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Brazil, Venezuela, and Mexico: three ways to nationalize oil

Argentina's renationalization of its biggest oil company, YPF, recently caused an outcry. But the cases of oil nationalization in Brazil, Mexico, and Venezuela show that outcomes can vary widely.

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Pemex has made important moves in the past six years to stabilize production, says Jeremy Martin, director of energy at the Institute of the Americas. "But the ... consensus is they need that outside support and partnership," he says.

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BRAZIL

Brazil established a monopoly over the oil industry in 1953 when President Getúlio Vargas created Petrobras, the outcome of a seven-year campaign with nationalist slogans like "The oil is ours." In 1954, operations began, and Petrobras produced only about 2 percent of the country's domestic oil consumption.

Nearly 60 years later, Petrobras is the fifth-largest energy company in the world and a leader in deepwater and ultra-deepwater oil extraction. Its monopoly in Brazil continued into the 1990s, a period when privatization, free trade, and neoliberal policies swept the Americas.

President Fernando Henrique Cardoso broke the monopoly in 1997 (see chart), and investment, competition, and efficiency increased as the company was forced to compete with outside companies to develop Brazil's oil fields, says Joao Augusto de Castro Neves, a Latin America analyst at the Eurasia Group. This opening could be credited for Brazil's 2007 discovery of "pre-salt" deepwater oil fields – named for the oil deposits in rocks located under a vast layer of salt – an area expected to boost Brazil's oil reserves by 50 percent, he says.

When socialist Luiz Inácio Lula da Silva was elected president in 2002, some feared his Workers Party platform would mean the end of international oil concessions. But Mr. da Silva, widely known as Lula, instead created a system where all future foreign investment in strategic areas would consist of partnerships with Petrobras, which would hold a majority stake. He did not amend existing oil contracts, nor did he expropriate enduring international partnerships.

Lula moved forward with countless social programs – catapulting 29 million Brazilians into the middle class – yet he didn't use Petrobras as a political tool to bankroll his programs the way Venezuelan leaders have with oil. The Petrobras model "forces the company to compete, but keeps ownership, national pride, and resource nationalism intact," says Terry Karl of Stanford University.

As the majority stakeholder, Brazil plays a larger role than before in the entire oil supply chain, putting a heavier burden on Petrobras to adopt better regulation policies and increase investment in equipment and distribution capacity.

A lack of high-skilled labor puts additional strain on Petrobras, and some fear the economic diversity that has allowed Brazil to grow and develop beyond many of its neighbors could decline if industry becomes too reliant on oil production.

VENEZUELA

President Hugo Chávez has increased state control over the oil industry, but he wasn't the one to nationalize Venezuela's oil.

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