerly Bonosol), a pension
that is given to 65 years-of-age or older Bolivians regardless of their socioeconomic status.
Another social program, “Bono Juancito Pinto”, promotes schooling (Flores-Macías 2012).
6 The subsidy for fuel in the domestic market was established in 2005 and prices were frozen.
40
In 2003, reserves began to fall. When nationalization is anticipated, companies tend to
reduce their exploration efforts but increase production to recover what was spent. Changes to
the regulatory and fiscal framework allowed the government to have higher revenues but at the
expense of lower investments in the hydrocarbon sector and, therefore, a lower capacity to carry
out much-needed exploratory efforts. Moreover, Morales government carried out a reserve
certification process that significantly reduced gas reserves in 20097. Since then, the resource
base has remained stagnant.
Despite institutional transformations, Bolivia seems to have responded to market signals
at a mixed pace. Figures 7 and 8 show Bolivian drilling activity averages per year in the
hydrocarbon sector and the average natural gas production per year. Although drilling activity
remained low for most of the 2000s, a higher number of rigs operating in the country during the
second half of the oil price boom allowed for a 6% increase per year on average in investment
levels (Baker Hughes 2016). In contrast, natural gas production grew at a faster pace than the
investment levels. Gas output rose an average of 10% per year during the commodity price boom
(BP 2018). However, the upward trend started well before oil prices recovered from the Asian
financial crisis of 1997. The little slope showing in 2009 could be attributed to the impact of the
US financial crisis on crude oil prices (Watts 2009).
The limited growth in the number of rigs, in the context of a price boom, suggests that the
increase in production was primarily the result of investments made before the nationalisation.
However, the incentives to foreign investment that have been granted from 2011 onwards should
not be underestimated as they have resulted in new exploration commitments, increasing
7 The Energy Ministry launched a certification process for natural gas reserves in 2008. This study determined that natural gas
reserves in Bolivia had been overestimated. As of 2009, reserves were reduced by almost two thirds (Ministry of Hydrocarbons
and Energy of Bolivia, 2016).
41
production and reserves (Mamani 2016, Paredes 2013, 2015; Tissot 2012). This might indicate
flexibility in the initial terms of Morales's statist agenda.
Figure 7 Figure 8
Source: Baker Hughes, Author’s own elaboration Source: BP, Author’s own elaboration
Argentina’s Hydrocarbon Sector Performance
Like Bolivia, Argentina's energy sector has alternated between state control and openness to the
private sector. The state-owned company, Yacimientos Petrolíferos Fiscales (YPF) was founded
in 1922 (Vásquez 2016). The last of these cycles of opening and expropriation began in the
1990s.
Between 1989 and 1992, Argentina experienced a series of economic reforms aimed at
reducing the size of the State and balancing public finances (Balza and Espinasa 2014),
propmted by high inflation rates, low economic growth and unemployment. By then-President
Carlos Menem privatized the state-owned oil company YPF as part of the reform package. The
process involved two main actions that took place between 1991 and 1993. First, YPF
relinquished its rights to operate some oil fields. In 1999, the Spanish Repsol went on to control
51% of YPF's shares. Second, the government privatized “Gas del Estado,” a company in the gas
sector, which was divided into two gas producing companies and eight gas distribution
companies (Vásquez 2016). After the deregulation of the market, the production of oil and gas
recovered remarkably. Between 1990 and 2003, oil production increased 74%, reaching a peak
0
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42
of 900,000 bpd at the end of the period (BP 2018). Gas production almost tripled, from 17.84
trillion cubic meters of gas (TCM) in 1990 to 41.04 TCM in 2003 (BP 2018).
However, the political and economic crisis at the beginning of the 2000s affected the
Argentine energy sector. In 2001, the Argentine peso was devalued when the government ended
the convertibility system of the fixed exchange rate, forcing the government to establish austerity
measures that caused high levels of civil unrest. The emergency measures in the energy sector
included foreign exchange control, new temporary export taxes, freezing of public utility tariffs,
and conversion of the contracts with utility companies to incorporate fees based on local
currency -devalued pesos- rather than fees in dollars (Vásquez 2016). President Fernando de la
Rúa, who had succeeded Carlos Menem, resigned and an interim government took control until
the elections in 2003, when Néstor Kirchner, candidate of the Front for Victory (FPV in
Spanish), a faction of the Peronist Party, came to power.
Kirchner came to the presidency with an unclear political agenda and a precarious
electoral mandate - only 22% of the votes obtained during the first round (Flores-Macías 2012).
Kirchner governed until 2007, when he was succeeded by his wife Cristina Fernández de
Kirchner, who was in the office for two consecutive terms, until 2015.
Despite being considered a leftist government, the political platform of the Kirchners had
an ambiguous approach to neoliberalism. Like other leftist governments, Néstor Kirchner
increased the role of the state in the economy, including the oil and gas sector: he created state-
owned companies, such as the company Energía Argentina Sociedad Anónima (Enarsa in
Spanish); expropriated companies that had been privatised in the 1990s, arguing national security
reasons; renegotiated and rescinded contracts of public services companies; established price
controls for gas tariffs in the domestic market; and increased energy subsidies and social
43
transfers for those who had fallen below the poverty line after 2001 (Flores-Macías 2012,
Vásquez 2016).
Statist policies were combined with some pro-market policies. For example, the
Kirchners did not increase taxes and maintained a fiscal prudence that, in the midst of the
commodity boom, resulted in record economic growth rates during the mandate of Néstor
Kirchner and the first term of Cristina Fernández de Kirchner (2007-2011). Even in the
renegotiation of contracts with public utility companies, doubts arose about the government's
willingness to change the relationship with foreign investors, since these renegotiations were the
direct result of the 2001 economic crisis and, in many respects, it did not seem to be a significant
change from past practices (Haslam 2010).
Despite progress on the path of economic recovery, both Kirchner governments kept
prices regulated on the domestic natural gas market, imposed control over the repatriation of
dividends from foreign companies, increased export taxes and further limited exports in order to
maintain supply levels to the domestic market. As a result, the companies cut investments and
gas production began to fall. This, coupled with the growing demand generated by energy
subsidies, made Argentina a net importer of natural gas, via gas pipelines and liquefied natural
gas (Balza & Espinasa 2015, BP 2018, EIA 2017, Mares 2013, Vásquez 2016).
State intervention in the energy sector reached its peak when in 2012 the Congress
approved the expropriation of 51% of the shares owned by Spain’s Repsol-YPF. Nevertheless,
the growing fiscal deficit created mainly by the import of natural gas8 and the negative impact
that the expropriation of Repsol had on investor confidence quickly forced the government to
adopt incentives for the oil and gas sector with the aim of regaining energy self-sufficiency.
8 Gas imports are purchased at international market prices but it is sold at a subsidized price in the domestic market. Other
variables also contributed to the fiscal deficit, including soaring inflation and a growing payroll in the public sector.
44
Among the adopted policies were the relaxation of export control and better prices for gas
production. This was added to the Gas Plus program, launched in 2008 in order to develop
unconventional gas reserves (Liendo 2012, Vásquez 2016).
The friendly policies in favor of foreign investment were different from the ones
implemented during the privatization process of the 1990s. This time the State decided to
maintain control of upstream activities through the newly re-nationalized YPF and the promotion
of public-private partnerships. With its new role in the Argentine energy sector, YPF launched an
ambitious investment plan aimed at achieving energy self-sufficiency through the development
of unconventional gas resources. To achieve this goal, the state-owned company signed strategic
partnerships with multinational companies - including the USA’s Chevron and Dow Chemical,
and Malaysia’s Petronas. Other transnational companies have shown interest in the area (Liendo
2012, Vásquez 2016). Argentina has the second largest world reserves of unconventional gas
(EIA 2017).
A new round of incentives to develop shale gas was granted in 2014, with the amendment
of the Hydrocarbon Law. The law also introduced the figure of licenses for unconventional
hydrocarbons and limited the rights that the provinces or regional governments had in the design
of policies and management of the energy industry. The federal government now has the right to:
1) reduce royalties in areas where exploration and production is far more complex than usual;
and 2) to establish a standard bidding process for the entire country, which would be designed in
collaboration with the provincial governments (Vásquez 2016). In spite of these reforms
investment commitments have been modest. The development of unconventional hydrocarbons
presents several challenges, including large investments amid an oil bust, the cost of production,
environmental impact, social conflicts, and the distribution of income among the provinces,
45
many of which are yet to be resolved (Gomes and Brandt 2016, Liendo 2012, Mares 2013,
Vásquez 2016).
The evolution of Argentina’s energy policy explains the performance of the hydrocarbons
sector during the price boom. Figures 9 and 10 show the drilling activity and the gas production
in Argentina. The drilling activity shows a great fluctuation throughout the period under study.
First, there is a growth path that begins in 2002 and continues until 2008. From there, drastic
variations are observed. As of 2014, there is a substantial increase in drilling activity which is
consistent with the start of the exploitation of unconventional hydrocarbons. Given reservoir
characteristics, producing unconventional oil and gas requires drilling a greater number of wells
(Baker Hughes 2016). Overall, during the price boom, drilling activity grew an average of 4%
year-on-year, thanks to the expansion of the sector at the beginning and at the end of the period.
Nevertheless, this was not enough to compensate for the fall in gas production. The prolonged
freezing of gas prices in the domestic market, the control of the profits of local producers and the
cap on exports brought negative consequences for the sector. Gas production reached a peak of
4.46 trillion cubic feet in 2006, when it began to fall to reach production levels below those
existing before the political-economic crisis of 2001, about 3.5 mmpcd (BP 2018). As a result,
Argentina missed the price boom by recording production levels that fell at an average rate of
3% per year.
46
Figure 9 Figure 10
Source: Baker Hughes, Author’s own elaboration Source: BP, Author’s own elaboration
Brazil’s Hydrocarbon Sector Performance
Brazil was the last country that joined the wave of liberalization of the oil industry. Since 1953,
the hydrocarbon sector was controlled by the state-owned company Petróleo Brasileiro S.A.
(Petrobras) and was seen as a strategic sector, for which strict regulations prohibited foreign
participation in the development of oil resources. Petrobras was a state monopoly for 40 years9,
even though a smaller portion of its shares was held by private investors (Palacios 2002).
In 1997, however, Brazil's oil industry changed. It went from being closed to foreign investment
to opening the sector up to private investors in almost all levels of the value chain, revoking the
legal monopoly of Petrobras and increasing private participation among the company’s
shareholders. This was the result of a series of reforms that began in 1995, during the
government of President Fernando Henrique Cardoso, which included a Constitutional
amendment.
The reform of the Brazilian oil sector is frequently compared to the successful model of
Norway. This is because one of the key aspects of the reform was the creation of an independent
regulatory agency, the National Agency of Petroleum, Natural Gas and Biofuels (ANP in
9 Since 1950, Petrobras underwent several institutional transformations, including expanding the oil business abroad and
downstream activities, including the creation of a petrochemical firm, Pesquisa, increasing refining capacity, developing an oil
transportation fleet, among others. See Palacios (2002) and Randal (1993).
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47
Spanish), responsible for issuing exploration and production licenses and ensuring that
companies comply with sector regulations (EIA 2015), which gave greater credibility to the
regulatory framework (Monaldi 2010).
The new Petroleum Law opened the sector to foreign investment so that operating
companies could access resources without having to associate with Petrobras. This promoted
competition and efficiency within the sector. In addition, the industry gained “access to
additional sources of financing, cutting edge technologies and know-how and enhanced
engineering capacity” (Balza and Espinasa 2015, page 42).
The reform of the sector also transformed Petrobras into a successful company, with
higher revenues, increased production and addition of reserves (Tissot 2012). This
transformation of Petrobras included, among other reforms, the reduction of State equity shares
to 33% from 51%, although it retains most of the voting rights (56%) (Monaldi 2010, Palacios
2002). Although the company was granted greater operating autonomy at commercial levels
within a more competitive environment, it retained its position of dominance in upstream,
midstream and downstream activities (EIA 2015). In addition, Petrobras was released from the
role of managing oil and gas reserves, it operates under the private laws as any other private
company and, by trading a portion of its shares in the stock market, became more accountable,
increasing financial sources (Balza and Espinasa 2015).
Thus, increasing oil production became a long-term goal. On January 1, 2003, when Luiz
Inacio “Lula” Da Silva came to power, the reform was already underway and giving results:
production increased 79%, between 1997 and 2003 (BP 2018). Lula, a union leader who fought
against the dictatorship and was leader of the Workers Party (PT in Spanish), came to the
presidency after competing in three previous elections, with moderate rhetoric and a solid 61.3%
48
of the popular vote in the second round of the elections (Flores-Macías 2012). Lula governed for
two terms and left office in 2010, with a record popularity of 87%. He was succeeded by Dilma
Rousseff, also from the ruling PT, who had served as Minister of Energy, and Head of the Civil
House during Lula’s government.
For most of his term, Lula maintained the status quo of the economic policies that
preceded him. Although his government stopped the privatization policy agenda, it did not
nationalize the oil industry, nor did it increase taxes. Social programs aimed at increasing
schooling, improving nutrition and fostering the local economy were consolidated (Flores-
Macías 2012).
In November 2007, Petrobras along with its partners BG Group and Petrogral announced
the discovery of the Tupi field (now known as Lula field), in the Santos basin, with recoverable
reserves estimated between 5-7 billion barrels, or equivalent to between 35% and 55% of
Brazil’s existing reserves at the time (EIA 2019). Tupi was followed by a series of discoveries
not only in the Santos basin, but also in the Campos and Espíritu Santo basins. The country had
gone from being an oil-importing country to one with energy self-sufficiency.
The pre-salt layer discoveries put Brazil on the radar as a potential net exporter of oil but
also sparked a new debate as a new regulatory framework for oil reserves in the pre-salt layer
was implemented, changing the operational environment. Among the main aspects of the new
legislation are: the creation of Pré-Sal Petróleo SA, another state-run agency that aims to manage
production and trade contracts; the Production Sharing Agreements (PSA) were implemented,
thus excluding the pre-salt area of the concession system and forcing Petrobras to have at least
30% of the equity shares and to be the operator of each PSA10 (De Luca, Ribeiro and Veloni
10 The Senate approved legislation that relieves Petrobras of its role as sole operator and mandatory stakeholder in so-called pre-
salt deep-water oilfields following company’s cash-flow problems and the bribery scandal. See Galvao & Valle (2016).
49
2010, EIA 2019). According to Tissot (2012), “(...) by granting Petrobras privileged access to the
country's reserves and changing the fiscal model, Brazil opted for a rent maximization strategy
that is likely to slow development of Brazil's resources (...) The development will be limited by
Petrobras' capabilities” (p.11).
