Photo: Shorthand.Social

The long and chaotic process leading to the statization of the oil industry on January 1, 1976, started with President Carlos Andrés Pérez’s initiative to create a commission through a decree on March 22, 1974, scarcely ten days after taking office. This process changed the dynamics of the entire region, and paved a new path for Venezuelan economy.

Its first article reads: “An ad-honorem commission is created to study and analyze the alternatives to carry out the reversion of concessions and the assets tied to them, so that the State takes control of the exploration, exploitation, manufacturing, refining, transport and marketing of hydrocarbons. The commission must focus its recommendations based on the proposal of a national energy policy that takes into account the entirety of our energy resources and the country’s long-term needs.”

The commission was chaired by the Mining and Hydrocarbons Minister and made up of a long list that included every sector linked to the oil industry. The commission was given six months to produce results. On December 23, the commission delivered its report, a rationale and a Draft Framework Law that gives the State full control over the Hydrocarbons industry and trade. On March 11, 1975, the Mining and Hydrocarbons Minister presented the Draft Law before the National Congress for discussion. Thus started the parliamentary debate, perhaps the last in-depth discussion about the oil industry in Venezuela. Not a small thing, considering its great importance.

Article 5 left a window open for the State to contract oil industry activities with foreign companies.

On April 2, the National Congress created the Special Sub-Committee of Oil Nationalization that convened a period of consultation between April 15 and May 8. All actors gave their opinions during this process. Considering the relevance of the oil matter, the list was very long and the sessions were exhausting. Article 5 was the hardest, followed by articles 1 and 12. The final speaker was lawmaker Celestino Armas, since lawmaker Arturo Hernández Grisanti, head of the Permanent Committee on Mining and Hydrocarbons, chose not to participate in the debate and left Congress. The Chamber of Deputies made changes to article 5 and, when the text for the Law reached the Senate, life senators Rómulo Betancourt and Rafael Caldera took the stand, as well as Gonzalo Barrios, then National Congress Speaker. The three speeches constitute historical documents about the oil debate, since both contextualized the events in national history, reminding us about the long process that led to this decision.

Oil_Statization_Venezuela

Besides the Draft Law presented by the Committee, other two projects were discussed: that of the MEP and that of COPEI, both coming from the Sub-Committee and later reaching the Chamber of Deputies and the Senate. Today we know, thanks to a party’s confession, that President Pérez himself penned article 5. He said so in the book Carlos Andrés Pérez: memorias proscritas written by Ramón Hernández and Roberto Giusti. He said: “My mind was so clear at the moment of oil nationalization, that we imposed article 5 of the Oil Law, which Juan Pablo Pérez Alfonzo called a floppy nationalization, while Caldera said that it wasn’t an oil nationalization but an “oil giveaway”… Article 5 was my idea. It wasn’t easy to include it in the law. I persuaded Rómulo Betancourt about the need for it, but many in the party didn’t agree, especially Arturo Hernández Grisanti, who left Congress. He asked for permission not to vote on the Law of Nationalization due to article 5. That’s history.”

In hindsight, the controversy reached astonishing extremes. Article 5 left a window open for the State to contract oil industry activities with foreign companies. Moreover, these associations always included a larger percentage for the State. It’s amazing that something so elemental made Pérez Alfonzo call the nationalization floppy for that reason. On May 7, 1975, in the Sub-Committee of Oil Nationalization, a radical Pérez Alfonzo said: “The best nationalization is that which excludes joint ventures; but it’s important to take that step as soon as possible, even though this is another floppy nationalization.” The former was a reference to iron statization, which the expert called floppy because it didn’t completely shut the door to the involvement of foreign companies in the iron industry. Obviously, the oil matter (and foreign companies) had become an obsession that surpassed the boundaries of reason.

Reading the Chambers’s Journal of Debates is shocking, since it’s mired with all sorts of exaggerations. The best speeches were those of Betancourt, Caldera and Barrios, who argued for synderesis, while Pérez Alfonzo insisted on its fundamentalist stance against foreign companies and, also, on the need to reduce oil production, given its effect on Venezuelan society: “We need to entirely scrap foreign investment in oil… therefore, I don’t think there’s a need for the State to create joint ventures with foreign investments… the fair and convenient decision would be to reduce production and prevent the depletion of that extraordinary resource with this policy of waste.”

Article 5 was approved on July 9, with 104 votes from Acción Democrática against 94 from the opposition.

Lastly, once all propositions were examined, article 5 was approved on July 9 with 104 votes from Acción Democrática and two from Cruzada Cívica Nacionalista, against 94 from the opposition. We reproduce here the final text of the controversial article 5, not before restating our shock: “Article 5°. The State will exercise the activities established in Article 1° of the present law directly through the National Executive or through entities owned by it, which may enter into any necessary operational agreements to better perform its functions, but in no way will these proceedings affect the very essence of the attributed activities.

