A Model For Venezuela
Commentary by Wayne Forrest
Oil once dominated the US-Indonesia narrative in a way resembling what we are seeing with Venezuela. Although there were trials and tribulations it never boiled into what seems to be emerging currently. Both countries were coveted for their large and accessible reserves beginning in the early 1900’s. Although Venezuela was independent then and Indonesia was a Dutch colony, foreign companies were initially given concessions under very favorable terms (low taxes etc.). Over time each country moved to nationalize the industry under a state-owned monopoly (Pertamina in Indonesia and PDVSA in Venezuela) but allowed the foreign firms to remain as partners not owners/concessionaires.
But the paths of each eventually diverged: Indonesia successfully institutionalized its nationalism with a high degree of certainty whereas Venezuela politicized it with high degree of uncertainty. For different reasons, neither country today is attractive for foreign oil companies.
Lets look at the timelines:
Birth of oil industry/Foreign Corporate Autonomy (1860-1940’s)
From ancient times petroleum that seeped to the earth’s surface and was used for lighting but with the development of drilling techniques in the mid 19th century these pools guided geologists to vast underground reserves. By the First World War Standard Oil and Royal Dutch Shell were operating fields in both Indonesia and Venezuela producing primarily kerosene. Private, foreign oil companies were given long term concessions with title to their oil at the wellhead and in return paid royalties and taxes to the government.
Increasing State Control (1950’s-1970’s)
Driven by a rising nationalism both countries ended the concession system which was deemed incompatible with a sovereign state. After achieving its sovereignty in 1949 Indonesia began nationalizing foreign, mostly Dutch enterprises. Companies such as Shell lost some of their upstream operations during a wave of anti-Dutch sentiment in the late 1950’s through expropriation but were later invited back in. American companies such as Caltex stayed, convinced by their Indonesian managers that the government would respect their rights and the role the US played in resolving the independence conflict.
In 1960 Indonesia enacted legislation placing all oil assets under State ownership but not necessarily control, realizing that it needed the financial and technical resources to develop its oil industry as a key foreign exchange earner. It created a state-owned company Pertamina, to be a legal partner with foreign oil companies through a unique new device, the production sharing contract PSC). The operations of all the existing oil companies were transferred to 30-year PSC, including Shell’s. The PSC allowed full operational control to foreign oil contractors with Pertamina managing policy, investment approvals.
State Ownership (1980-present)
Venezuela managed its state control differently. In 1976 it created its own oil company Petróleos de Venezuela, S.A. (PDVSA). Concessions were eliminated and foreign oil companies became subsidiaries and unlike in Indonesia, many lost operational control. Some companies had their assets seized, with compensation. By the 1990’s Venezuela’s policy shifted and the sector opened again to foreign companies through joint ventures and operating agreements. By allowing foreign companies back into the sector, often holding majority stakes, Venezuela brought large amounts of capital to modernize and expand the industry. By then, Indonesia had already renewed some of its PSC’s creating even more legal certainty in the sector.
Venezuela shifted direction again after Hugo Chavez’s election in 1998. He enacted a policy of forcing all operations to be 51% owned by the state through PDSVA. More than that the Chavez regime demanded operational control over the relatively autonomous foreign operations. When many foreign oil companies declined the “offers”, Venezuela forced renegotiations or expropriated assets. Companies such as ExxonMobil and Conoco left Venezuela, won arbitration awards a through the World Bank (ICSID), although they have yet to receive compensation. The PDSVA became the engine for the socialist government’s social programs. International sanctions, loss of talent, access to capital, and technical expertise led to huge production drop offs.
To its benefit Indonesia has maintained its PSC system throughout this period of increased resource nationalism but has at times altered features or implementation that has created unnecessary uncertainty. These include non-renewal of the contracts of long term partners, changes to the profit-sharing formula, forced deposits of proceeds in local banks, and workforce demands. The non-renewal of Caltex’s (Chevron) PSC in 2021 and Total’s in 2017 was a watershed moment for the industry, signaling Indonesia’s intention (and sense of its own ability) to manage resources. Although there have been production declines due to loss of technical expertise, they have not been as dramatic as Venezuela, in part, because international subcontractors have been able to continue to play a role. Furthermore, Indonesia has not overtly banned foreign oil companies and continues to invite them to bid on blocks as they become available. Pertamina itself continues to have reputational issues, especially corruption in oil trading (kickbacks) as well as the activities of its subsidiaries rather than in upstream production. This means its standing with foreign oil companies is relatively solid, compared to that of PDSVA’s, which is in the hamper.
Indonesia’s respect for long term contracts and the role of foreign capital has served it well. Although oil and gas is no longer the dominant export earner, it remains an important foreign exchange earner. The sector still attracts the interest of new players as well as established names that stayed (Eni, Shell, BP, ExxonMobil). The question is if today’s PSC terms will be enough to turn the interest into real projects.
Oil companies have a way of operating even if there is political instability if there is a good degree of contract certainty. Chevron has done this successfully in Venezuela and did this in Indonesia (as Caltex and the Chevron Indonesia) for over 70 years, transitioning from colonial rule (1950) and weathering the collapse of the Soekarno and Suharto autocracies. We will see what comes of President Trump’s interest to return US oil companies to Venezuela. Indonesia’s PSC, designed in part by an early AICC member (Delson & Gordon), its sovereign attorney, would be a very good model.
(These views are the author’s and may not reflect those of AICC or its members.)