With the reform, Brazil also tried what in Venezuela was called “the sowing of oil.” That
is, to promote the industrialization of the country by creating links between the oil industry and
the local economy (Tissot 2012). This created standards of national content so that it is
mandatory for companies participating in the development of the pre-salt area to obtain specific
percentages of their workforce, equipment and services in Brazil. Oil companies are required to
buy as much as 65% of their goods and services from domestic companies. However, the
inability of the local industry to meet the demand for goods and services from the oil sector has
resulted in higher project costs and delays. In addition, there are challenges linked to the oil
exploration and production of offshore projects, such as the availability of equipment (DiPaola
2011). This coupled with other externalities such as the fall in oil prices, the increase in
Petrobras’ financial debt and corruption scandals have complicated the ability of the company to
meet its production goals (EIA 2019, Valle 2016).
The continuity of the institutional transformation of Brazil’s oil sector after Lula’s arrival
in office may explain the positive trajectory of production and investment during the great part of
the commodity boom. Figures 11 and 12 show the performance of the oil sector by the
aforementioned variables. The drilling activity has quadrupled during the last 20 years, reaching
a peak of 91 drills in mid-2012 (Baker Hughes 2016), when it had a slight setback, due to the
unavailability of equipment. As these units were delivered, drilling activity recovered. During
50
the period of higher oil prices, between 2004 and 2014, the drilling activity grew at an average
rate of 6% year-on-year (Baker Hughes 2016).
As a result of the continuous drilling activity, Brazil’s production doubled, taking full
advantage of the price boom. Crude oil production, that has sustained growth since 1995,
increased by 52% from 1.54 million barrels per day in 2004 to 2.35 mmbpd in 2014 (BP 2018).
The production of the fields in the pre-salt area was incorporated in 2008 and contributed with
492,660 bpd or 22% of the total production for 2014 (ANP 2017). The fall in production between
2012 and 2013 is attributed to the natural decline of oil wells in mature fields, projects delays
due to lack of equipment and strict national content policies.
Figure 11 Figure 12
Source: Baker Hughes, Author’s own elaboration Source: BP, Author’s own elaboration
2.4. Conclusion
As the empirical evidence indicates, the hydrocarbon sector in selected countries of Latin
America performed differently despite the quantum leap in oil prices. However, market price
signals have proven to be insufficient to produce satisfactory outcomes (Van de Graaf 2013).
Instead of finding a similar trajectory as a result of the political agenda of the Left, which sought
to break apart from the neoliberal reforms of the 1990s, the analysis at the country-level showed
different reactions to the oil price boom that occurred between 2004 and 2014.
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One could possibly fall into a dichotomy and differentiate the trajectory of the sector
between those who performed well and those who performed poorly. This, however, will point to
extreme cases such as Brazil and Venezuela. Reality is more complicated than that. The change
towards a resource nationalism policy, after the opening and privatization of the 1990s, featured
considerable variation in the countries that turned to the Left at the beginning of the 2000s. This
variation occurred in a range that goes from highly statist reforms to more soft and moderate
policies, in some cases in combination with policies that have favoured the role of the market.
The more radical leftist government, Venezuela, introduced in-depth institutional reforms
that resulted in a high degree of government intervention in the management of energy resources,
income distribution and the management of the state-owned company PDVSA. The company
deviated from its core business and became highly politicized, which affected its available
sources of financial resources and human talent. Changes to the regulatory and fiscal framework
caused some foreign companies operating in the country to abandon their projects, while others
lost control over the development of oil resources and, with it, their assets and revenues diluted.
The barriers to investment for both the state-owned company and international oil companies
translated into poor performance of the oil sector during the commodity price boom.
Bolivia followed a statist and radical agenda similar to Venezuela, which also resulted in
a wave of nationalization of strategic sectors of the economy, renegotiation of contracts with
foreign investors and appropriation of the rent. However, Morales’ government maintained fiscal
discipline and the implementation of resource nationalism was moderate: export commitments
were honoured, the sector was not closed to foreign investors and no subsequent reforms were
introduced. The distribution of income was decentralized, and there was less intervention in the
management of the state oil enterprise. Although the investment has been moderate, one can say
52
that the Morales government took better advantage of the price boom by achieving an increase in
oil production. Moreover, the government has shown greater flexibility to achieve investment
commitments necessary to increase the resource base without relinquishing its rights as
administrator of resources, which will allow the continued supply of gas to Argentina and Brazil
in the long term, and potentially diversify export markets.
In contrast, Argentina seems to have had a more pragmatic approach throughout the
period, using a combination of statist and pro-market policies, and in some political spheres it
kept the status quo. The pendulum moved from one side to the other as the governments of
Néstor Kirchner and Cristina Fernández considered necessary. Both governments, deemed as
examples of the so-called populist Left, stayed away from the wave of nationalizations for most
of the period. However, they kept gas prices frozen in the domestic market, and tightened export
limits and the repatriation of dividends. In 2008, a law was enacted to attract foreign investment
in order to develop shale gas reserves. The business environment, however, was again affected
when the government expropriated YPF in 2012, just a few months after Repsol announced the
discovery of the giant shale gas resources. New changes to the regulatory framework were
introduced in 2014 in order to have greater control of the sector, particularly in upstream
activities. Although a slight recovery in production in 2015 could be attributed to more favorable
conditions in the business environment, the end of the price boom was a major challenge to
obtaining better results and compensating for the poor performance of the sector for more than a
decade.
On the other side of the spectrum is Brazil, which is often categorized as the social
democratic or institutional Left. Although theoretically speaking these governments seek gradual
changes framed within liberal democracy and the market economy (Luna 2010), in practice
53
President Lula maintained the governance of the hydrocarbon sector unchanged for most of his
period in government. This does not necessarily mean that the sector remained untouched and
free of manipulation. Indeed, Brazil implemented a sort of soft nationalisation in order to
maximize revenues. The state-owned company carried the burden of gasoline subsidies and
corruption investigations suggest that Petrobras’ revenues had also been used to finance PT’s
electoral campaigns. The reforms introduced after the discovery of the pre-salt layer ended up
affecting the financial and operational performance of Petrobras and, therefore, the development
of these offshore resources. That said, the attempt to implement a soft nationalization, overall,
did not prevent the production of crude oil in conventional areas from continuing its rhythm, and
it can be said that the Brazilian hydrocarbon sector took full advantage of the price boom.
In sum, the hydrocarbon sector in Latin America had varied trajectories during the price
boom. Although leftist governments tried to break apart from neoliberal policies through
resource nationalism, there were significant differences in the way they did it. The question is,
what explains these differences? How was the government of President Chávez in Venezuela
able to make reforms of the sector at his will? Contrary to concerns that the government of
President Evo Morales in Bolivia would follow a statist path in line with that of President
Chávez, his administration had a more moderate orientation and has become even more flexible.
Why? In the subsequent chapters, this study advances an explanation based on the different
constraints and opportunities that political coalitions, institutions and pre-existing socio-
economic structural configurations can create in each case to eventually understand the different
trajectories of the hydrocarbon sector during the commodity price boom.
The following chapters will analyze the evolution of two case studies, Bolivia and
Venezuela, in light of the theoretical framework proposed in the previous chapter.
54
3. VENEZUELA’S OIL SECTOR: Discretionary State Monopoly
“We are going to begin to undo the wrong-doing inherited from the old, stateless PDVSA,
controlled by transnational interests (...), to fix deviations, deactivate mechanisms of domination
(...) to recover full sovereignty over the oil”, President Hugo Chávez said on September 2004
before announcing his government’s unilateral decision to increase royalties from 1% to 16% to
Orinoco Belt projects, originally signed amongst the openness process of the 1990s. The
following years, the government took several other steps to fully gain control of the oil industry.
The initial concerns surrounding the policy orientation of the leftist governments then became
true. The State, with the support of the legislative body, the Supreme Court and the tax agency
among other institutions, reneged on its contract obligations and transformed the oil sector.
Without checks and balances, Chávez’ government reorganized the sector, appropriated a greater
portion of the oil rent and distributed it at his will. Moreover, the government leveraged on the
oil revenues to advance its plans of putting the state-owned oil firm PDVSA at the services of his
political project. In Chávez’ own words, “We have regained control of our oil industry (...) The
oil opening (...), which we are definitely reversing, is disastrous for the national interest,
damaging the interest of Venezuela (...)” (Aló President 207, 2004).
This section addresses these policy transformations and analyzes how those changes were
made possible. I argue that a system that enjoys low partisan constraints creates opportunities for
government intervention in the hydrocarbon sector. State intervention increases when the
government is also able to circumvent non-partisan factors and take advantage of the country’s
socio-economic configurations flowing from a natural resource led model of development. The
greater the government intervention in the management of the resource wealth, the worse the
sector performs.
55
The mechanism can be summarised as follows. The rapid popular support that Chávez
created in his favour, despite his inexperience in the electoral arena and due in part to mass
alienation from the party system, suggests that his leadership was built on his charisma rather
than rooted in an autonomous and organized social movement, which explains the high degree of
autonomy he enjoyed once he was in power. Thus, weak party links, the rise of personality
politics and increasing concentration of power in the hands of the Executive, facilitated a policy
shift and institutional transformations in the petroleum sector, eventually altering its trajectory.
The socioeconomic structure that Chávez inherited, one that assigns a significant role to the State
in the economy and is highly dependent on oil revenues, also enabled these transformations. This
occurred amid a political context in which the organized opposition was severely limited. As a
result, Chávez carried out a series of reforms that gave the State more control over upstream
activities as well as over the distribution of the oil revenues, restricted access to private capital,
and expanded the social mission of the state-owned company PDVSA at the expense of its
autonomy, financial sustainability and transparency standards.
In the following pages, I provide a detailed account of each of the steps of this
mechanism. First, I describe the origins of Chávez political coalition, the Movimiento V
República (MVR), and how mass alienation from politics and a party system in disarray
favoured Chávez populist leadership and facilitate the concentration of power within the ruling
party. Second, I discuss opportunities for government action created from poor organizational
capacity of the opposition and the resource-led model of development inherited, including the
structure of the oil industry that was in place when Chávez came to power. Finally, I discuss the
implications of Chávez’s ability to freely advance his agenda in the governance of Venezuelan
oil industry.
56
3.1. Endogenous Constraints
Party Institutionalization
When Hugo Chávez won the presidential elections in 1998, he did so through a newly created
movement: The Fifth Republic Movement (MVR, in Spanish) that “explicitly rejected the notion
of a political party” (Flores-Macías 2012, p. 104), and exhibited a popular and nationalist
orientation in its statutes (Pereira-Almao 2001). Chávez was elected with 56% of the votes, an
advantage of more than 16 percentage points with respect to his closest rival (Aznarez 1998) and
38 percentage points above the popularity he enjoyed when he announced he was going to run
for office a year before (‘Así consiguió Chávez’ 1999)11. Chávez’s came to power with the
support of the military, a coalition of leftist parties with some legislative experience such as the
Movement Towards Socialism (MAS in Spanish) and the Communist Party of Venezuela (PCV
in Spanish), and an atomized social base, mainly configured of popular sectors disillusioned with
the traditional political parties as they failed to fulfill economic and social promises (López-
Maya & Lander 2000; Luna 2010).
That heterogeneity made difficult the consolidation of the party in the long-run. Although
the MVR allowed the establishment of alliances with other political forces, it was unable to
become a political party with collective leadership. As expected, the different currents within the
movement generated internal differences that only Chávez was capable of suppressing (López-
Maya 2011). Therefore, the MVR was a vertical, centralised structure that mainly served as an
electoral vehicle to bring Chávez to power (Cameron, Beasley-Murray & Hershberg 2010;
López-Maya 2011). Moreover, the MVR’s political platform was confusing. Chávez’s main
11 Chávez officially presented his candidacy for the presidential elections in May 1997, when he barely had 8% popularity. A
month before arriving to office, in November 1998, the MVR won eight out of the 23 governor offices and nearly a third of the
seats in Congress.
57
campaign platform focused on seeking a “radical change” in the country's political and economic
arena, but the content of the platform was ideologically vague (McCoy 2010). “This was not a
vote for leftist ideology, but a vote of frustration and anger” (p.83)12.
Party Linkages
The crisis of representation triggered by the collapse of the traditional political parties originated
a major transition in partisan identity, leaving many voters without a firm link to a political
group to contest power (Hawkins, Patch, Anguiano & Seligson 2008). Since the transition to
democracy in 1958, there was a strong partisan attachment to two major parties, the centre-left
party Democratic Action (AD in Spanish) and the conservative party the Committee for
Independent Political Organization (COPEI in Spanish). However, longstanding frustration with
the party system, along with social dislocation and the economic hardship that characterized
Venezuela during the 1990s, led to weak partisan identity and mass alienation from politics,
resulting in the election of independent, “antisystem candidates” in 1993 and 1998 (Hawkins et
al. 2008, McCoy 2010).
The proportion of voters who identified with a party progressively decreased between
1973 and 1993 and increased from 1998 onwards, when voters began to identify themselves with
the new political parties that entered the electoral arena during those elections. However, the
nature of political allegiances showed different characteristics from the years of bipartisanship
(Pérez & Núñez 2017). “In the case of newly emerged organizations, (...) it is very likely that the
stable loyalties that are typically considered in the literature as ‘partisan identification’ have not
12 Subsequent studies on electoral behavior in Venezuela between 1993 and 1998 suggest that party ideology is a variable of
moderate force in the intention to vote, since it depends on the candidates clearly identifying themselves within the left-right
political spectrum. See Molina, J. (2000).
58
yet been consolidated” (Molina 2000, p. 43). Therefore, voters equally weighted the economic
situation, the government plan, the personality of the candidate and the evaluation of the
previous government at the ballot box (Hawkins et al., 2008, Molina 2000).
Chávez’ government also lacked linkages with interest groups such as unions. The
organized labor movement, which was already deteriorated when Chávez came to power, had a
critical stance toward the leftist project, even leading civil strikes during the early years of
chavismo in office (McCoy & Myers 2006). Moreover, the disarray in the party system further
weakened the labor movement as they had strong ties with traditional political parties AD and
COPEI (Flores-Macías 2012). Chávez also encouraged labor conflicts that either led to the
creation of pro-government unions that run in parallel with official unions, or triggered
companies’ bankruptcy to later justify government takeover (Corrales 2010).
Centre of Political Authority
The personality politics that had already become prominent during the 1990s, continued after the
arrival of Chávez to power. Due to the weak programmatic party structuration13, Chávez’s
government relied on emotional appeals and the constant mobilization of his constituents in
exchange for incentives, often used to gain political allegiances and overcome electoral
challenges (Kitschelt, Hawkins, Luna, Rosas & Zechmeister 2010; McCoy 2010). Given the
rigid structure of the ruling party and the social dynamics between the grassroots and the party,
political leadership depended fundamentally on Chávez’ charisma and, therefore, mobilizations
were directed from above (Luna 2010; Pérez-Almao 2001; Roberts and Levitsky 2011),
13 Programmatic Party Structuration entitles programmatic coordination and programmatic linkages. See Kitschelt, H.; Hawkins,
Kirk A.; Luna, J. P., Rosas, G.; and Zechmeister, E. (2010).
59
bypassing institutions intended to mediate between the bureaucrats and the constituencies
(McCoy 2010).