In special cases and when deemed convenient for public interest, the National Executive or the aforementioned entities, in the exercise of any of the indicated activities, will be able to enter into association agreements with private entities, with such a participation that it guarantees the control on the part of the State and with a determined duration. Entering into those agreements will require prior authorization of the Chambers in joint session, within the established conditions, once they are duly informed by the National Executive of all pertinent circumstances.”

The best defense for the article was made by then veteran Betancourt, as his last central speech about the oil matter in national public life. Betancourt said: “I’ll say that I fully support that article 5, which doesn’t establish but two possibilities: the possibility of operational contracts with the headquarters that will manage the entire industry; or of association contracts, which the Federal Executive couldn’t make without the support of Congress, with both Chambers gathered in joint session. This possibility of associations, since there’s no mention in article 5 about joint ventures, bears some similarities with those escape valves established in the ‘61 Constitution and in the Hydrocarbons Law of 1967 to avoid tying the State’s hands. We could see a moment in which it might be favorable and necessary for the country’s interest to enter into an association agreement. I don’t see that agreement becoming a new phase for giveaways, because I believe in Venezuela and I believe in Venezuelans; because I know that there won’t be any more dictatorships here and that only dictators are capable, out of venality or for other reasons, of disrespecting national interest.”

The process of creating the law concluded with its promulgation and publication in Official Gazette on August 29, 1975, with the final title of “Framework Law that Reserves the Industry and Trade of Hydrocarbons to the State.” This was the end of a long phase and the start of another in Venezuela.

On December 31, 1975, all concessions expired and the control of national oil activity was assumed by the company created by President Pérez on August 30, 1975: Petróleos de Venezuela, S.A. (PDVSA). The Board of Directors was established in accordance with Pérez’s idea regarding political meddling in the leadership of the nationalized industry.

The justified belief was that anything that was touched by party politics fell apart.

Let’s keep in mind that there was much prevention in public opinion about this matter back then. The justified belief was that anything that was touched by party politics fell apart, and that wasn’t the intended fate of the nascent company. Pérez was emphatic about this. He appointed as chairman of the company, a citizen with an impeccable and exemplary track record in public management, respected by everyone: general Rafael Alfonzo Ravard, who was also an engineer graduated from MIT (Massachusetts Institute of Technology) and had entered public life in Guayana in 1953, heading the Committee of Studies for the Hydroelectric Development of the Caroní River, and was later chairman of EDELCA (Electrificación del Caroní, C.A.), chairman of the Venezuelan Corporation of Development and the Venezuelan Corporation of Guayana, dedicating his entire administrative life to developing the south of the country. Back then, no other Venezuelan had the public management and ethic credentials that general Alfonzo had. Pérez chose well and the country felt it.

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22 COMMENTS

  1. The voting on Article 5 was 104 yes and 94 no’s ; all YES essentially coming from AD and the NO’s from all other parties. This vote illustrated the tragic influence of ideology on Venezuelan politics and largely explains the reasons why the oil industry has finally collapsed. Even the so-called right parties, like COPEI voted NO. The curse of Venezuelan politics has been statism, the perverse belief that the State should control and run all “strategic” industries. This belief persists today and has been a main factor in the collapse of PDVSA but many of the most important Venezuelans were (and are) afflicted with this curse. Perez Alfonzo objected to the Article, Hernandez Grisanti left Congress in disgust. Alll politicians of note fought each other publicly in order to be more “nationalistic” and “patriotic” than the others. This has been going on since the last century and it is still running strong.
    Chavez has been the extreme case of this curse. He really applied the coup de grace to the oil industry, with the help of the thieves that led the company during his tenure. Today, in spite of facing the tragic facts, many political “leaders” still talk of the oil industry as reserved for the control of the State. Ignorance? Stupidity? Blind ideology? False nationalism? Probably all of the above

    • It’s somewhat nice to see, finally, recognition that the oil industry was nationalized in 1976 (not under Chavez as many appear to believe). Not to be too egocentric, but I’ve been saying “1976” for a couple of years here. The upshot of it all was the beginning of an exodus of the gringos. There was a transition period, as I recall, of about four years, a phase-out of the gringos. As the gringos gradually left, of course it didn’t have an impact on the housing market or on national consumption numbers, or any of that, but it did impact sectors of the economy. Places they used to frequent felt the impact, and companies they did business with felt the impact, and so on out the “affiliation chain” if you will. It was not just oil people who left. Some probably left simply for personal reasons. There were fewer Americans in American schools, for example. And it was not just Americans who left. A lot of Venezuelans also saw that the writing was on the wall. They moved to the U.S. along with their American friends.

