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  • Profit Sharing between Governments and Multinationals in Natural Resource Extraction: Evidence from a Firm-Level Panel
  • Margaret McMillan and Andrew R . Waxman

At the beginning of the last century, Venezuela, with its rudimentary agricultural economy, had the reputation as being one of the most back ward nations in the Western Hemisphere. The country was run by Juan Vicente Gómez, who was put into power in 1908 by a U.S.-backed coup d’état and the first in a line of caudillos, or military-style dictators. Seven years after the coup, the Mene Grande oil field was discovered, and in 1917 Venezuela began exporting petroleum. The “understanding” that Gómez had with the U.S. oil companies and the U.S. government allowed him to use revenues to equip the first national army and expand the bureaucracy and his repressive regime in exchange for cheap oil concessions and accommodating legislation.1

Yet, from the beginning, the Venezuelan authorities and the oil companies were engaged in a tug-of-war over the terms of profit sharing. By the 1950s,Venezuela enjoyed greater bargaining power than did its Middle Eastern competitors.2 In 1958 the government increased the tax rate on oil extraction 10 percentage points over the initial rate agreed with U.S. companies, shattering its amiable business relationship with the United States. This break in relations between Venezuela and the United States began a period of greater assertion of bargaining power over government take of oil rents by the government of Venezuela—culminating [End Page 149] in its major role in the formation of the Organization of the Petroleum Exporting Countries (OPEC) in 1960, which through the cartelization of oil resources afforded member countries an organization to coordinate production to influence international prices. With the uptick in oil prices during the mid-1970s, the Venezuelans were again able to increase their share of economic rents through contract renegotiation. On the tails of OPEC came the establishment of the national Venezuelan oil company (la Corporación Venezolana del Petróleo). By developing technical ability and expertise in oil extraction, the Venezuelans were able to play a bigger role in upstream negotiations and put extra leverage on negotiations.3 In 1973 the Acción Democrática government of Carlos Andrés Pérez nationalized the petroleum sector after taking power.

Chad has not been as successful as Venezuela at protecting the rents associated with natural resource extraction. It is a landlocked Saharan country with one of the lowest per capita income levels in Africa. It suffers major security problems from incursions on its borders with Sudan and Libya and substantial refugee influxes from the Darfur region. The country is universally considered a failed state with consistently some of the highest levels of corruption in the world. Nevertheless, the World Bank undertook an effort with a petroleum consortium in 1995 to begin to take advantage of the country’s oil resources in an effort to reduce the drastic levels of poverty in the country.

Construction of the Chad-Cameroon pipeline to transport extracted oil from the Doba fields in Chad began in 2000, with oil flows beginning in 2004. The revenues accruing to the government were set up in such a way as to promote transparency and poverty reduction.4 According to a Guardian article, the government’s original take was 28 percent of the total value of oil, far smaller than that of other oil-producing countries in the region with comparably low scores on governance such as Equatorial Guinea, Angola, the Republic of the Congo (Congo-Brazzaville), and Gabon.5 In addition, the consortium of foreign petroleum companies seems to have been able to negotiate contracts such that when national laws conflicted with any contracts, the contracts would supersede. In an attempt to renegotiate its contracts, the Chadian government spent $1.6 million [End Page 150] on lawyers and consultants with the result being a mere 2 percent increase in the terms of the second contract.6

As of late, Chad has not been the only case of extremely generous extraction concessions. A recent op-ed piece in the Boston Globe notes that “for a minimal return, [the Democratic...

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Additional Information

ISSN
1534-0635
Print ISSN
1520-5479
Pages
pp. 149-175
Launched on MUSE
2008-06-26
Open Access
No
Archive Status
Archived 2012
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