In 2007, the “new personality-based system” was further strengthened when Chávez
created the United Socialist Party of Venezuela (PSUV in Spanish), consolidating in one single
party the 24 parties that supported the government (Hawkins et al. 2008). The PSUV, however,
did not amend the mistakes made by the MVR nor did it offer ideological clarity to President
Chávez’ political project. With the arrival of the PSUV came the promise of the so-called “21st
Century Socialism,” an empty concept with the capacity to unify and mobilize the social base
that supported Chávez but that progressively was shaping the statist character of the
government's economic policy.
President Chávez not only consolidated his power through party lines. He was also able
to transform the executive-legislative relations in a way that eroded horizontal accountability14
(Corrales 2010). The deactivation of the Legislature as a bargaining factor and placing the
policymaking process in the hands of a dominant personality, who faced little resistance given
the nature of the party’s social base configuration and its dynamics, were key factors in
achieving one of the government's goals: the redistribution of resource wealth.
Chávez sought to achieve power to change the old political and economic order and was
radical in his approach. That is, a departure from market economy and liberal democracy in the
search for a new socio-political arrangement (Luna 2010) with the aim of meeting the needs of
the dispossessed. Aside from top-down mobilization, Chávez's method of reversing the old order
also included the politics of confrontation, a permanent political campaign of “us against them”,
which often pitted his followers against the economic and political elites, the unions, the media,
14 The greater concentration of power also allowed to erode the autonomy of the Central Bank, the Judicial system, and the
electoral council CNE. See Corrales (2010).
60
foreign “enemies” and other public powers, including the National Assembly (Flores-Macías
2012, McCoy 2010).
Chávez’s first year in office was marked by a long confrontation with Parliament as he
threatened to deactivate the bicameral Congress unless it approved an Enabling Law that sought
to incur more debt and make changes in the oil industry. In December of 2000, the Executive
issued 53 decree-laws. Subsequently, Chávez dissolved Congress by calling a National
Constituent Assembly to draft a new Constitution. The proposed draft bill came from the hands
of President Chávez himself (‘Así consiguió Chávez’ 1999)15. The new Constitution reinforced
the presidential system, increasing the centralization of power in the Executive branch of
government, extending the length of the presidential term, allowing consecutive re-election,
granting the president the power to dissolve the Parliament and extending the powers that can be
granted via the Enabling Laws (Corrales 2010, McCoy 2010). Between 1999 and 2012, the pro-
government National Assembly granted President Chávez powers to rule by decree four times,
which allowed the Executive to issue a total of 215 laws in a wide-range of areas from
emergency response to natural disaster to restructuring the military and agricultural sectors, and
reforms in the financial, telecommunications, electricity and petroleum sectors, among others,
facilitating greater state intervention through mechanisms such as expropriation and
nationalizations (Hernández 2008; ‘Conozca cuántas leyes’ 2013).
3.2. Exogenous Constraints
Organizational Capacity of the Opposition
15 Chávez convened the Constituent Assembly on February 2, 1999, during his inauguration. Elections were held in July of the
same year with Chávez’ candidates obtaining 121 out of the 131 seats of the ANC. See Aznarez (1999)
61
The precarious state of the party system after the end of the partidocracia paved the way for
Chávez to circumvent the institutions, especially the legislature, once he came to power (Flores-
Macías 2012). The opposition had few resources, a low capacity for organization and lacked the
ability to generate support among voters to resist the harassment of the government and the
political confrontation that Chávez promoted during his first year in office.
In 1999, the Parliament, although it was dominated by the opposition, succumbed to the
request of the Enabling Law following Chávez threats to declare a state of emergency and
dissolve the Congress. The opposition protested the issuance of Decree No. 3 that called for a
consultative referendum so that the people could decide on the installation of a National
Constituent Assembly. They attempted at least 14 appeals to annul Decree No. 3 without success
(Maigon, Baralt & Sonntag 2000). Chávez was favored by Supreme Court rulings. The resistance
of the opposition, however, did not translate into votes against the project to reform the
constitutional order. Although an overwhelming majority (92.3%) approved the conformation of
the National Constituent Assembly, less than 40% participated in the consultation, while 62.5%
abstained (Political Database of the Americas).
As a result, Chávez’s candidates won most of the seats in the Constituent Assembly that
would be responsible for drafting a new Constitution. In the following years and after the
approval of the new legal system, Chávez continued to undermine the ability of the Legislative
branch to check the Executive. Although the ruling party showed a certain indiscipline as some
members deserted from its ranks, it always maintained the necessary majority to advance its
legislative agenda. Indeed, Bloque por el Cambio (pro-Chávez parties) won 115 seats in the
legislative elections held in July 2000, but two years later 32 legislators had stopped supporting
Chávez.
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In addition to the opposition's inability to repel Chávez's project at the polls, a series of
strategic errors only served to radicalize Chávez’s political project, accelerating the pace of
reforms and increasing control over institutions. First, between 2002 and 2003, the opposition
tried unsuccessfully to remove Chávez from power with the support of the military. Then, in
November 2005, the two main opposition parties, AD and Copei along with Proyecto Venezuela,
withdrew all their candidates for the legislative elections, on the basis that there were no
conditions to guarantee the transparency of the elections. That year, Bloque por el Cambio again
controlled the Parliament, this time with 165 seats or 98% (‘Así ha evolucionado’ 2016). In
2010, the opposition made some progress in returning to Parliament and snatched 63 seats from
the ruling party. However, its absence from the legislative body between 2000 and 2010 allowed
the ruling party to pass legal reforms aimed at increasing control over the management of the oil
sector and revenue distribution.
Path Dependencies of Natural Resource-led Development
When Chávez came to power, Venezuela had the “lowest level of neoliberal reforms” in Latin
America (Flores-Macías 2012, p. 114). The government had failed in its attempts to assign a
greater role to the market during the governments of both Carlos Andrés Pérez (1989-1992) and
Rafael Caldera (1993-1998). Therefore, the model of Import Substitution Industrialization
(ISI) that prevailed in Venezuela since the 1950s was only partially dismantled. As a result,
Chávez faced little resistance to undo neoliberal policies. Instead, he implemented an economic
policy that favored nationalizations, local content policies, protection of the exchange rate,
energy subsidies, and fiscal and monetary expansion, or what political scientist Javier Corrales
calls “the return to a modified form of ISI” (2012, p. 39).
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Chávez’s alternative development model, known as “Socialism of the 21st Century”
(McCoy 2010, Weyland et al., 2010), leveraged on a massive oil windfall. For almost a century,
Venezuela has depended on oil revenues for its socioeconomic development and Chavez's left-
wing government was not an exception to this rule. In 1998, 68% of total export revenues
corresponded to oil exports. By 2014, oil exports represented 96% of Venezuela's total export
revenues (BCV 2015). As a result, the government managed an average of US$67.4 billion per
year in oil revenues between 2004 and 2013, three times more than what it managed between
1999 and 2003, about US$21.5 billion on average, according to data from the Central Bank.
The expansion of the ISI model, however, reproduced the successes and failures of the
previous model. On the one hand, transfers from the central government, based on oil revenues,
contributed to economic growth and the reduction of poverty rates. Moreover, the government
obtained the necessary funds to finance expropriations and nationalizations in various sectors of
the economy, including the oil sector. On the other hand, the alternative development model
presented the vivid image of inefficient state companies that are full of corruption, political
patronage and cronyism (Corrales 2012). All this together discouraged public and private
investment and undermined state-owned companies’ financial sustainability. For example,
PDVSA favored political allies by selling them oil at preferential rates. Cuba and other
Caribbean countries, who are beneficiaries of energy initiatives such as Petrocaribe and Caracas
Energy Agreement, bartered a portion of the oil bill for agricultural products, restricting
PDVSA’s cash-flow (Balza & Espinasa 2015, Manzano et al. 2008, Párraga 2010).
The structure of the oil industry that Chávez inherited also facilitated control of the rent
and shifts in PDVSA’s commercial policy. The socio-material characteristics of the oil sector
give shape to that structure. First, Venezuela’s resource endowment is the largest in the world -
64
300 trillion barrels of oil (BP 2018). Second, Venezuela is a net oil exporter as domestic
consumption is lower than production levels -the domestic market accounts for 20% of the oil
production on average (PDVSA 2006-2015). Third, although the quality of Venezuela’s crude oil
is relatively poor and productivity per well is low by industry standards, the petroleum sector had
the infrastructure and access to state-of-the-art technology to produce oil with better market
value16. This is because of the participation of international oil companies in the early years of
sector development as well as during the openness process of the 1990s (Barberii 2001). More
importantly, both the Nationalization Law (1975) and the Hydrocarbon Law (1943 and 2001)
kept State rights to transport and trade oil. State control of these activities along with the access
to a globalized oil market, given Venezuela’s geographical location, emboldened the government
to dictate new commercial policies for the state-run oil firm.
3.3. Discretionary Administration of the Resource Wealth
A system with low levels of both endogenous and exogenous constraints creates opportunities
for the government to act freely. Chávez support was built on an atomized social base (without
ties), ideologically alienated, and disenchanted with traditional political parties. Once Chávez
arrived into office, his supporters delegated to the charismatic leader the responsibility of fixing
the political and economic system by conferring him powers via the Constitution and other legal
mechanisms such as the Enabling laws17. This laid the foundations for the control of institutions
in all branches of government while reducing institutional spaces available for the political
16 Orinoco Belt projects were under development when Chávez came to power and all of them came on stream
before state intervention increased. Therefore, when the government reneged on its contract obligations or
expropriated foreign firms’ assets, most of the investment had been already disbursed. See Campodónico (2004). 17 The 1999 Constitution expanded presidential powers when compared with the 1961 Constitution and other
Constitutions in Latin America. See Corrales, J. (2010).
65
opposition. The massive and unexpected inflow of petrodollars further eroded checks and
balances and re-established clientelistic ties between the government and its social base,
minimizing distributive conflicts. Therefore, there was a top-bottom policymaking process,
entirely led by Chávez himself.
This context provides a fertile ground for shaping a governance structure of the
hydrocarbon sector that I call Discretionary State Monopoly. The characteristics of this type of
structure are as follows: First, a greater appropriation of the oil rent and a discretionary
distribution of it. Second, the sector is organized so that the government monopolizes oil
production and manages resource development as it pleases. Third, the state-owned company has
no commercial behaviour as it is focused on attending to its social mission and, therefore, its
budget is highly linked to the central government. A discussion of this structure follows.
Petroleum Sector Organization and Governance
Venezuela’s Constitution grants the State the ownership as well as the rights to develop and
manage its natural resources (Constitution 2006). The oil sector is regulated by the Ministry of
Popular Power of Petroleum (MINPET in Spanish). It implements the oil policy by means of the
state-owned company PDVSA, which is enabled with a wide-range of competences for
everything related to both oil and non-oil related activities. The MINPET is also the body in
charge of collecting taxes and royalties from the oil industry (RGI 2017). During the 1990s,
Venezuela took steps towards the liberalization of the oil sector allowing the participation of
private actors in the areas of exploration and production (EIA 2018). The privatization of the
retail sector18 was also planned. Starting in 2002, “La Apertura”, the process of openness to
18 Supply and distribution of oil products in the domestic market.
66
foreign investment, was progressively reversed through the Parliament as late President Hugo
Chávez failed to stop it via the judicial system (Toro Hardy 2017b). This process was twofold:
first, the National Assembly granted the president powers to rule by decree (Brewer-Carías 2007)
and, second, the pro-government National Assembly passed several Executive-sponsored bills,
facilitating the control of upstream activities by PDVSA19 (Chirinos 2007, Párraga 2010).
Indeed, without opposition from the legislative body, the Executive enacted a decree-law
governing the Venezuelan petroleum sector in 2001. The new Hydrocarbon Law, put into place
in January 2002, superseded the previous Hydrocarbons Law (1943) and the Nationalization Law
(1975). Under the new law, the MINPET holds the regulatory function and is enabled to grant
licenses through multiple processes, such as bidding or direct assignment for strategic reasons,
leaving an open window for discretion, as has already been the case in granting exploratory and
development rights to political allies such as China and Russia in exchange for loans to support
government spending (Párraga & Ulmer 2017).
According to the new law, private companies can still participate in the upstream sector
(exploration and production) but it is mandatory to enter into a partnership with the state-owned
firm PDVSA, which will have at least a 51% majority shareholding (Manzano et al. 2008). The
contractual framework that regulates the Mixed Companies (joint-ventures) establishes that
PDVSA will have a 60% stake. Between 2005 and 2007, the government reneged on its contract
obligations and forced international oil companies to migrate to the new scheme of participation
in the upstream sector as minority partners (Brewer-Carías 2007), allowing PDVSA to take full
control of the upstream activities in the oil sector.
19 The Oil Ministry deemed “illegal” the operating contracts and the joint ventures in the Oil Belt between 2005 and
2006. Then, the pro-government National Assembly declared them “extinct”. See Brewer-Carías (2007).
67
Although the government terminated the contracts early and unilaterally, some 40
companies renegotiated them under the new regulatory framework and partnered with PDVSA to
create mixed companies. The government expropriated the assets of those companies with whom
they could not reach an agreement (Párraga 2010). “We buried the oil opening today”, said
Chávez during an event to celebrate the completion of the process to create the joint ventures
under the new law (Chirinos 2007)20. As a result, PDVSA, which previously held between 30%
and 50% interest in its 17 affiliated companies, now controls a minimum of 60% in 88 affiliated
companies (Transparencia Venezuela 2017).
Oil Revenue Distribution
The State, as the owner and administrator of oil resources, establishes the means and the amount
it aspires to capture from the income derived from oil production. The rent is captured through
different fiscal mechanisms such as royalties and other taxes that apply specifically to the oil
sector (Balza & Espinasa 2014). Together, these mechanisms are known as the government take.
How much the government aims to capture has advantages and disadvantages, because a very
high government take can hinder the necessary investments to produce oil.
The regulatory framework that was in place prior to 2002 was complex and even
confusing as it involved old legislations enacted under various circumstances. Most importantly,
the old legal framework was contrary to Chávez’ government aims, since it represented the basis
of the process of openness that had begun in the 1990s (Corrales & Penfold 2015; Párraga 2010;
Toro Hardy 2007). In contrast, the new bill introduced by Chávez not only sought to unify and
20 The government also expropriated oil services companies in 2009, further increasing its control over the oil
sector. See Jones (2009).
68
simplify the regulatory framework, but to grant the State greater control over the oil revenues21
(Párraga 2010). In fact, the government take that represented an average of 67.6% of the oil
revenues between 1990 and 2004, rose to 87.3% in the period 2004-2008 (Rodríguez, Morales &
Monaldi 2012). More conservative estimations indicate that the government take was
consistently greater than 60% between 1999 and 2006 (Manzano & Scrofina 2013).