      The thing not accounted for in the mathematics and the money, was the moral content exiting the country. Talk about synderesis – a fancy word for the philosophical principal that man is intuitively capable of telling right from wrong – they kind of ignored that, since money was the key. And of course, there was the Cuban socialist machination, thed foul putrid stench of “Marxism” – which the Americans would have no part of, being capitalists.

      The thing you learn in life is that sometimes it is better to pay someone, than to try to do it yourself. That sounds anti-capitalist, really, the idea that you can’t keep all the profit for yourself. But capitalists have learned the pitfalls of just being plain greedy. And monopolies simply do not work. It takes all the competition out of it, takes all the fun out of it.

      We Americans – the ones the commies call “gringo” – didn’t have a choice. We had been invited to leave. No problem. We were never there to create a problem. The Caballo de Troya was not the American oil interests, it was communism. Y le abrieron las puertas.

      • Gringo, This article has nothing to do with Americans. You missed point and write a romanticized off topic comment. Westerners (Americans included) were keen to work in Venezuela thru the 1980’s and 1990’s. Under Chavez and his disasterious policies to consolidate power that change. There was no crystal ball in 1976 that US citizens gazed into and foresaw the disaster Venezuela has become. Nobody in their right mind predicted in 1998 that Chávez could transform the country into a dictatorship. I’m not saying there weren’t many many many people that didn’t realize that he wanted to be a dictator. But most people thought he would fail. It could have easily gone the other way and Chávez could have been ousted democratically and the country spared a lot of hardship. Remember the 2002 coup. It failed but barely. My point is that the US citizens that left and the majority that stayed or were replaced in different capacities (re: JV’s by a different name) had little to do with how Venezuela history turned out. They were there to get oil out of the ground. Not serve as the saviors of Venezuelan civilization. They couldn’t have had that effect.

  2. I also read the debate on article 5 and with very few exceptions they revealed the utter ignorance of the speakers on how an oil business works and their delusional views of what might be of national interest in years to come ………., they were mired in a dramatized pseudo heroic pretentious perspective where being absolutely belligerent in their opposition to any future involvement of international companies in the oil business as representing a betrayal of the most sacred principles . That cast of mind I fear is the most prevalent in many venezuelans mind , makes you tremble for democracy that it can make such views fashion the countrys policies in regard to Venezuelas oil industry. The nationalization was necessary becaue the concessions were expiring in a few years and meantime the concessionaires were stopping all investments fearful that they would not have enough time to recover their investments , also a single national company professionally run with a strategic sense of what could be accomplished could optimize operations and yield better business results . A business cannot be ruled by politically partisan or ideologically dramatics , this is something that the average venezuelan can not understand , therein our tragedy as a country ……..!!, Grisanti Luciani was an ass.!! When an explanation was given to him by Pdvsa general counsel Aguilar Mawsdley on how the Veba deal operated which wasnt that accurate he lapped it up not realizing that the true benefits of the deal were not being mentioned …….!!

  3. Well, respecting that PDVSA did operate for a number of decades more-or-less efficiently, Venezuela’s oil nationalization was a mistake, as opposed to letting multinationals run the show efficiently, and squeezing them prudently tax-wise when necessary. A management consultant friend once estimated that as late as the 1980’s only 5 Govt. oil industry tax collectors were needed to fund the Country, thereby eliminating the bloated Ministry Of Finance, and all other Venezuelan taxes.

  4. It was not a mistake because there are suboptimal results when a national oil industry is exploited by 5 to 10 different profit centres each looking after its own world wide profits (so that maybe its best to run up your production in Nigeria or Malasya rather than developing a long term market for specific venezuelan crudes , having a country strategy rather than 8 different corporate strategies means that too often something falls between the cracks……..

    When nationalization came the best of the international oil companies had been developing the local talent for years and could rely on these to run their business without having to bring in expensive expatriates to do the job , when nationalization came , most of the managerial staff was local , even at the upper levels …nationalization had been something foreseen and planned so not many expatriates were needed to run the companies in the end……, in fact there was some effort to take abroad quite of few of the local managers to serve the international companies elsewhere ……..the govt imposed a limit to the number of locals which the international companies could take from the country on nationalization , in one large company they limited the number of locals which they could take abroad to maximum 17.

  5. Bill,
    You pose one theoretical argument for nationalization, among a long list of possible pros. I am not sure why you pick on that particular point, since history shows that Venezuela did not do an especially good job of managing its downstream strategy, thery was starved of capital because of permanent tension with central government and, even if sufficient funds had been left to PdVSA to pursue an intelligent country strategy, the internecine strife between Maraven, Corpoven and Lagoven provided enough cracks to assure poor capital allocation and sub-optimal development of the industry as a whole.

