Book Reviews

The New Governance of Venezuelan Oil, by Bernard Mommer, Oxford, Oxford Institute for Energy Studies, 1998, ISBN 1 901 795047, 80 pages, bibliography

Venezuela is one of the founders of OPEC with which it now only has a tenuous relationship. It spearheaded economic nationalism in building a "rentier society" living off oil income continuously increased by foreign investment, higher production, higher prices and higher tax income extracted by continuous bargaining. Driven by forces of nationalism, it nationalised the foreign-owned and operated oil industry in the 1970s, built up PDVSA as one of the leading state petroleum companies. Now, under the impact of the oil price declines of the mid-80s (and again the late 90s) and a series of internal economic, financial and political crises, it has reversed its policy into a general "apertura" (opening) and has brought back the international oil companies through a series of tortuous deals where the legal and political obstacles of the nationalist period were interpreted away to create deals which are in effect concession contracts, but under the cloak of services rendered to the state oil company. This is, in short, the subject of the study in contemporary petroleum history presented by Bernard Mommer, currently a fellow at the Oxford Energy Institute and former senior planner with PDVSA.

After a brief summary of the legal and contractual development since 1900, Mommer focuses on the nationalisation after 1973, the relation between the government and PDVSA, including issues of OPEC (mainly Venezuela's disregard of quotas) and the domestic market. The main focus is then the "apertura" policy initiated in 1990. He quotes the then PDVSA chief executive with his disdain for the political and regulatory process, for OPEC ("should be converted into a research centre cooperating with the IEA" and his ambition to make PDVSA into a commercial international oil company. Mommer describes the setting of the legal foundation for the opening, mainly through PDVSA itself, which was less through constitutional and legislative change than through imaginative re-interpretation of existing laws. On this basis, and with PDVSA becoming in effect the government's licensing agency, a series of contracts were signed between PDVSA and foreign oil companies which in essence - though not in form - are similar to the traditional concession, as it has re-emerged in Norway, the UK, Argentina and now Brazil and Peru. Hallowed principles of Latin America - such as the Calvo-clause, the rejection of international arbitration - were given up.

Governmental control is exercised in essence not that much different from the regulatory control exercised, e.g., by the UK Department of Trade and Industry. On the tax side, the tax philosophy which allowed the government as landowner maximise its rent from the land-using oil industry in the past (the minimum 1/6 royalty as a charge for depleting non-renewable resources; special oil and additional profit taxes) have been partly given up, partly much flexibilised in response both to the high-cost heavy crude acreage, the decline in petroleum prices, global competition for investment and the model role played both by US (income tax) and UK (phasing-out of special petroleum levies). His review of contracts is the most up-to-date so far done for any major producer country. Mommer raises several very interesting issues in the context of his analysis: The effect of changing national governance patterns on the oil price - his thesis being that nationalisation led to an excess of greediness by the producing countries which was ultimately self-deafeating; the inability of producing societies (see the similar results reached by George Philipps, the Political Economy of International Oil, 1994 and earlier work by Hartmut Elsenhans, Abhaengiger Kapitalismus oder Buerokratische Entwicklungsgesellschaft, 1981) to put oil income to good use supporting the "curse of natural resources endowment" concept; the fact that a state company will develop its own dynamics and separation from the state, with interests similar to those of a foreign investor, but with the ability to get away with it since without the label "foreign" it is protected from the political anger directed at corporate practices only if carried out by foreign entities; the use of the concept of "ground-rent" for landuse to explain the features of mineral taxation and the close relationship between oil taxes and the social, political and economic features of the "rentier society" unable to survive and addicted to oil taxes. Many of these issues are worth further thought and development. This is just the budding application of such concepts as governance systems, rent capitalism and the landlord-tenant perspective on international oil&gas investment.

I would wish that the author now continues to broaden his perspective from Venezuela to other producing countries (developed and developing) and questions established concepts of mineral taxation in the broader context of both tax generation and tax use (and its economic and political implications). I have also not been able to fully identify the Mommer's views on the developments he analyses: Does he suggest the Apertura and the gradual relinquishment of tax demands for depletion of a non-renewable resource is wrong - from an economic or environmental perspective? What are the options that oil-producing societies have in the current scenario? Is the go-for-maximum-production approach in Venezuela justified under current global and national circumstances - would a Norwegian policy of restraint (combined perhaps with economic diversification) make more sense? What institutional setting is appropriate for the current situation in Venezuela (as in Peru, Argentina, Brazil, Nigeria, Indonesia, Malaysia, and perhaps even Saudi Arabia, Kuwait and Abu Dhabi)? Is it not better to assign licensing and regulation to a Ministry, try to develop PDVSA (and its sisters) into increasingly privatised international oil companies and promote diversification by national private petroleum investment?

To sum up: This is a timely, interesting, very up-to-date analysis of the problems now confronting the developing country petroleum producers which raises questions for both policy and academic investigation in the next decade.

Thomas Wälde CEPMLP/Dundee