The first step to appropriate a larger portion of the rent was to raise the royalty from
16.6% to 30%, except for the Orinoco Belt projects where the royalty increased from 1% to
16.6% (Toro Hardy 2017a). Then, the framework to create and operate the new Mixed
Companies, approved by the National Assembly, introduced the Shadow Tax (or Ventaja
Especial), increasing royalties by 3.33% (Manzano & Scrofina 2013). In 2006, the pro-
government National Assembly also passed an Executive-sponsored amendment of the
Hydrocarbon Law, incorporating two new taxes: The Export Tax and the Extraction Tax. The
reform of the law also increased the Income Tax for the oil sector from 34% to 50% (‘Aprobadas
reformas’ 2006). Finally, in February 2008, President Chávez suggested the creation of the
Windfall Tax to capture additional revenues given the oil boom (Pérez 2008). The Windfall Tax
is a mechanism that is activated when the oil price exceeds 70 dollars and is intended to be used
for social investment. In 2011, Chávez modified the tax via the Enabling Law in order to capture
an additional portion of the windfall profits ('Venezuela aumenta impuesto', 2011).
Changes to the fiscal regime allowed the State to capture a greater portion of the rent.
However, the government failed to follow pre-set distribution rules. On the one hand, the tax
burden increased over time, undermining the rule of law. On the other hand, the government
created para-fiscal mechanisms or off-budget expenditures that facilitated the discretionary
21 For a detailed account of Venezuela’s fiscal regime changes for the hydrocarbon sector, see: Manzano and
Scrofina (2013), and Rodríguez, Morales and Monaldi (2012).
69
distribution of revenues by not setting up institutional mechanisms to hold the State accountable
in regard to the management and transfer of funds (RGI 2013, RGI 2017). Although the
president has historically had powers over the use of the funds, Chávez's discretionary handling
of oil revenues exceeded these in an unprecedented way.
For example, the reform of the Law on the Central Bank of Venezuela (BCV in Spanish)
created the National Development Fund (FONDEN in Spanish), a sovereign fund fed by oil
revenues and managed as a vehicle to finance infrastructure projects. This reform removed from
PDVSA the legal requirement to sell all foreign currency to the BCV. It also incorporated the
concept of estimation of the adequate level of international reserves so that all additional income,
anything above that cap (surplus), goes to FONDEN. The president is the single authority to
approve FONDEN disbursements, the fund does not require budget approval by the National
Assembly and there is no numerical rule that governs the amount of funds to be transferred,
making it highly discretional (Manzano & Scrofina 2012, RGI 2013, RGI 2017). Between 2005
and 2016, the government managed USD132.8 billion through these funds (Armas 2017),
although the destination and use of the funds is difficult to track since the government failed to
disclose periodic financial statements (Ellsworth & Chinea 2012; RGI 2017).
The transfer of funds to FONDEN undermined the availability of resources that should
have been allocated by law to the regions and other savings mechanisms for macroeconomic
stability established before 1999. It also affected the financial position of the state-owned oil
company. More importantly, the lack of institutional mechanisms to distribute the oil wealth
reinforced the clientage ties between the incumbent president and the voters, many of them oil
workers, creating a dependent civil society instead of an autonomous social movement
independent of the state (Hawkins & Hansen 2006).
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SOC Corporate Governance
PDVSA is a company created under private law and 100% owned by the State, which is
represented in the Shareholders Assembly by the Oil Minister (Barberii 1998). The company is
directed by a Board of Directors, appointed entirely by the President and comprised by a
minimum of seven and a maximum of eleven members, two of them non-government officials or
executives of the company (Tordo, Tracy & Arfaa 2011). Although there has been a direct
relationship between the Executive and the state-owned company since its inception in 1975,
PDVSA’s governance structure protected the company’s operational management from political
interference.
Between 1975 and 1997, PDVSA’s corporate governance structure limited the State and,
particularly, political parties from interfering in SOC’s operations. The government only had
presence in the board of directors of the parent company, while the three operating companies,
all subsidiaries of PDVSA, had their own board of directors ─posts filled with technocrats. This
structure ensured the company’s professional management without sacrificing state control over
the oil industry (Corrales 2015). In 1997, PDVSA began its transformation into a vertically
integrated company, where the three subsidiaries became business units to face national and
international competition amid a process of liberalization (Giusti 1999). This new structure
reduced economic inefficiencies but at the same time removed the isolation mechanisms against
the company’s politicization (Mares & Altamirano 2007). This new corporate structure granted
PDVSA's board of directors a greater role in the design of strategies and decision making in day-
to-day operations (Barberii 1998; Corrales 2015), although it ensured the company’s financial
autonomy and a human resource policy where employees were promoted based on merits
(Espinasa, Medina & Tarre 2016).
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Chávez attempted to keep this management style by appointing Roberto Mandini as
PDVSA’s CEO. Mandini was seen as an experienced manager who developed a professional
career within the company and was promoted based on merit rather than on political affiliation
(Stewart 1999)22. However, the internal divisions between those who opposed changes and those
who supported the subordination of PDVSA to government plans rapidly increased ─President
Chávez appointed four people as CEO of PDVSA in his first three years in office (Pals 1999).
PDVSA’s CEO term used to last four years. In February 2002, right after the new Hydrocarbon
Law was enacted, PDVSA’s board of directors and managers publicly protested the appointment
of a new Board of Directors that they perceived as too accommodating to President Chávez’
political interests, triggering the company’s ‘institutional crisis’ (Liendo 2002a, 2002b).
Subsequent events as a result of internal tensions in PDVSA became a breaking point in the
SOC's trajectory and, in general, in the country’s political and economic stability23.
After the oil strike that brought oil production down to historic lows24, Chávez took
advantage of the corporate structure’s openness to political interference and made a series of
strategic moves to reorganize the state-owned company and take full control of its management,
undermining its autonomy, budget independence, human resource capacity and standards of
transparency. First, he appointed a board of directors based on political affiliation whose
members were willing to put PDVSA under the service of the president’s political agenda.
Without resistance from the management team, Chávez ordered the reform of the company's
22 Presidents Luis Herrera Campins, Jaime Lusinchi and Carlos Andrés Pérez appointed presidents of PDVSA that
came from the political party leadership, the private sector or from among family members, rather than from the
company’s managerial elite. See Mares and Altamirano (2007). 23 The fear of the PDVSA managers for the politicization of PDVSA converged with concerns from political parties,
elites, unions and the middle class over Chávez' plans to transform the political, social and economic life of the
country. This led to the 2002-2003 civil strike. 24 The literature provides different figures regarding oil output during the strike and ranges varies from 25,000 bpd
to 700,000 bpd. See Espinasa, Mediana and Tarre (2016); Párraga (2010).
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bylaws to allow the Oil Minister to exercise the dual-function of CEO of PDVSA and Minister, a
member of the Executive branch of government. “My appointment as president of Petróleos de
Venezuela speaks of a clear message, which is the necessary and definitive integration between
the actions of the oil industry and the national development plans (...) It also has to do with
dismantling the entire valuation system, prizes, groups, that had a clear objective and that did not
provide good results”, said then-minister Rafael Ramírez (‘Reforma de estatutos’ 2004). In 2008,
PDVSA's bylaws were modified once again to allow the company's CEO to take on tasks related
to the ruling party, the newly created United Socialist Party of Venezuela25 (PSUV in Spanish)
(Martorano 2008). Ramírez was elected as a member of the party’s board of directors and vice
president for the Andean region, actively campaigning for Chávez (‘Comandante Chávez
juramenta’ 2008). Finally, Chávez increased the military presence on the Board of Directors26
and appointed union leaders as ‘independent’ board members (external directors). This served as
a mechanism of political patronage and co-optation of the workers as well as a way to mitigate
labor unrest.
Second, Chávez laid off over 18,000 employees or about 47% of the payroll for their
participation in the two-month national strike, resulting in a significant loss of managerial and
technical skill sets (Hults, Thurber & Victor 2011). The shortage of management and technical
staff was progressively addressed replacing them with employees loyal to the Chávez
government (Rapier 2017). PDVSA also absorbed a large number of workers following contract
renegotiations or expropriations of assets from private firms. As a result, PDVSA’s payroll
increased 176% between 2006 and 2016 (PDVSA Management Annual reports 2006-2016).
25 The MVR was dissolved in 2006 and in 2008 it merged with other parties that supported President Chávez to
create the ruling party PSUV. 26 Chávez expanded the military’s role by giving it an active involvement in the execution of public policies in the
name of national development. See Strønen (2016).
73
Although PDVSA lacks data that shows its level of professionalization, the literature suggests
that the hiring process of human talent also followed the rule of the top management positions.
After the general strike in 2002-2003, it became an ordinary practice to scrutinize potential new
employees to know their political affiliation before hiring them or threatening current workers
with being fired or facing charges of treason if they failed to embrace Chávez’ socialist project
(Carroll 2009). Several public offices, including PDVSA, used the so-called “Tascón list”,
created by-then lawmaker Luis Tascón to verify whether PDVSA’s employees had voted in
favor of the recall referendum held in 2004 and aimed at ousting President Chávez from office
(Párraga 2010). In 2006, in a video leaked to the media, PDVSA’s CEO and Oil Minister, Rafael
Ramírez, said that the company was “roja, rojita” -alluding to the colours of the ruling party- and
threatened to dismiss those managers who were not affiliated with the ruling party PSUV and
loyal to the so-called “Bolivarian Revolution” led by Chávez (Chirinos 2006). Oil workers were
often seen in PSUV political rallies (‘Frente de Trabajadores Petroleros’ 2006). In the words of
opposition union leader, Iván Freites, “PDVSA became a committee of the (ruling) PSUV”
(Zapata 2018).
Third, the system of checks and balances that existed before 2002 between PDVSA and
government institutions was progressively dismantled. Before the general oil strike, four
institutions exercised supervisory functions over PDVSA: The Oil Ministry, the Comptroller
General, the Central Bank and the US Securities and Exchange Commission. After the strike, the
president of PDVSA became a member of the Cabinet; that is, the same person exercised the
dual position of regulatory authority -in matters such as the approval of the budget and
accountability- and subordinate state-entity; the Central Bank stopped being responsible for
receiving all oil export revenues; and, PDVSA opted to buy-back all of its US dollar-
74
denominated bonds to withdraw from the Security and Exchange Commission, undermining the
mechanisms designed to ensure a company’s solvency in respect to its debt obligations (Corrales
2015). Moreover, although PDVSA reports its financial situation on an annual basis, it often fails
to disclose the financial information of its subsidiaries and off-budget expenses, while
production figures are subject to great scrutiny given the lack of consistency with those reported
by other government agencies and international organizations. In the 2017 Resource Governance
Index, PDVSA ranked 27 out of 74 SOCs because of its weak governance, which represents a
decline compared to the 2013 index, when the state-owned firm ranked 7 out of 45 (RGI 2013,
RGI 2017).
The oil sector is Venezuela’s economic engine. It is the largest supplier of foreign
currency, the main source of government income and the biggest contributor to the fiscal sector
(Manzano & Scrofina 2013). Therefore, oil is the most important factor shaping budgetary policy
in the country, not only as an economic variable but also when political factors (e.g. electoral
year) are to be weighted (Puente, Daza, Rios & Rodriguez 2006). This has implications for
PDVSA’s financial and budgetary autonomy. Even though the budget and business plans of the
company are approved by the Board of Directors (Official Gazette N° 39.681, 2011), these are
intrinsically linked with the national budget and the country's development plans. It comes as no
surprise then that the political control of PDVSA hampered the company’s efficiency and
increased the cost of doing business. The SOC became an increasingly cash-strapped company as
it was heavily taxed and allocated more resources to off-budget expenses. Between 1999 and
2014, PDVSA’s net income (after taxes) become smaller. In 2012, the year in which PDVSA
received the highest revenues, less than 4% of oil sales remained in the company’s pockets. In
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terms of efficiency, production costs per barrel27 increased 379% during the same period
(PDVSA Financial Statements 2000-2014). To offset a tighter cash flow and be able to continue
financing government spending, PDVSA took on high cost debt issuances while delaying
payment to vital service providers to keep operations afloat (Palacios 2016,). As a result,
accounts payables soared more than 744% and the long-term debt increased 424% (PDVSA
Financial Statements 2000-2014). PDVSA’s commercial behavior exacerbated its dire financial
situation.
SOC Commercial Behaviour
PDVSA is an incorporated company (Decree No. 2,184, 2002) and as such is governed by the
commercial code, in other words, under private law (Balsa & Espinasa 2015). This formally
grants it independence from the central government (Mares & Altamirano 2007). As a state-
owned company, it has the mission of creating value for the Venezuelan society (Barberii 2001).
Its ability to do so depends on both its commercial (operational and financial) and non-
commercial (social mission) performance.
Since its inception, PDVSA’s commercial orientation created value for the country. This
strategy was particularly clear between 1997 and 1999, when the company began the
transformation towards a vertically integrated one, to concentrate on strategic planning and
economy of scale (Mares & Altamirano 2007). In other words, to produce large volumes of oil
and capture markets. Its non-commercial orientation was limited to 1) meet the energy demands
of the domestic market; 2) absorb the costs of fuel subsidies and; 3) contribute to the country’s
27Production costs include extraction expenses incurred to operate and maintain productive wells and related
equipment and facilities, including costs of operating labor, materials and supplies, fuel consumed in operations and
the costs of operating liquid natural gas plants incurred by PDVSA and Empresas Mixtas. See PDVSA (2016).
Financial Statement.
76
social development via corporate social responsibility programs. The rest of the contributions to
the nation were made through taxes, royalties and dividends.
Since 1999, PDVSA reoriented its commercial strategy towards one that maximizes
revenues instead of oil production volumes. Several factors were key in this new transformation
of the SOC as it became responsible for the country’s economic development (Tordo et al.,
2011). First, the SOC executed a policy choice that prioritize prices over markets; that is,
complying with the production quotas established by the Organization of Petroleum Exporting
Countries to boost oil prices (Liendo 2009). Second, in the international arena, PDVSA used oil
as an instrument to promote geopolitical alliances (Párraga 2010). Chávez ‘petrodiplomacy’ was
implemented through energy regional initiatives such as the Comprehensive Cooperation
Agreement with Cuba and Petrocaribe ─PDVSA sells oil on preferential rates to countries in
Central America and the Caribbean (PDVSA 2005).
Regarding the non-commercial strategy, the government expanded the scope of PDVSA's
social mission. PDVSA's 2005-2030 business plan, which Chávez himself called “Plan Siembra
Petrolera” (Oil Sewing Plan), first sketched new SOC tasks:
“(...) Oil sewing implies the use of oil and the entire oil industry and the oil business and the
muscle and the nerve of oil as a lever for the integral development of all that [Orinoco] axis and of
this entire country. Now, oil has to be used in that direction, to promote integral, social, economic,
productive, integral development” (Chávez 2005).
