Nationalization

Summary: Nationalization, the act of placing assets under government ownership, is a critical issue in the energy world. Few sectors of a country’s economy are seen as more strategically important, or more publicly visible, as natural energy resources and infrastructure.

Nationalization, the process of placing assets—both hard and contractual—under the majority or complete ownership of the government of a country, creates a challenge when the assets were previously owned by private-sector actors, as opposed to being recently discovered and immediately nationalized without an act of appropriation. Nationalization’s purpose is often to empower elected officials and satisfy popular will, but the risk of appropriation can dissuade foreign investment, denying a country hard currency, technical know-how, technology transfer, and external market access. The threat of nationalization increases the risks that foreign investors must consider when engaging in energy projects.

The nationalization of energy resources—whether they be upstream assets, such as oil and natural gas fields, or downstream assets, such as refineries, pipelines, shipping terminals, and gas stations—inherently involve major capital assets, and frequently large sums of money, whether hard cash or future revenue streams. The contending parties sometimes settle their differences through international arbitration bodies. Varying examples of nationalization have occurred in such energy resource host countries as Mexico, Venezuela, Bolivia, Iran, and Russia.

Mexico

Mexico, a leading supplier of petroleum to the United States, originally nationalized its energy resources in the revolutionary period of 1917. Article 27 of the 1917 Mexican constitution gives the government a permanent and unalienable right to all of the nation’s subsoil resources. In 1923, in the Bucareli Agreements, the United States and Mexico confirmed they would regard titles held by foreign oil companies as concessions by the Mexican government—as opposed to outright ownership claims.

On this basis, president Lázaro Cárdenas nationalized the petroleum industry in 1938, in what became celebrated as the “expropriation.” As a result, Mexico forged a state monopoly in its energy sector, extending from exploration, production, and refining of its crude oil and natural gas to chemical businesses, marketing, and distribution. The international oil companies reacted with a boycott, and pressured governments to comply. In 1943, Mexico and the oil firms settled—driven in part by the overriding energy and trade needs of the Allies engulfed in fighting World War II—with a payment by Mexico of $24 million in compensation for the seized assets. Still, Mexico found itself shut off from many of the world’s best technological minds, methods, and equipment—and financing—well into the 1950s.

Mexico’s state-owned oil and natural gas company, PEMEX, despite having command over extensive natural resources, was plagued by inefficiencies and corruption, in part due to lack of shareholder oversight and access to foreign expertise. The problems were severe enough to stymie Mexico’s broader economy; a range of successful reforms was enacted in the 1980s—and PEMEX itself was restructured in the wake of the horrific 1992 natural gas explosion in Guadalajara that killed hundreds. Over time, the Mexican government and PEMEX relaxed their control. A partial denationalization came about. In the 1990s, PEMEX divested many of its petrochemicals plants. Private investment was also permitted in parts of the downstream natural gas business.

Venezuela

Like Mexico, Venezuela is among the leading suppliers of petroleum products to the United States. In the 1990s, it allowed some private investment in its oil industry, and foreign companies were let in to form “strategic associations” to manage specific oil fields. About one-quarter of total oil production is handled in this manner.

However, in April 2006, Venezuelan president Hugo Chávez announced that Venezuela was nationalizing the oil fields that were managed by foreign companies. The government’s shares in these projects, therefore, rose from 40 percent to 60 percent. This is an example of partial nationalization, as opposed to outright seizure of all privately owned assets. Nevertheless, even partial nationalization can deter future investment and hobble a host country’s production.

On May 1, 2007, Chávez fully nationalized the remaining private projects in Venezuela’s oil-rich Orinoco Belt. The move was estimated to have impacted $30 billion in projects and included the privatization of assets from ExxonMobil, British Petroleum (BP), and Norway’s Statoil.

Venezuela’s state-owned natural gas and oil company is Petróleos de Venezuela, S.A. (PDVSA). In June 2010, the US oil rig firm Helmerich and Payne learned that its 11 oil rigs in Venezuela would be seized by PDVSA. The US company, which had done business with Venezuela for more than 50 years, said PDVSA owed $40 million in back payments at the time of the seizure. PDVSA asserted that Helmerich and Payne had balked at renegotiating their rates when world oil prices plunged in 2009; the rigs had gone idle. In late 2011, the private company sued for breach of contract. By 2018, Venezuela's oil production fell to 1.5 million barrels per day, a 50 percent decrease from 2006.

