The collapse of the Venezuelan oil industry: The role of above-ground risks limiting foreign investment

Francisco Monaldi, Igor Hernández and José La Rosa Reyes

Resources Policy, 2021, vol. 72, issue C

Abstract: This paper examines the role of foreign direct investment (FDI) in expanding the Venezuelan oil industry in the 1990s, the drivers leading to the expropriations the following decade, and the obstacles to attracting new investments afterward. We argue that operational control by private companies, an attractive fiscal regime, and investor protection clauses were crucial elements in fostering the expansion of the oil industry after the oil opening in the 1990s. However, a successful investment cycle adding production and reserves, combined with an oil price boom, provided strong incentives for the government to increase taxes and expropriate projects. Weak institutions, policy instability, and the lack of credible property rights for the sector generated high “above ground risks” inhibiting FDI during the oil boom, despite the massive resource base and the substantial number of deals signed. FDI underperformance contributed to the decline of the Venezuelan oil industry, even before the imposition of U.S. sanctions. Using project-level data, and industry indicators, we document how volatile fiscal terms, changes in contract governance, discretionary policies, poor operating conditions, and the lack of investor protection, explain the failure to attract FDI.

Keywords: Foreign investment; Expropriation; Venezuela; Oil and gas (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jrpoli:v:72:y:2021:i:c:s0301420721001306

DOI: 10.1016/j.resourpol.2021.102116

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