The “Sowing the Oil” plan was threefold. First, PDVSA directly finances government social
programs, the purchase of imported food and equipment for the electricity sector, and even the
payment for expropriated companies (PDVSA Financial Statements 2000-2016). Second, the
SOC engaged in non-oil related activities. For this purpose, President Chávez modified the
statutes and articles of incorporation of the SOC, enabling it to create seven new subsidiaries
aimed at serving different sectors of the economy. One of them was PDVSA Agrícola whose
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purpose is providing seeds to the agricultural sector. PDVSA also created PDVAL aimed at food
import and distribution (PDVSA 2016). Finally, PDVSA assumed costly subsidies locally and
abroad. On one hand, fuel and diesel in Venezuela’s domestic market are heavily subsidized by
the State and keeping this low oil price comes with a high cost for PDVSA. In 2014, local
consultancy firm Econoanalítica estimated that for the SOC to avoid financial losses, fuel price
would need to be 28 times higher than the current price. Measured as a percentage of the Gross
Domestic Product, the oil subsidy equals combined government spending in health, education
and housing: 10.6% (Balza, Espinasa and Serebrisky 2016). On the other hand, PDVSA entered
into commercial agreements with political allies in Central America and the Caribbean to supply
oil at preferential terms, such as the energy regional initiative Petrocaribe and the Caracas
Energy Agreement signed with Cuba in 2000. PDVSA has supplied an average of 107,000
barrels per day to more than a dozen beneficiary countries (PDVSA Annual Management Report
2006-2016). A portion of the oil bill is paid up-front, while the remaining portion is paid in the
long-term (between 17 and 25 years) and could be paid with services or goods (Goldwyn & Gill
2016).
As mentioned in the previous section, the transformation of PDVSA’s corporate
governance and commercial behaviour undermined its financial capacity and, as the cash-flow
dried up, its operational performance declined. In spite of its massive influx of revenues, the new
responsibilities of the company created a competition for the use of those resources. In terms of
capital expenditure, PDVSA allocated an average of 56% of its investments to exploration and
production between 2006 and 2015 (See Figure X). Even though most of PDVSA’s investment
disbursements were allocated to the core business, off-budget expenditures represented a relevant
portion of the company’s expenses in recent years. These expenses were earmarked for parallel
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mechanisms such as the state-ruled National Development Fund (FONDEN in Spanish) and
social programs known as “Misiones”. During 2006-2015, off-budget expenditures represented
13% of PDVSA total expenses, reaching peaks in electoral years. Amid the oil boom, PDVSA
committed to honour supply agreements with its allies, while its accounts receivables bulged. As
of 2014, almost three quarters of SOC’s account receivables, or USD6.2bn, corresponded to
these energy agreements.
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4. BOLIVIA’S GAS SECTOR: Distributive State Monopoly
“Nationalized. Property of YPFB,” read on the billboards that were placed along gas facilities on
1 May, 2006, while military and state officials continued to take control of energy facilities now
owned by Yacimientos Petrolíferos Fiscales Bolivianos (YPFB in Spanish). These actions
responded to the announcement of the nationalization of the hydrocarbon sector that the
President of Bolivia, Evo Morales, had just made a few hours before. “The time has come, the
awaited day, a historic day in which Bolivia retakes absolute control of our natural resources (…)
The pillage of our natural resources by foreign companies is over,” he said (‘Bolivia gas under’
2006).
After signing Decree 28701, “Heroes del Chaco”, Morales passed Law of Hydrocarbon
N° 3058, that had been approved by Congress in 2005. In doing so, he fulfilled the mandate
emanating from the 2004 referendum. This mandate was to recover for the state ownership of
natural resources (including hydrocarbon), rebuild YPFB and recover the ownership of its shares
for Bolivians, guarantee internal consumption, and increase the tax burden to at least 50% of the
value of production (Vargas Suarez 2009). In the following years, the state renegotiated gas sales
contracts and prices, recovered YPFB's shareholding control and, with it, transport networks. But
it also faced redistributive conflicts with the gas-producing regions controlled by the opposition,
while the industry faced a lack of financial and human resources, dependent on the Argentinean
and Brazilian gas markets, and geographical limitations, among other difficulties.
The mechanism can be summarized as follows. Evo Morales’ leadership was built based
on an organized social movement with deep, organic ties with his political party. These links
were established during the collapse of the traditional party system and the struggle for resources
- the Water and Gas Wars. Morales also capitalized on the vote of other sectors of the
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population. Therefore, Morales’ administration faced the challenge of fulfilling the demands of
different streams of support, including the changes that had to be implemented in the
hydrocarbon sector, as well as the challenges posed by an organized opposition. That explains
the lower degree of autonomy he had once in power. In addition, the socioeconomic structure
that Morales inherited, which assigns a significant role to the market, the operational and
financial limitations of the industry itself, as well as the strong opposition to the constitutional
reform, including the new distribution of natural resources wealth, also limited the capacity to
government action. The transformation of the sector therefore, was limited to increasing taxes,
renegotiating contracts with private companies, and controlling the ownership of oil and gas
companies. Thus, with a “partial nationalization”, the state reorganized the sector by increasing
its role through taxation and its participation in upstream activities and decentralizing the
distribution of wealth. The re-institutionalization of the state-owned company YPFB, however,
went halfway through. After all, the hydrocarbon sector showed a favorable performance that
was reflected in an increase in gas production. However, the fiscal terms of the nationalization
and weak financial position of YPFB prevented the gas industry from fully leveraging itself on
the price boom. This translated into lower investments in upstream activities, among which the
scarce exploratory activity for replacement of reserves stands out.
Each of the steps in this process is explained in the following sections. First, I discuss the
origins of the Movement towards Socialism (MAS), the configuration of its social base and the
dynamics between this movement and its leader, Evo Morales. Second, I explain the challenges
that the government faced once it came to power because of its dependence on a natural
resourced-led model of development and the opposition's organizational capacity. Finally, I
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provide an account of how these variables played out during the government of Evo Morales to
carry out the reforms in the hydrocarbon sector.
4.1. Level of Endogenous Constraints
Party Institutionalization
The indigenous leader Evo Morales won the elections on December 18, 2005 on behalf of the
Movimiento al Socialismo (MAS), a broad coalition of peasants, indigenous groups, and urban
middle-class voters (Molina 2010). With only 10 years in the political arena, MAS challenged
and displaced the traditional parties - DNA, MIR and MNR. Morales won an overwhelming
victory of 53.7%, 25 percentage points above his main rival, the candidate of PODEMOS, Jorge
Quiroga (OEP 2010). It was the first time that a presidential candidate won an electoral majority
since the country returned to democracy in 1982 (Madrid 2011), and with a platform that
resonated very well among the impoverished regions of the Altiplano, calling for the
refoundation of the state and the dismantling of the existing political order that had brought
exclusion, misery and privatizations (Flores-Macías 2012).
MAS is a hybrid organization, part political party and part social movement, that
“embraces post-liberal policies by participating in representative institutions without abandoning
non-electoral street politics” (Anria 2010, p.103). Its own leaders have defined it as a “political
instrument” of indigenous peasant movements (ibid.), and this remains the backbone of the
party's grassroots. However, its arrival to power is the result of a rapid internal transformation,
more inclusive, that took place by articulating the demands of various groups in a broad electoral
coalition and that went beyond the ethnic appeal in the midst of a wave of protests and the
collapse of the party system (Anria 2010, Madrid 2006). The Assembly for the Sovereignty of
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the Peoples (ASP in Spanish), the predecessor of MAS, was created in 1995 at the request of
indigenous groups and organizations of rural social movements, including the main
confederation of peasant unions, la Confederación Sindical Unica de Trabajadores Campesinos
de Bolivia (CSUTCB). In 1998, Morales separated from the ASP after a dispute over the
leadership of this social movement and formed the Political Instrument for the Sovereignty of
Peoples movement (IPSP in Spanish). As a formality to participate in the 1999 municipal
elections, the IPSP had to adopt the name of a deceased yet registered political party, the
Movimiento al Socialismo-Unzaguista, or MAS-U (Madrid 2011). The results of that first
electoral experience were not very promising. MAS-IPSP obtained just 3.3% of the total national
votes and won 81 seats in the local council (Albó & Quispe 2004).
In the following years the movement was consolidated by expanding its base of support
to include traditional Marxists, some other indigenous organizations, and voters of the urban
middle class under a political platform open to all people (Molina 2010). What began in the
Chapare region as a movement of coca growers against neoliberalism and the US-sponsored
“War on Drugs” became a broad national electoral coalition that strengthened in the midst of the
war over the resources ─the Water War (2000-2002) and the Gas War (2003-2005) (Anria 2010,
Phillips & Panizza 2011). Indeed, the general elections of 2002 made it clear that radical
opposition to the party system was on the rise. In these elections, Morales came second in the
race for the presidency when he obtained 20.9% of the votes, while the MAS-IPSP obtained 27
seats in the Chamber of Deputies and 8 seats in the Senate (OEP 2012, Phillips & Panizza 2011).
Progressively, MAS expanded from local to national and from rural to urban (Anria 2010). The
organization not only embraced the traditional demands of indigenous groups, such as land
reform, local autonomy, and the legalization of the coca leaf, but also pursued the support of
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other urban groups dominated by mestizos, also disenchanted with traditional parties, opposed
the privatization of water services and gas exports to Chile, and demanded a more even
distribution of the resource wealth. Morales was subsequently elected in 2009 and 2014, with
63.91% and 61.01% of the votes, respectively (OEP 2010).
The origins and evolution of this political organization favoured the configuration of a
dynamic and complex structure between the leader and his support base. So, when Morales came
to power, he did so with a clear mandate from his broad base of support, which translated into
less autonomy to government action (OEP 2010, Luna 2010, Madrid 2011, Phillip & Panizza
2011). In other words, the Morales government faced pressure from within the Party. In fact,
“politics within the MAS tend to unravel time to time and exert an enormous amount of pressure
upon both the executive and the congress” (Molina 2010, p.74). For example, in December 2010,
supporters of Morales, including leaders of the cocalero movement, where Morales comes from,
blocked streets and burned tires in the main cities of the country in a wave of protests against the
gasolinazo -a decree that established a price hike of 73% for the diesel and 83% for fuel
(‘Bolivia paralizada por’ 2010). Morales apologized and reversed the measure, reiterating that he
“only ruled by obeying.”
Party Linkages
The arrival of MAS to power is explained more by voters' disenchantment with the traditional
political parties (Madrid 2011) and the neoliberal policies they implemented between 1985 and
2005, than by their identification with the Left (Arnold & Samuels 2011). The Left had little
success in the electoral political arena after the Popular Democratic Union (UDP in Spanish),
which governed immediately after the country returned to democracy, submerged Bolivia in a
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deep economic crisis. Then, three parties alternated power ─namely, the Nationalist
Revolutionary Movement (MNR in Spanish), Democratic Action and Nationalist Movement
(ADN in Spanish) and the Left Revolutionary Movement (MIR in Spanish). This last one
changed its orientation by supporting pro-market policies and forming an alliance with ADN─
and enjoyed of important popular support (OEP 2012, Madrid 2011). For example, in the 1985
and 1989 elections, these three parties controlled 73% and 74% of the votes (OEP 2012).
During the “pacted democracy” (1985 - 2002), the left-right division was meaningless,
since the most important parties subscribed more or less to the same economic and political
principles. This situation changed in 2002. The indigenous and peasant movement of Evo
Morales, which had led vigorous protests against privatization and the political establishment,
was now in Congress, further weakening the MNR-MBL and MIR government coalition led by
Gonzalo Sánchez de Lozada and Carlos Mesa. The links of this social movement were woven
during years of mobilization and revitalized thanks to an innovative way of framing and
intermediation, and also because of the decline of political power and the economic crisis (Silva
2017). According to Phillips and Panizza (2011), two events made it possible for the social
movement to transcend from the confrontational sphere to participation in democratic institutions
of representation.
First, the rise of an independent Aymara intellectual and political movement, led by
Felipe Quispe, with strong ties with rural communities which challenged the country’s political
order by electoral means. This was achieved thanks to a series of legal reforms such as the
constitutional reform of 1994 and the introduction of the Law of Popular Participation that
encouraged and significantly expanded popular participation (Anria 2010, Morales 2012, Silva
2009). In the 2002 elections, traditional parties obtained 42% of the vote (OEP 2012). Although
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Quispe’s party, the Pachakuti Indigenous Movement (MIP in Spanish), only obtained 6%
support, it had significant influence on the emergence of new leaders from the grassroots. In fact,
along with MAS ─which obtained 21% of the votes (OEP 2012)─ the indigenous movement
became the second political force in the country. Their refusal to make post-electoral agreements
marked the end of the “pacted democracy,” while the support they received at the polls showed
limited attachment of the population to traditional political parties.
Second, “careful framing between Bolivian people (us) and politicians (them)
strengthened collective action” (Phillip & Panizza 2011). The ‘us’ included the urban popular
classes and indigenous peoples demanding “sovereignty, state control of natural resources, pro
formal sector employment and workers right policies, agrarian reform, demilitarization of drug
war and a call for a Constitutional reform” (Silva 2009, p. 107). The “Gas War”, for example,
contributed to consolidate the collective power of social movements by transforming demands
from local, regional or union specific to national-level demands (Silva 2009).
Thus, the partisan identities evolved towards more complex ones, where ethnic loyalties,
regionalisms and socioeconomic class prevail (Centellas 2010, Madrid 2011). The arrival of
MAS to power, however, did not necessarily reflect a change of voters’ party identity with the
Left. In 2001, less than 15% of the population identified as left-wing. Although this proportion
increased slightly after Morales became president, it still did not exceed a quarter of the
population by 2008 (Arnold & Samuels 2011). The Morales government also did not create links
with the labour movements, as the power of the industrial unions declined with the return to
democracy and the collapse of the state mining sector (Phillips & Panizza 2011).
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Centre of Political Authority
President Evo Morales concentrates a lot of power in his hands and has bypassed institutional
channels to achieve his goals (Anria 2010). In addition, the crisis of the party system and the lack
of a consolidated opposition have minimized the role of Congress as a check to the executive,
weakening horizontal accountability mechanisms (ibid.). As Phillips and Panizza (2014) assert
“Mobilized civil society is the new moderating power (instead of the legislature) of Latin
American politics” (p. 41). Indeed, Morales’ control of MAS is based on years of mobilization,
therefore its leadership is dispersed and remains accountable to an autonomous popular
movement organized from below, which imposes constraints on its leadership (Levistky &
Roberts 2011). Anria (2010) explains, Morales cannot act as he pleases because of the social
accountability structures imposed by the nature of the internal organization of the MAS.
Social accountability mechanisms are non-electoral, non-institutional, yet vertical
mechanisms that rely on “(…) interested, organized sectors of civil society and media institutions
that are able to exert influence on the political system and public bureaucrats (…)” (Peruzzoti &
Smulovitz 2000, p. 10).
Anria (2010) explains that social accountability within the MAS operates in two
dimensions. On the one hand, the MAS operates vertically top-down with organizations that are
part of the party's statutes -such as the cocaleros- and that lack independent authority from
Morales. The dynamics with pre-existing urban organizations (before the arrival of MAS to
power) is also top-down, since alliances with these have not been formalized and lack organic
participation within the MAS structure. Thus, Morales approves or conditions the selection of
MAS candidates without challenges, just to mention an example. “The MAS initially strove for
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partnership but steadily moved toward co-optation arguably an inevitably tendency in the
complex and highly contested terrain in building a political party” (Farthing & Kohl, p. 57-8).