Bolivia

Bolivian president Evo Morales, an ally of Chávez, has nationalized a series of upstream and downstream resources since taking office in 2006. Such initiatives include seizure of natural gas fields, hydroelectric and other power generating facilities, and in 2012 the country’s electric grid. These steps were a reversal of the privatization of much of this same infrastructure in Bolivia during the 1990s.

Bolivia’s state-owned natural gas and oil company is Yacimientos Petrolíferos Fiscales Bolivianos (YPFB). Although it is a relatively poor, landlocked nation, Bolivia and YPFB control one of the larger natural gas resources in South America. Since major investments began in the 1990s, gas output has zoomed, to 520 billion cubic feet in 2010. However, the amount of natural gas produced in the country dropped, largely due to shortages. In 2016, Bolivia produced 56.6 million cubic meters per day, but this amount had decreased to 31.9 million cubic meters per day by 2023. However, a discovery of a 1.7 trillion cubic-foot reserve in 2023 north of the country's administrative capital, La Paz, would remedy the situation.

Iran

Nationalization of energy resources is certainly not exclusive to Latin American countries. Iran originally nationalized its oil operations in the 1950s, under the leadership of its head of state, prime minister Mohammed Mossadegh, who joined a long line of Persian political figures in denouncing the practices of the Anglo-Iranian Oil Company (a predecessor of BP) in Iran. The expropriation took place in 1951. Stung by the loss of this strategic and lucrative asset, the United Kingdom organized a boycott of Iranian oil. The resulting cutoff of much-needed hard cash hamstrung the government of Iran; a coup d’etat was precipitated in 1953, returning to power the dictator Mohammed-Reza Shah Pahlavi (who would in turn be ousted by the Iranian Islamic Revolution of 1979). In the aftermath, a new oil development consortium was established with eight oil companies participating, the National Iranian Oil Company (NIOC). Although Anglo-Iranian had hoped to regain its full mastery of Iran’s industry, it settled for a 40 percent share of the restructured enterprise, the largest of any of the participants.

This is an example of a temporary nationalization scheme. The cycle turned again, however, as with the 1979 revolution all assets of NIOC were nationalized. Today, NIOC is one of the world’s largest oil and gas companies. There are some private firms operating in Iran’s fossil fuels sector, mainly in the downstream operations segment. Ironically, Iran has several joint ventures with BP, including a 50/50 operation in the North Sea, the Rhum field—however, production there was shut down in December 2010 in accordance with European Union sanctions against Iran. In 2015, the Joint Comprehensive Plan of Action (JCPOA) was signed by Iranian officials and President Barack Obama. It enabled Iran to once again sell oil throughout the world. In 2023, Iran produced 3.985 million barrels of oil per day and in 2022 consumed 2.13 million barrels per day.

Russia

Russia was the world’s top oil producer in 2009 and is estimated to host the world’s largest natural gas reserves, the second-largest coal reserves, and the eighth-largest crude oil reserves. The Russian gas titan Gazprom was created in the transformation of the Soviet Ministry of Gas Industry into a 100 percent state-owned company in 1989. Following the Soviet collapse, the structure of Gazprom was altered again; in 1993 shares were offered for sale. In this semi-privatization, state control of shares dropped eventually to 38 percent. However, this trend was reversed through purchases—nationalization with compensation—and since 2005 Russia has owned 50.1 percent of Gazprom.

Nationalization of Fossil Fuels

Because of climate change, some experts in the United States contended in 2024 that the federal government should purchase controlling ownership of the three major oil and gas companies: ExxonMobil, Chevron, and ConocoPhillips. The cost to purchase these companies would be about $420 billion. These experts believed that as long as these companies remained public, they would continue to sell large amounts of oil and gas to make a profit. However, if the government owned these companies, it could determine production levels and price to better combat climate change.

Bibliography

Merrill, Tim L., and Ramon Miro, eds. Mexico: A Country Study. Washington, DC: U.S. Government Printing Office for the Library of Congress, 1996.

Pollin, Robert. "Nationalize the US Fossil Fuel Industry to Save the Planet." The American Prospect, 8 Apr. 2022, prospect.org/environment/nationalize-us-fossil-fuel-industry-to-save-the-planet/. Accessed 5 Aug. 2024.

Rapier, Robert. "Charting the Decline of Venezuela's Oil Industry." Forbes, 14 Apr. 2022, www.forbes.com/sites/rrapier/2019/01/29/charting-the-decline-of-venezuelas-oil-industry/. Accessed 5 Aug. 2024.