VENEZUELA - Enters The Chavez Era.

Punto Fijo began falling apart once oil rents declined in the mid-1980s. It received its deathblow when Chavez was elected president in late 1998. The conflict between Chavez and the oil industry was about who controlled PDVSA. Beyond that, the specific issues that control was being fought over in late 2002 and early 2003 had to do with PDVSA's efficiency, internationalisation, its out-sourcing and sub-contracting practices, OPEC membership, and special oil contracts.

Control over PDVSA had been in dispute since the company was created in 1976. As the oil industry was nationalised, the trans-national corporations' dependencies were turned into 14 Venezuelan companies, which corresponded with the 14 main trans-national oil firms that did business in Venezuela. The entire management had years earlier been Venezuelan and did not change with nationalisation. For example, the former president of Shell Venezuela was the same as the new president of Maraven, with the PDVSA unit which took over from Shell Venezuela having kept the Shell culture. Critics of the nationalisation process, such as Carlos Mendoza, said the nationalised oil industry was nothing more than a Trojan Horse.

Venezuela's oil industry maintained a trans-national corporatist culture throughout its existence. The ties to the former owners of the nationalised firms were maintained through technical assistance contracts and through commercialisation contracts, which heavily discounted the price of oil to their former owners.

The government's lack of control over the oil industry was institutionalised further in PDVSA's board of directors. While normally a board of directors is supposed to represent the interests of the owners vis-a-vis the management, in the case of PDVSA the board was appointed from PDVSA management. This is why when Chavez appointed a board of directors who did not come from PDVSA, the management protested and joined the April 2002 coup attempt work stoppage against the government. The management did the same during the nationwide strikes from Dec. 2, 2002 to February 2003, because of which Chavez sacked 18,000 of PDVSA's staff of almost 39,000. In appointing PDVSA's board members, Chavez was breaking a decades-old tradition which regarded board membership as the highest promotion a PDVSA manager could receive. Whereas before the change PDVSA was a meritocracy, now this is different.

The first issue on the Chavez's mind with regard to reforming PDVSA had to do with the company's efficiency. Critics of PDVSA said the firm had become increasingly inefficient over the previous 25 years. From 1976 to 1992 the average share of PDVSA's income going to the company's costs was about 29% and the share that went to the government was 71%. For 1993 to 2000, that relationship was practically reversed, with 64% kept by PDVSA and only 36% went to the government.

According to rankings of America Economia, PDVSA was the largest Latin American company in 2000, but in terms of efficiency it ranked among the lowest of the 50 most efficient firms, far under any of its state-owned competitors, such as Petrobras of Brazil, Pemex of Mexico, or Petroecuador. Other measures of profitability show similar results. For example, in terms of the dollar income provided to the government per barrel of oil produced, PDVSA paid only about a quarter of what PEMEX paid out to the government in 2001.

One reason for PDVSA's drop in efficiency from the mid-1990s had to do with its internationalisation and a change in its accounting methods. In 1989 PDVSA adopted a worldwide combined accounting method, so that costs and losses outside Venezuela would be balanced against the revenues and profits within the country. Previously the accounting for transactions within Venezuela and for those abroad was done separately. The result of the account consolidation was a large-scale import of costs incurred abroad. As PDVSA's tax rate in Venezuela was about twice that in the US, for example, the firm had to transfer a much smaller proportion of its income to the state.

Venezuela's oil industry reform under Chavez encompasses four areas: solidification of state ownership, higher taxes and royalties on output, subordination of the oil industry to national interests with PDVSA controlling all JVs, and the strengthening of OPEC.

The 1999 constitution, written by Chavez aides, anchors state ownership of the oil industry. (The government of Rafael Caldera, Chavez's predecessor, wanted to privatise PDVSA). The new constitution states that "for reasons of economic and political sovereignty and of national strategy the state will maintain the totality of the shares of PDVSA or of the entity created to manage the oil industry". But some critics say a backdoor to privatisation remains open because the constitution says the state shall own all shares of PDVSA, "except those of subsidiaries, strategic associations, businesses, and whatever other that has constituted or constitutes PDVSA as a result of the development of its business". So in theory, PDVSA could turn some activities into subsidiaries and then sell them off. After the general oil industry strike, this is what PDVSA's directors have been considering, mostly to rid itself of unprofitable units. Related to state ownership is a provision in the hydrocarbons law of 2001 specifying that all state activity related to oil E&P is to be dedicated to the "public interest".

Early 2003 saw the oil market affected by a double blow. First came Venezuela's general strike, which wiped out two months of exports and reduced OECD stocks to a 20-year low. Then followed the US-led invasion of Iraq, in March, which knocked out another 2m b/d of exports through to July. Neither Venezuelan nor Iraqi output has since regained its previous production level.

Chavez has urged his Latin American allies to develop a nuclear energy programme, raising questions in Washington about his atomic ambitions. A self-described socialist revolutionary fiercely opposed to the Republican administration of George W. Bush in the US, the main oil market for Venezuelan oil, Chavez says he wants to co-operate with Argentina, Brazil and Iran to develop nuclear energy as part of his drive for regional integration. But experts estimate it will take his government at least five years of studies, training and investment to develop a sustainable nuclear energy project in Venezuela, now the world's No. 5 oil exporter.

Chavez in 2005 told a Brazilian newspaper: "Nuclear energy is for peaceful purposes. We are not the ones developing atomic bombs, it's others who do that. We are not the ones who launch atomic bombs" - dismissing fears over his proposal. Venezuela's support for Tehran in its clash with the US and EU over its nuclear programme has left Washington wondering about the motives behind Chavez's quest for atomic energy. Ties between Venezuela and the US are tense.

Extra money could usefully be spent on improving Venezuela's creaking infrastructure, for example. Roads are in poor shape in many areas. In parts of Venezuela, poor maintenance has led to power cuts.

Chavez, a blunt-speaking, ex-army officer, has rattled Washington by allying himself with Fidel Castro and promoting his Bolivarian ideas overseas. Venezuela has signed the Nuclear Non-Proliferation Treaty (NPT) limiting use of nuclear material and would have to follow safeguards from the UN watchdog, the IAEA, before any transfers of technology.

Flush with cash from oil, Chavez promotes resource nationalism worldwide (see OMT) and has pushed to counter US influence with energy deals at discounted prices with Latin American countries and strengthened ties with Iran, Russia, China and India to reduce reliance on the US. Tehran is interested in oil and aluminum deals with Caracas, as well as co-operation in transferring nuclear technology to Venezuela.

Chavez's announcement about acquiring nuclear technology with help from Iran met with wary reactions from Latin American neighbours worried about how the US might view such co-operation. Brazil and Argentina have the most advanced nuclear programmes in South America. But while Brazil said it was uneasy about involving Iran, Argentina appears more willing to help Venezuela and already has experience exporting technology.

Venezuelan officials have given mixed signals about what they want and initially suggested they could use nuclear energy to power oil operations. But Energy and Petroleum Minister Rafael Ramirez says the programme is still in its infancy (see down18VenzEnBasOct31-05).