On the other hand, MAS operates in a vertical bottom-up direction because there are
organizations that are not integrated to the MAS party statutes and, therefore, are autonomous
and “can mobilize for and against the government, effectively, putting limits to Morales’
leadership” (Anria 2010, p. 113). In other words, although Morales has made moves that
resonate well with his grassroots, he is not exempted from protests led by MAS grassroots,
notably both the mining and water sectors as well as the state-owned airline (Farthing & Kohl
2014). In August 2010, there were protests in Potosí over the government’s failure to invest in
infrastructure and create jobs. “In a city where roughly 80% voted for MAS in 2009, over 60%
of the population occupied the streets until the government capitulated,” noted Farthing & Kohl
(2014, p. 51). The government’s decision to cut fuel subsidies is once again an example of the
challenges Morales faced from within the ruling party, as protests showed to what extent it limits
government policy options.
4.2. Exogenous Constraints
Organizational Capacity of the Opposition
The collapse of the traditional party system facilitated the arrival of MAS to power. That new
opposition, although not strongly consolidated, has posed challenges to President Evo Morales.
Indeed, the government’s limited capacity to handle conflicts has often forced it to renegotiate
the initial terms of its agenda (Farthing & Kohl 2014).
For example, Morales won the presidency in 2005 with an overwhelming majority. At
that time, MAS candidates also obtained the majority of seats in the Chamber of Deputies, but
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they did not control the Senate, with only 12 out 27 seats (OEP 2012). Morales was not able to
control the Supreme Court either, as judges were mostly appointed by former President Gonzalo
Sánchez de Lozada and his MNR party (Farthing & Kohl 2014).
On July 2, 2006, Morales led the “No” movement against regional autonomies that
prevailed in a national referendum. However, the “Yes” side still obtained a majority in four
departments, namely Santa Cruz, Beni, Pando and Tarija, which would later form the media luna
conservative opposition. On the same day, the ruling MAS won the election to form a
Constituent Assembly by an absolute majority, but it did not achieve the necessary two-thirds to
modify the constitution.
For more than a year, between September 2006 and November 2007, the Constituent
Assembly was halted by demands from the Conservative opposition to move the government’s
capital from La Paz to Sucre. Massive rallies in both cities polarized the country and violent riots
in Sucre forced the approval of the new constitutional text in the Altiplano city of Oruro on
December 9, 2007. Demands for regional autonomy also included control over the natural
resources, that is, the right to retain control of up to two-thirds of all tax revenues generated in
the department and the authority to set policies in the areas of defence, currency, tariffs and
foreign relations (Phillip & Panizza 2011). Although the new Constitution was approved by
61.4% of the voters (OEP 2012), “the entire procedure was so fraught that it eroded MAS
authority and menaced political stability” (Farthing & Kohl 2014, p. 44) as the government
relinquished plans for land distribution, environmental controls, and indigenous rights.
After the approval of the Constitution and the subsequent re-election of Morales, the
ruling MAS began to reform and take more control of other institutions. For example, the
Plurinational Assembly replaced the old Congress and indigenous groups had privileged access
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to the electoral and judicial powers. Morales’ government, however, was not exempt from
protests. In 2010, the government not only reversed the fuel price hike, but had to decree a wage
increase of 11% to appease a strong confrontation with the unions, who had enacted strikes,
blockades, and marches to protest the inflation spiral. The judicial elections of October 2011
were also another process of institutional transformation promoted by Morales that faced
challenges. The conservative opposition took advantage of an indigenous protest to campaign for
the “null vote”, turning the judicial elections into an unofficial plebiscite on Morales
administration.
Path Dependencies of Natural Resource-led Development
Bolivia, unlike Venezuela, had only a superficial experience with the Import-Substitution-
Industrialization model of development, which facilitated the adoption of pro-market policies as
of 1983 (Flores-Macías 2012, Kaup 2010a). By the time Morales came to power, the level of
neoliberal reforms was well advanced, with the hydrocarbons sector leading the change in the
development model. This changed the role of YPFB within the sector, reduced royalties and
taxes on new investments, and gave investors the right to market the hydrocarbons they extracted
as they pleased (Kaup 2010a).
The reforms in the hydrocarbon sector began in the state company YPFB and in the
administration of its oil and gas resources, with the adoption of the Investment Law of 1990 and
the Hydrocarbons Law 1194. With these laws, the state sought to attract investment and alleviate
fears of government intervention in the sector. Then, in 1994, the state promulgated the
Capitalization Law that later allowed the division of YPFB into three parts and its respective
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privatization. This allowed to increase investments and production. As a result, proven gas
reserves also increased.
The positive trajectory of the hydrocarbon sector had a high cost for the country and for
the industry itself. First, the distribution of wealth resulting from the gas sales in the international
market was the main point of departure for social conflicts in Bolivia due to the inability to
generate benefits for the most deprived. Second, the investments made by transnational
companies after the capitalization of the hydrocarbon sector focused on areas where YPFB had
geological information, that is, where they already knew there were gas reserves, so little was
invested in reserve replacement. Meanwhile, the agreements signed with the International
Monetary Fund limited the capacity of the state company YPFB to invest in new capital goods
and finance its operations (Kaup 2010). Third, with the privatization of YPFB, experienced
professionals went to work for transnational companies, which translated into a loss of know-
how for the industry.
Morales then inherited an industry that for several years had lacked investment in
exploration of new areas, with a state-owned company that lacked administrative capacity, had a
weak financial position and was constrained by the commercial gas export agreements with
Brazil and Argentina. (Kaup 2010, Molina 2010). In effect, investments in exploration and
exploitation that had reached USD898 million in 1998, declined to USD243 million in 2004, one
year before nationalization (MHE 2016). As a result, gas reserves that had multiplied more than
six times between 1996 and 2001 (BP 2018), stagnated the following years. A reserve
certification study conducted in 2009 revealed that reserves had been overestimated ('La caída de
reservas' 2010). Finally, although the State recovered the right to commercialize hydrocarbons, it
was also legally bound to comply with the long-term gas export contracts (20 years) with Brazil
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and Argentina, which limited its capacity to market the gas, including allocating it to other uses
within the domestic market (Kaup 2010).
The result is a development model that reflects continuity with the previous one due to its
extreme dependence on hydrocarbon resources (Molina 2010). Farthing and Kohl (2014) call it a
“neo-extrativism” model.
“The recent model differs from long-standing extractivism by granting a stronger role for the
state, ensuring more favorable contracts with multinationals, and promoting efforts to add value
to natural resource exports. Its continuity with the past in the face of burgeoning world demand
can mean, however, as in Bolivia’s case, even greater dependence on natural resources (p. 79).
4.3. Implications of the Distributive Administration of the Resource Wealth
A highly constrained system has more resources to restrict the leadership. Although Morales’
support was built during years of social mobilization, including demands for better access to the
distribution of wealth, the movements act autonomously from the party and its leader. Once
Morales came to power, his supporters demanded that he comply with the promises he made
during the campaign. This paved the way for the nationalization of the hydrocarbon sector and
the convening of a National Constituent Assembly to reform the Constitution. Tensions over
distributive conflicts between the opposition and Morales’ supporters highlight not only the
degree of polarization under which Morales has ruled, but the complexity of the policymaking
processes in Bolivia.
This context provides a fertile ground for shaping a structure of the hydrocarbon sector
that I call Distributive State Monopoly. The characteristics of this type of structure are as
follows: First, the sector is organized in such a way that the government monopolizes the
production of hydrocarbon resources and manages their development, although it allows private
participation. Although there is a regulatory agency, its role is not relevant in upstream activities.
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Second, the state appropriates a large portion of the revenues which are distributed according to
the norms pre-established in the Constitution and laws, including the allocation of resources to
the provinces. Third, the purpose of the state company is to execute government policies, so that
its administration is highly linked to the central government. However, due to its limited budget
and low professionalization, its operational capacity within the hydrocarbon sector is also
constrained.
Hydrocarbon Sector Organization and Governance
The governance structure of the hydrocarbon sector is complex because it is subject to a
handful of laws enacted in different years and in response to specific events, making it difficult
to integrate them into a unitary and coherent regulatory framework. The Political Constitution of
the State (CPE 2009), enacted in February 2009, establishes that minerals such as hydrocarbons
are natural resources. As such, they have a strategic nature and are of public interest for the
development of the country. They are also inalienable and imprescriptible property of the
Bolivian people28. The state, on behalf of the Bolivian people, holds the ownership of all
hydrocarbon production in the country and is the only one authorized to market it (RGI 2017).
Hydrocarbons Law No. 3058, enacted in 2005, defines the bodies that regulate the
hydrocarbon sector. The Ministry of Hydrocarbons and Energy (MHE in Spanish) is the
authority that prepares, promotes and supervises energy related policies. This legislation also
establishes that the state-owned company Yacimientos Petrolíferos Fiscales Bolivianos (YPFB),
is an independent company under public law under the direction of the MHE. On behalf of the
state, YPFB exercises property rights over all hydrocarbons and represents the state in signing oil
28 See Article 348° and 359° of Bolivia’s Political Constitution.
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contracts and executing the activities established by law in the entire oil and gas value chain. The
law grants YPFB powers to operate and/or participate in the entire hydrocarbon value chain, and
also carry out control and inspection activities in the exploration and production areas such as the
payment of royalties to the National Treasury and the certification of production.
The law also created the National Hydrocarbons Agency (ANH in Spanish) as the
regulator for downstream activities ─that is, transportation, refining, marketing of oil and gas
products and distribution of natural gas through pipeline networks. Other bylaws, of lower legal
rank, establish the mechanisms through which exploration and exploitation activities will be
carried out in areas reserved in favor of YPFB. The municipalities, although they receive a
portion of the rent, do not participate in the policymaking processes related to the hydrocarbon
sector, nor in its implementation.
According to Bolivia’s Political Constitution, private companies, national or foreign, can
participate in upstream activities through the signing of Operating Agreements ─a contract under
which they provide services for a fee. The Constitution also authorizes YPFB to form
partnerships with private companies for any activity related to the hydrocarbon sector29, while
Law No. 3058 necessarily contemplates the participation of YPFB in the contractual regime.
Other decrees and resolutions issued by the ministry establish the mechanisms through which
YPFB can carry out exploration and production activities, and under what conditions it can be
associated with private companies30. For example, YPFB must have the majority shareholding in
associations to explore and produce in the areas reserved in favor of YPFB.
In many respects, the reorganization of Bolivia’s hydrocarbon sector responded to the
social demands that gave rise to the “Gas War” claiming to recover the ownership of
29 See articles 362° and 363° of Bolivia’s Political Constitution. 30 See Supreme Decree 29139 and Supreme Decree 130.
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hydrocarbons in favor of the Bolivian State, halting plans to export natural gas via Chile, and
increasing oil revenues by capturing at least 50% of the value of the produced natural gas. The
outcome of these social demands resulted in a binding referendum, which was held in July 2004
and where the population decided on the new policies that would be adopted in the hydrocarbon
sector. As a result of this participation and citizen consultation, in May 2005 a new
Hydrocarbons Law was approved, but a clash between the executive and legislative powers
delayed the enactment of the law, forcing then-President Carlos Mesa to resign. Given the
demands of MAS’ social base of support and the dynamics under which the party and its
constituencies operate, Morales had a clear mandate when he came to power: to put into place
the institutional framework for the hydrocarbon sector approved in early 2005. In 2006, the
Morales administration deemed Supreme Decree 24806 unconstitutional to recover the state right
to commercialize its hydrocarbons once it reaches the point of extraction and proclaimed the
nationalization of the sector (Kaup 2010), a fundamental flag of his electoral campaign.
Although the hydrocarbon sector is heavily regulated, this regulatory framework reflects
contradictions. The participation of private companies in trading activities of the hydrocarbon
sector is an example of these. Although the current Hydrocarbons Law allows private companies
to trade hydrocarbons and its products in the domestic and international markets (import and
export), the CPE establishes that YPFB is the only company authorized for this activity
(Velásquez 2015).
This is because Hydrocarbons Law No. 3058 and Supreme Decree of Nationalization No.
28701 were promulgated prior to the approval of the new Political Constitution of the State. In
the absence of a Hydrocarbons Law adapted to the realities imposed in the CEP, the Morales
administration relies more on supreme decrees and bylaws issued by the ministry, generating
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“uncertainty to the companies to make investments in exploration, since both instruments depend
only on the Executive and a change of authorities may imply the risk of changes in these rules”
(Velásquez 2015, p.13).
Oil Revenue Distribution
Under the contracts signed in the 1990s, the government was unable to increase royalties (Kaup
2010). This changed following the institutional reforms that took place in the hydrocarbon sector
after 2005, with the State increasing rent appropriation (Chávez 2013). The Hydrocarbon Law
No. 3058 ratified existing taxes: royalties and participations with a 18% levy, including 11% of
departmental royalty. These precepts were ratified by the 2009 Constitution31. The Hydrocarbon
Law also created the Direct Tax on Hydrocarbons (IDH in Spanish) with a 32% levy. This new
fiscal framework allowed the State to keep 50% of revenues from hydrocarbon production,
fulfilling the mandate of the 2004 referendum.
The law specifies the mechanisms that govern natural resources revenues distribution to
the central government and subnational governments (RGI 2017). One portion of the transfers
goes to the gas producing departments (Cochabamba, Chuquisaca, Santa Cruz and Tarija
municipalities), while non-producer departments (Pando and Bani municipalities) are entitled to
a compensatory royalty and participation from the National Treasury (TGE in Spanish). A
portion of the IDH is also distributed among the producing, non-producing departments and the
TGE, while the remainder goes to indigenous people, peasants, universities, the Armed Forces
and the police. The profit tax on companies goes to the National Treasury, while the Contractual
31 See Article 368° of Bolivia’s Political Constitution.
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Participation, created when oil contracts were signed, taxes companies with a levy that ranges
between 1% to 18%, which then goes to YPFB (RGI 2017, Velásquez 2015)32.
As the Morales administration largely followed the pre-set distributional rules approved
before he came to power, the state gained access to a greater portion of the natural resource
revenues. Natural resource rents increased six times from USD4.6 billions in the 1985-2005
period to over USD31.5 billions between 2006 and 2015 (MEH 2016). Amid the oil price boom,
revenues to subnational governments increased, while transfers to the central government funded
social programs such as Renta Dignidad (formerly Bonosol) and the Juancito Pinto bonus
(Flores-Macías 2012). Nevertheless, the distribution of the natural resource wealth responded to
a wave of protests from certain sectors of society rather than to a development plan, generating a
fiscal burden that reduces the availability of funds to reinvest in the hydrocarbons sector,
including financial resources to the state-owned company YPFB, as it is subject to the same
fiscal rules. As discussed in previous chapters, “too large a (government) take may (…) hamper
altogether the development of a marginal field under the prevailing rent-capturing parameters”
(Balza & Espinasa 2015), while the economy becomes excessively vulnerable to external shocks,
such as the oil prices downfall.