    Nationalization MIGHT have worked out well for Venezuela, if successive governments had been prepared to allow PdVSA to operate without excessive political demands and distractions. BUT IT DIDN’T. It is no good re-writing history. The decline in Venezuela’s fortunes can be traced back directly to the decision to nationalize. Government attention and the intellectual resource devoted to PdVSA came at the expense of diversification and growth of other industry. PdVSA became a monster which consumed a disproportionate amount of government time and attention, and a vehicle for the slow but steady increase in corrupt practices. By the late 1990’s PdVSA HAD TO bring foreign oil companies back into the country in some guise because, with no cash available other than for maintenance, and having fallen behind certain critical technological advances in the international industry, it had few other options.
    So yes, nationalization could have worked out well. But the historical reality is that the vote in 1976 was a vote for Dutch disease, endemic corruption and an under-capitalised oil industry in a state of contention with central government.

    • The corruption in the oil industry by political appointees was snowballing in the 1990’s–I remember being attended at a Bariven Board meeting by a white-gloved tuxed maitre d serving refreshments off a silver plate.

    • I know you are MISTAKEN , I had a front row seat to watching how the industry was run and also some idea of how it was run in other places and they did a job as good as would have been done by traditional offshore companies if not better , it wasnt perfect but you d surprised at some of the vices and flaws in the way some big name companies operate, yes there were tensions with the govt , and sometimes towards the end specially it needed more money that the industry might have considered wise to hand over, but even international oil companies recognized the professionalism of the job done in Pdvsa before Chavez took over.
      Its false that the reason the companies where brought back as partners was just because of a lack of cash , It was just plain good business sense, Pdvsa had some highly profitable ventures and some which where not so great but still decently profitable or which involve big risks , they did not have enough money to go for all of them (no company has) , so it retained for itself the most profitable less risky projects and gave the partnerships with foreign oil companies a stake in those project which prospects were decent but inferior to those it retained , you dont know how carefully those things were calculated ……, I think you have to hear what people like Monaldi or Haussman have to say about the so called Dutch Disease before you understand what it really entails ……, as to corruption it did exists as it has existed in plenty of international oil companies but it was aggresively persecuted and controlled , if you think white coated attendants involve corruption then you have never attended a board meeting in any big US corporation nos considered the perks and extravagant salaries US executives pay themselves (sometimes bordering on the obscene)…
      The debacle came after Chavez took over the oil industry but thats another story.

  6. I’m curious if, at the time, Venezuelans were experiencing long lines at the gas pumps and skyrocketing prices, or if even then, gasoline was heavily subsidized. Was that part of the debate in Venezuela?

    As I vaguely recall, the effects of the Middle East oil crisis in the 1970s was what spurred the government of Pierre Trudeau to create Petro Canada (exactly at the same time as these events in Venezuela), and as I recall, direct involvement from Ottawa over a resource in one particular area of the country proved politically unsustainable, and the experiment in semi-nationalization seen as an inefficient and ineffective way to achieve certain policy objectives (ie control on gas prices).

    I don’t know why governments should be directly involved in resource extraction. I don’t think the experiences of Pemex or Petrobras provide any better examples, but many others here would know better.

  7. This is the eternal debate between “in-house” vs “outsourcing”, Public vs Private.
    You can come with a long list of pros and cons from one or the other.
    I don’t think that was the determinant factor in the failure of the nationalized oil industry.
    What really makes the difference in any government or corporation is the human talent period.
    In the specific case of the Nationalization of the Oil Industry the main culprit was the people in government more than the people who worked in PDVSA and its subsidiaries.
    This always comes back (as I’ve wrote zillions of times) to the electoral system which generates and promotes a populist dynamic rather than a meritocracy. A roll of the dice…

  8. In any democracy partisan politics instigates conflicts of interest between the common weal of the country and the partisan political interests of the parties in government , the ruler wants to do things that make it popular and allow it to win elections while professionals running public bodies but lacking any partisan political interests just want to get the job done the best way possible ……., thats why in mature political countries things like the running of the army , the Central Bank and the Rule of Law are entrusted to certain elite meritocratically trained professionals even where they have no special political interest to distort their activities to favour the ruling political group. My own ideal would be to have businesses as Pdvsa to be run like public non political corporations , like the BBC in Britain or Harvard University in the States…….,

  9. It is necesario to include in the analysis the natural resources nationalistic ideas that flourished in Latin America in the 20th century. Think about the influence of Mexico, Peru or Argentina among our intellectuals and politicians. This was not a unique or original debate.

  10. WHAT A WASTE OF TIME!!
    I remember my father telling me that this was the beginning of the end for Venezuela. He had no formal education, and still, you write these ultralong nationalistic analyses that will not advance Venezuela of a decimal of a nanometer.

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