Morales’ government has tried to compensate this situation by issuing decrees that aim to
attract foreign investment with incentives for exploration and production. Policy moderation also
responds to the necessity to address the downfall in revenues due to lower oil prices. For
example, the government issues Supreme Decree No. 2195 to speed up the consultation process
and Supreme Decree No. 2366, authorizing the development of hydrocarbon activities in
protected areas (Velásquez 2015). Likewise, a series of economic incentives were approved that
32 See Velásquez (2015) for a detailed account of Bolivia’s fiscal framework and its correspondent distribution.
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promote the increase of private investments in exploration and production of hydrocarbons
(Liendo 2018). The implications of these measures remain to be seen.
SOC Corporate Governance
YPFB was created on December 21, 1936, during the presidency of General David Toro with the
issuance of a decree-law that granted it legal status and its own autonomy, and under the
principle that natural resource had to be managed by the Bolivian State. Since then, control of the
company has alternated between the state and the private sector (Jiménez 2009, Vargas 2007). In
fact, the re-foundation of YPFB ordered in 2006 within the framework of Hydrocarbon Law No.
3058 was part of the third wave of nationalization in Bolivia’s hydrocarbon sector.
Its functions are established in the Law of Hydrocarbons (2005) and Bolivia’s Political
Constitution (2009)33. The company is managed by a Board of Directors, an Executive President
as the legal representative of YPFB, a Vice Presidency of Operations and a Vice Presidency of
Administration of Contracts and Inspection. Law 3058 established a geographical distribution of
this YPFB structure (they work from different cities) that responds to regional criteria. The board
of directors is chaired by the Executive President and ten members: five members are
representatives of the executive branch and are appointed from three candidates proposed by the
Ministries of the Presidency, Economy and Public Finance, Development Planning and
Hydrocarbons and Energy; four members are appointed by the Prefectures of the producing
departments; and one member is appointed by the YPFB Union. Each of these representatives is
appointed directly by the President of the Plurinational State, through Supreme Decrees
(Vásquez 2015).
33 See previous section on Hydrocarbon Sector Organization and Governance for more details
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The Supreme Decree 29507 (2008) establishes the regulatory framework and the strategy
for YPFB to become a corporate entity, in order to create subsidiary companies to operate in the
different parts of the chain. Meanwhile, Supreme Decree 86 (2009) grants YPFB the status of a
Strategic National Public Company, with the objective of conferring the necessary human
resources and mechanisms to achieve its objectives. Finally, Supreme Decree 1150 (2012)
regulates transfers of resources from YPFB Headquarters to public and / or private institutions,
within the framework of the corporate social responsibility policy adopted by YPFB, in order to
make their investments viable.
This legislation grants a certain degree of institutionalization to YPFB that is not
reflected in practice. First of all, the geographical distribution of the company ordered by Law
3058 creates difficulties for the efficient administration and operations of the company (Aramayo
2009). The dismemberment of YPFB, fostered by an aspiration of participation in the company
of each hydrocarbon producing department, has resulted in lack of coordination, weak
management control that can facilitate acts of corruption and, in addition, a considerable delay in
the construction of a robust, efficient national oil company, providing results in exploration and
operating the main hydrocarbon fields (Sánchez & Velásquez 2016).
Second, in the first three years, the management of the state oil company focused on the
implementation (albeit very slowly and partially) of the 44 operating contracts signed in October
2006, leaving aside the promotion and development of exploration and market allocation. The
result of this is reflected in the lack of new wells and insufficient production to simultaneously
cover the domestic market and the maximum demand of the main purchasers of natural gas.
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Third, in its attempt to rebuild YPFB, the state has encountered a lack of capacity.
According to Kaup (2010), “Many of the people who had worked for YPFB prior to its
capitalization went to work for transnational energy firms” (p. 132), while low wages make
difficult to bring in experienced people (ibid.). In this context, project development is affected as
proposals get stuck in the state bureaucracy. This problem is exacerbated by the turn over of the
board of director. Between 2006 and 2017, YPFB had eight interim executive presidents (‘Seis
de los 7’ 2017), making it difficult to implement a business vision and long-term strategy. Its
institutional changes have consisted in granting greater powers and expanding its bureaucratic
apparatus through regulations issued directly by the executive, with a lack of long-term vision
and coherence with the new sectoral policies (Sánchez & Velásquez 2016). Moreover, the
majority of those appointees are members of the ruling party MAS, so those who have opposed
the policies issued by the Executive have often been replaced (Kaup 2010).
Other problem is dual roles in company’s structure. According to the current structure of
YPFB, the Vice President of Administration of Contracts and Control fulfills the double role of
operator ─through its companies YPFB Andina, YPFB Chaco and YPFB Petroandina SAM─
and fiscal tax agency or auditor as YPFB headquarter is responsible in addition to signing
exploration and exploitation contracts with its own subsidiaries. Moreover, in 2017, the Law of
Hydrocarbon was amended to allow Luis Sánchez, Minister of Hydrocarbons, to serves as
chairman of the YPFB as well, further limiting YPFB independence for management.
This brings us to the last point: transparency. YPFB is ranked 12 out of 74 state-owned
companies, according to the Resource Governance Index (RGI 2017). Its position is affected by
the lack of information on gas sales abroad and expenses in social projects. However, this is an
improvement over 2013, when YPFB ranked 21 out of 45 (RGI 2013). In spite of this, public
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information on the licensing process by YPFB falls short. The absence of licensing and contract
transparency threaten the Bolivian oil and gas sector (RGI 2017).
Oil is to Venezuela's economy what natural gas is to Bolivia's economy: the main source
of revenues. However, the excessive tax burden, which also applies to YPFB, creates difficulties
for the growth of the sector. As Kaup (2010b) aptly puts it, the Morales administration has been
limited to fund YPFB appropriately due to efforts to decentralize the distribution of the natural
resource rents to departmental and municipal governments. This makes it “difficult for the state
company to appear a viable investment partner in potential joint-ventures with foreign firms” (p.
27). Thus, Bolivia's dream of becoming an energy hub fades (Millan-Lombrana, Gilbert & Valle
2019, Parker 2017b). The exploratory activity that had already halted before the nationalization,
is still not reactivated. Foreign funding and know-how are crucial to making the exploration
successful (Parker 2017a).
SOC Commercial Behavior
Since the government called the re-foundation of YPFB, the company has the right to own all the
hydrocarbons, represents the state in the execution of the activities of the entire production and
marketing chain, in the signing of contracts, in the formation of companies and in the operation
and enforcement of property rights in territories of other states. Likewise, the CPE (2009) grants
it rights to commercialize gas, while being the sole importer and wholesale distributor in the
country.
Its mission is “to operate and develop the hydrocarbon chain, ensuring the supply of the
domestic market, the fulfillment of export contracts and the opening of new markets, generating
the greatest value for the benefit of Bolivians” (Mission y Visión YPFB s/f). The company also
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has a social mission, established in 2012, through Supreme Decree 1150. This decree defines the
new Corporate Social Responsibility policy that applies to YPFB’s headquarter and all its
subsidiaries.
Although the state legally regained the right to commercialize its hydrocarbons, existing
contracts of sale have limited its ability to commercialize its hydrocarbons as it pleases (…)
A 20-year supply agreement obligates Bolivia to send the majority of its natural gas to Brazil
until 2019 (Kaup 2010, p. 131).
Given its condition of a landlocked country, without new reserves and without financial
resources to increase transport capacity, YPFB has only been limited to renegotiate the prices of
the gas it exports to Argentina and Brazil.
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5. Conclusion
Bolivia and Venezuela share more than geographic proximity. In political terms, there are other
similarities. Since late 1990s, these two countries experienced economic hardships and growing
discontent with the political parties that sought to implement a neoliberal model of development
during previous years. Thus, the disarray of the political party system gave rise to outsider
candidates who campaigned to dismantle the existing political order and called for the
refoundation of the state to break free from the neoliberal model. The overriding priority of these
left leaning projects was to reduce social and economic inequalities (Luna 2010, Roberts and
Levitsky 2011, Weyland 2010). This required fundamental changes to the governance structure
of the oil and gas sector, given that Bolivia and Venezuela rely heavily on natural resource
revenues. Therefore, once in power, Bolivia’s President, Evo Morales, and Venezuela’s late
President Hugo Chávez, pursued a series of statist reforms, including the reversal of
privatizations and the openness process to foreign capitals in the hydrocarbon sector, royalty and
tax increase, contract renegotiation and asset expropriation. For all of this, these two countries
tend to be clustered together as the radical-populist wing of the Pink Tide when analyzing Latin
America’s Left Turn in early 2000s. Yet, the hydrocarbon sector in Bolivia and Venezuela have
shown different trajectories, making them interesting cases for comparison.
As discussed in Chapter 1, the performance of the hydrocarbon sector in Latin America
during the commodity price boom varies depending on the institutional setting of the sector
itself. Scholars have paid little attention to the political and socio-structural conditions necessary
for policy transformations in this sector. As the literature shows, the governing style of left-wing
governments goes beyond the “good” and the “bad”, and what they can do once in office
depends on partisan factors and path-dependent trajectories of each case. Thus, this thesis
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challenges this sectoral-institutional approach by taking into account politico-institutional as well
as structural variables to explain the dissimilar performance in the hydrocarbon sector in
countries that share the same programmatic agenda. More importantly, it addresses the
fundamental question of how institutional transformations are made possible. I propose a
typology to try to understand constraints and opportunities for policy shifts, creating different
types of governance structures that will eventually help to predict how the sector will perform.
The analysis of the performance of the hydrocarbon sector during the commodity price
boom, as shown in Chapter 2, reveals that Latin American countries reacted differently to the oil
price increase. In rational economic terms, if price increases, investment and production should
move in the same direction, leading the sector to perform well (Balza & Espinasa 2015). Instead,
the reaction of the hydrocarbon sector to market signal across selected cases of Latin America is
far from uniform even when comparing governments that represent the more radical
programmatic agenda within the wave of left-leaning political projects that arrived to power
from 1999 onwards. Indeed, in Venezuela production declined despite slightly higher investment
levels, whereas Bolivia’s gas output increased even though there was a lower number of rigs
working. What accounts for this variation is a set of politico-institutional factors and path-
dependencies that either allowed or prevented presidents Chávez and Morales to implement
significant policy shifts in the hydrocarbon sector.
The Venezuelan case, in chapter 3, is the typical case in which partisan factors
fundamentally create opportunities to government action. Leaders are not only able to carry out
their political agenda without setbacks, but to intervene in the administration and management of
the hydrocarbon sector as they please, crafting a Discretional State Monopoly governance
structure. Despite the inexperience of the MVR in the electoral arena, its leader, President Hugo
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Chávez, quickly consolidated great popular support among an atomized and alienated social base
with the traditional political parties. Once in office, they delegated in his leadership solving the
economic and political problems of the country. This extreme popularity, along with his
charismatic authority and the lack of organic ties with the ruling party, gave him a high level of
autonomy to concentrate more power in his hands, erode checks and balances by circumventing
the institutional opposition installed in the National Assembly, and transform the established
institutions. Thus, Chávez carried out a set of statist reforms in the oil industry that went beyond
the initial terms of his political agenda. The reform of the Hydrocarbons Law in 2001 put an end
to the openness process to private capitals that had begun in the 1990s, increasing royalties and
taxes and establishing state control in all upstream activities (exploration and production) for all
new and ongoing projects. As Chávez gained control of the institutions, he not only exacerbated
his rent-seeking behavior, but also the authoritarian, top-down character of the policymaking
process, leading to a major intervention in the oil sector. He was able to create parafiscal
mechanisms to redistribute the rent at his will, expropriate assets and renegotiate contracts,
interfere in the operational management of the state oil company PDVSA, appointing managers
and technicians based on political allegiances instead of professional merits, divert resources
from the company for non-oil related activities and redefining the commercial strategy of
PDVSA based on regional geopolitics at the expense of company’s autonomy, financial
sustainability and transparency standards. As a result, the Venezuelan oil industry was unable to
leverage the oil boom and, conversely, faced a 19% decline in oil production (BP 2018). The
evidence suggests that the modest increase in drilling activity after 2004 was not enough to offset
the natural decline of oil wells. The prolonged lack of investment consequently led to lower
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levels of oil production decreased, a downward trend that began long before the collapse of oil
prices in 2014.
Bolivia, unlike Venezuela, reflects the case in which partisan and, fundamentally non-
partisan factors, impose restrictions to government actions. In this case, there is a complex
interaction between the leaders and their social base of support and a set of structural conditions
that hamper government ability to carry forward its radical political agenda. Therefore, the
government is forced to negotiate the terms of the institutional transformations necessary to gain
control over the administration and management of natural resources while fulfilling social
demands that ultimately brought the leader to power, shaping a Distributive State Monopoly in
the hydrocarbon sector. This governance structure enables the government to capture a greater
portion of the natural resource rents and to establish institutional mechanisms for the distribution
of the resource wealth. However, the government is unable to exacerbate its statist approach in
the management of the resource due to the limits posed by the institutional opposition and the
path dependencies steaming from country’s development model.
As shown in chapter 4, party institutionalization in Bolivia is as low as in Venezuela, as
the MAS ruling party was relatively new in the electoral arena when Evo Morales came to
power. Although the MAS is a hybrid political organization, linkages between this “political
instrument” and its constituents are stronger than those of the political coalition that brought
Chávez to power in Venezuela. Morales’ popular support from indigenous peasants and coca
growers is rooted in years of social mobilization during the crisis of neoliberalism and
representational institutions. Moreover, MAS has linkages with urban constituents built over the
course of the natural resource wars. This results in a complex social dynamic between the leader
and his supporters. Although “Morales has centralized power within MAS” (Anria 2010, p. 113),
106
his leadership is dispersed and remains accountable to an autonomous popular movement
organized from below (Levitsky & Roberts 2011). Therefore, Morales’ arrival to power reflected
a clear mandate to address long-held demands mentioned before. Among those demands were
recovering the ownership of natural resources and YPFB assets as well as obtaining greater
benefits from gas exports. So, Morales unlike Chávez was brought to power to implement
reforms in the hydrocarbon sector approved in a referendum held two years before he assumed
the presidency. In doing so, he was not only less autonomous given the internal logic and
organization of the ruling party, but was also constrained by the opposition's organizational
capacity, the weakness of the central state, and the path-dependencies of the natural resource-led
development model.
Thus, institutional transformations of Bolivia’s hydrocarbon sector were limited to
recovering state ownership of the natural resources, increasing royalties, renegotiating contracts
with private companies and controlling the ownership of oil and gas companies, while
decentralizing the distribution of natural resource wealth. The Morales administration was only
able to advance a partial and much less radical transformation compared to Venezuela, given the
weak administrative capacity of the state and the state-run firm YPFB. The significant
dependence on Brazil and Argentina’s natural gas markets was also salient, as Bolivia is a
landlocked country that heavily relies on natural resource revenues. This forced Morales to
negotiate the distribution of natural resource rents and the terms of participation of private
companies in conditions similar to those in place in Venezuela prior to 2004. Moreover,
Bolivia’s government has issued legislation to attract local and foreign private capital.
Transformations within Bolivia’s hydrocarbon sector show mixed results to say the least. After
all, gas production steadily increased until oil prices collapsed, and investment reached a
107
stalemate. Despite the limited growth in the number of rigs, gas production increased 114% over
the 10-year span of the commodity price boom, or 75% since 2006 (BP 2018), when Morales
nationalized the hydrocarbon sector. Meanwhile, state-owned company YPFB is yet to be re-
institutionalized.
The analysis of the performance of the hydrocarbon sector in Bolivia and Venezuela
sheds light on the reasons why governments with the same programmatic agenda approach
energy policy choices differently, resulting in a different governance structure for the oil and gas
industry. Moreover, it shows the need to complement sectoral-institutional approaches with
politico-institutional and socio-structural variables to better understand policy transformations
and performance outcomes in the hydrocarbon sector. The cases of Venezuela and Bolivia show
that major institutional reforms in the hydrocarbon sector took place in countries in which the
government was able to squeeze pro-market regulations and, to a greater extent, alter property
relations to favour the State. In contrast, those governments that worked with pre-existing
institutions governing the hydrocarbon sector lacked access to the state apparatus and were less
autonomous from civil society. Therefore, analyses of the political economy of the hydrocarbon
sector should pay greater attention to partisan and non-partisan factors that constrain government
action. I find that low-constraint cases are more likely to attain radical policy shifts that
ultimately alter the sector’s trajectory, whereas high-constraint systems are more likely to make
piecemeal reforms and preserve the status-quo in the hydrocarbon sector.
Those constraints are at least as important as the sectoral-institutional variables that shape
the governance structure of hydrocarbon sector. Taking these high or low levels of constraints
into consideration produces a different taxonomy of governance structures of the hydrocarbon
sector of those already available, which are as dichotomous as the initial classifications of left-
108
wing governments. Particularly, it introduces distinctions within the radical current of the Left
until now treated as a single group. Venezuela appears to have more opportunities for
government intervention into the hydrocarbon sector given the autonomy President Chávez
enjoyed from the ruling party PSUV which, in turn, translated into greater concentration of
power in his hands. In contrast, Bolivia is highly constrained to further intervene in the
management of the sector because of endogenous factors and, more importantly, because of
exogenous factors. Demands from social movements have certainly pushed the Morales
administration to decentralize state funds and redirect hydrocarbon rent to the departmental and
municipal governments. Yet, Bolivia’s embeddedness in a natural resource- led development
model highly dependent upon its regional trading partners along with the inheritance of an
industry lacking investments in exploration, human talent and financial resources, put limits to
government actions, which in turn created a more stable, friendly environment for the sector's
operations. In sum, chapters 3 and 4, confirms Luna’s assertion that:
“ (…) analyses of the economic policies or of the broader development model that leftist
governments should pay more attention to the social, political, and institutional variables in which
those models are necessarily embedded, as well as to the sociopolitical coalitions that make them
workable (or not) in the long run” (2010, p. 38).
A brief comparative analysis of the Brazil and Argentina cases validates the merits of the
main argument in this thesis. In Brazil, Luiz Inácio “Lula” Da Silva, leader of the Workers' Party
(PT in Portuguese) came to power after several years of experience in the electoral arena and
government administration. This progressive institutionalization of the party system (Flores-
Macías 2012) and of limits to presidential power (Hipólito-Ramos 2017) prevented Lula from
eroding checks and balances, particularly the legislature. The PT had to negotiate with both its
political allies and the opposition to pursue its agenda. Although Lula stopped privatizations, he
maintained the status quo in many policy areas, including the oil sector. In other words, given the
109
constraints imposed by endogenous factors, the institutional transformations of the oil sector that
occurred in 1997 under the government of Fernando Henrique Cardoso continued after Lula
came to power. These reforms included the creation of a regulatory agency to manage natural
resources, opening the sector to private participation and restructuring of state-owned oil firm
Petrobras (Balza and Espinasa 2015). As a result, the oil sector could leverage itself in the price
boom and increase oil production 64% in that 10-year period (BP 2018). The recent corruption
scandals and the possibility that Brazil will become an energy power with export capacity will
most likely put this governance structure, that I have named Institutionalized State Participation,
to the test.
In Argentina, in contrast, Néstor Kirchner, of the Front for Victory (FPV in Spanish), a
faction within the Peronist Party, came to power in 2003 with an ambiguous agenda and
diminished popular support (Flores-Macías 2012). This, first of all, translates into more
autonomy for government actions. As in the case of Venezuela, President Kirchner’s supporters
delegated to him the responsibility of fixing the economic and political problems that led
Argentina to the 2001-2002 political crisis. Kirchner and his wife, Cristina Fernández, who
replaced him in 2008, “had special powers to make decisions that would normally have fallen to
Congress” (Vásquez 2016, p.14). Second, the government coalition tends to be flexible and more
pragmatic in its policy orientation, which is why it tends to operate according to the preferences
of the party leadership and the social, economic and political context (Roberts and Levitsky
2011), which in this case reflects the importance of exogenous factors. The result is a
contradictory governance structure, that I call State Control in Disarray. On the one hand, the
government intervened in the industry by implementing restrictive policies for the sector's
operations (Balza and Espinasa 2015, Vásquez 2016) as a cap on exports, regulation of gas
110
tariffs and foreign exchange control. On the other hand, they have tried to attract new
investments for the development of shale gas in order to increase gas production (Liendo 2012).
As a result, Argentina's hydrocarbon sector reflects a poor performance equivalent to a 21% drop
in natural gas production between 2004 and 2014 (BP 2018).
A more complete analysis of the social base configuration of the political party and of each
country’s path-dependencies would be necessary to assess the importance of endogenous and
exogenous constraints on the adoption of less radical resource nationalist policies. The arrival of
Andrés Manuel López Obrador (AMLO) to Mexico’s presidency on December 1, 2018, would
be another intriguing case to analyze. Will he be able to intervene in the management of the
hydrocarbon sector and to what extent he will be bounded by partisan and/or structural factors?
He has stated that intends to tackle corruption created by neoliberal policies, while investors fear
that he will undo the 2014 energy reform (Cattan & Martin 2018). Although AMLO’s
government coalition, Movimiento Regeneración Nacional (MORENA in Spanish), enjoys a
majority of deputies in Congress, it does not fully control de Senate which could limit him to act
freely (De la Rosa 2018). The state-run oil firm Petróleos Mexicanos (PEMEX in Spanish) faces
important operational and financial constraints, aside from transparency issues (Moy 2019). I
leave this case for future research as the analyses presented up to here are already a sufficiently
complex story of governance in the hydrocarbon sector and its implications for performance.
Before exploring further researches, I want to highlight lessons learned from cases
analyzed in so far. When designing and analyzing public policies, context matters. This thesis
focuses specifically on the domestic context. That is, the dynamics between society and the
government and the socioeconomic structure of the country in which they are embedded, as well
as the policies that the government can carry out when taking into account these variables.
111
Certainly, policies can also be influenced by international factors and this can be the subject of
future debate. What concerns us here is the perennial challenge of countries highly dependent on
natural resources in moving towards a governance structure that allows, on the one hand, the
long-term sustainability of the hydrocarbon sector backed by strong institutions and, on the other
hand, that this long-term plan should be consistent with the development model of the country
that is to be achieved and that, consequently, go beyond governments and/or regimes to become
a state policy.
The cases of Venezuela and Argentina are clear examples of energy policies that keep pace
with a pendulum and depend on the government in office, resulting in poor performance of the
hydrocarbon sector. Moreover, in the Venezuelan case, the high dependence on oil revenues
leaves the country's economy devoid of resources when fluctuations in oil prices occur, with
catastrophic consequences for society. Bolivia has left us with a lesson learned on how to
decentralize via institutional mechanisms the distribution of the wealth of natural resources
through municipal and departmental governments, reducing the discretion of the executive in the
distribution of it. As we saw, too much decentralization could also be troublesome. In the case of
Bolivia, the fiscal policy of not increasing public spending at times of high income is also
notorious, which has allowed it to overcome the fall in oil prices with a better financial position.
This is a challenge to the ‘Paradox of the Plenty’ of Terry Lynn Karl (1997), who points out that
in times of high-income, governments tend to overspend. Neither the Venezuelan nor the
Bolivian case has achieved the diversification of the economy and the use of resources as a
mechanism to leverage development and reduce inequalities ─ arguably the narrower goal the
Left had when it came to power. Faced with this failure, in terms of economic, and more
particularly of energy policy, Bolivia and Venezuela show more continuity than change.
112
Therefore, in the search for the most appropriate governance structure, best practices in
other countries should be considered, as is the case of Norway, whose extractive model continues
to be the most successful model in the management of natural resources known to date. And in
this, the distribution of wealth plays a fundamental role. Norway has been concerned with
investing wealth and diversifying the economy, mitigating the effects on the economy of the
distribution of wealth internally. To achieve this, it is necessary to build trust in the institutions
of the state and in consensus with society. In doing so, the establishment of a regulatory body,
independent and autonomous, could be a good point to start.
These cases also open the doors to a broader research agenda of the comparative political
economy of the hydrocarbon sector. Future lines of inquiry might include the incorporation of
social and environmental variables along with endogenous constraints, and going beyond the
government’s ideology and the Latin American regional context. That is, testing the model by
assessing the performance of the hydrocarbon sector in countries such as Russia (natural gas) or
Canada (Alberta oil sands) and how these cases fit within the typology of governance structures I
developed in this thesis. Setting aside considerations regarding data measurement and
availability across cases of study, which might make quantitative comparison difficult, it would
be interesting to analyze how politico-institutional factors and variation in the socio-material
traits of the oil and gas industry in these two countries, particularly its transport infrastructure,
affect sector performance. Moreover, with the development of new energy resources, such as the
case of Guyana to cite one example, further research on the intersection between the
development and governance of natural resources is pertinent.
113
Appendix A
Variables and Indicators
Constraints to government action are assessed along two factors: 1) endogenous or partisan
factors, namely parties’ organizational patterns, mobilization strategies and configuration of its
social base; party institutionalization and locus of political authority; and 2) exogenous or non-
partisan factors; such as organizational capacity of the opposition and structural factors derived
from country’s development model. The assessment along these two variables is measured
according to the following codes: elements that introduce high level of constraints into
government action are coded positive (+); whereas elements that create opportunity for policy
shifts are coded negative (-). The degree of openness in the petroleum sector is measured along
four sectoral-institutions variables: sector organization and governance, distribution of the oil
rents, corporate governance of the state-owned enterprise (SOC), and SOC’s commercial
behaviour. They are scored according to the following codes: policies and/or actions that
represent higher degree of openness in the petroleum sector are coded positive (+), and policies
and/or actions that allowed for greater state intervention within the sector are coded negative (-).
Dimensions of Analysis: Degree of Openness in the Hydrocarbon Sector
Variable Indicators
Hydrocarbon Sector
Organization and
Governance
Management separation: Clear management separation exist among
oil and gas policy making (executive), regulation (autonomous
entity), and commercial operations. The roles and responsibilities of
different ministries and agencies need to be clearly defined and
enforced. This helps to avoid overlapping or conflicting competencies
and roles in policy- and rule-making, and monitoring. At the same
time, it prevents gaps in regulatory responsibility (+).
High turnover rates of Ministry/Regulatory Agency (-)
Commercial activities: (+) the openness of the hydrocarbon
production and refining market in the country to non-SOC
participants. (-) Joint ventures and/or other alliances exist between
the SOC and third parties domestically and/or internationally in order
to promote efficiency and new technology assimilation.
114
Revenue Distribution Fiscal regime: The extent to which the oil revenue is appropriated by
the government. The fiscal regime (royalties, taxes, dividends, cost
sharing, profit sharing, and so on) is clearly defined for all sector
participants. Whether the income goes to the National Treasury or
another national account. If so, then (+); if not, then (-).
Fiscal sustainability: (+) The fiscal regime for SOC and non-SOC
participants in the upstream sector allows/attracts the level of
investment and operating results established by the government. (-)
The fiscal regime permits the SOC & POC attract the appropriate
amount of external financing. The SOC could be forced to increase
commercial debt to transfer the money borrowed to the government.
Therefore, it expropriates future revenues of the company.
SOC Commercial Behaviour Capital expenditure. Level of expenses in the upstream sector. 2/3
or more of total expenses (+); less than 2/3 of total expenses (-).
Expenditure in non-oil related activities. the SOC share of non-
commercial expenditure to total expenditure captures the relevance of
a SOC’s corporate social responsibility expenditure, which can
include malaria awareness campaigns, the construction of schools,
clinics, public roads, and similar projects (-). In countries with low
public investment management capacity, the NOC is often viewed as
the most competent managerial organization. As such, the NOC is
may be asked to manage projects with little or no relationship to oil
or gas. In fact, these NOCs become contractors on behalf of the
government.
SOC Corporate Governance Ownership structure and Organization
Independence of the BOD. Independent boards of directors are
thought to be more effective in sheltering the NOC from political
interference (regardless of whether or not the SOC is partially
privatized), allowing it to focus on achieving its goals (+). How
members of SOC's Board of Directors are appointed, by who, and
turnover rates.
Independence of SOC capital and budget processes. The ability of
the SOC to finance its operations is crucial to value creation. If the
SOC is given too little financial and budgetary autonomy from the
state, it will likely hamper the SOC’s efficiency and may increase the
cost of doing business (-). On the other hand, too much financial and
budgetary autonomy may be a disincentive to improve efficiency.
SOC Transparency. State-owned companies (SOCs) often play an
influential role in sector governance. Given their unique institutional
status and frequently high levels of authority, SOCs often operate
with limited oversight and accountability (-).
Human resources. Industry capacity measured as availability of
labour force and its know-how (experience). Too much political
allegiances (-).
Dimension of Analysis: Level
of Constraints to
Government Actions
115
Partisan Constraints Locus of Political Authority. It distinguishes between parties that
concentrate power in hands of a dominant personality (-) and those
that disperse power more broadly within a party organization or
social movement networks (+).
Presidential Power. Ability of the executive power to get his/her
legislative initiatives enacted.
Party Institutionalization: The level of institutionalization of the
party or movement that supports the leader. Whether it is a
established party organization (+) or a new party vehicle is created (-
). Established parties: parties' organization structure, support
networking and identities are longstanding; they compete in elections
well before the onset of the left. Newly created parties or movements
work as a vehicle to challenge the political establishment during the
1990s-2000s crisis. There is a more clientelistic linkage between
party and voters.
Party Linkages (Party Social Base Configuration). The nature and
strength of the linkages political parties for with mass constituencies.
It might include indicators of party identity, political ideology and
links with labour unions. Strong ties increase level of constraints (+).
Non-partisan Constraints
and Path Dependence
Organizational capacity of the opposition. Organized opposition
increase levels of constraints (+). Weak opposition decrease levels of
constraints (-).
Path-Dependencies: 1) Socio-material characteristics of the natural
resource sector (physical traits, underlying scarcity, variation in
quality or grade, and distribution around the globe). This includes
high (+) and low (-) dependence on natural resource rents 2) The
extent to which neoliberal reforms in the sector were advanced and
role of the SOC in determining its commercial policy. The more
advanced, the more difficult to undone (+).
116
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