The Cyclical Phenomenon of Resource Nationalism in Latin America

The Cyclical Phenomenon of Resource Nationalism in Latin America Francisco J. Monaldi, Baker Institute for Public Policy, Rice University https://doi.org/10.1093/acrefore/9780190228637.013.1523 Published online: 31 March 2020 Summary Latin America has seen recurrent episodes of resource nationalism, particularly in oil and gas, characterized by increased state control over the industry and investment expropriation. These episodes tend to occur in cycles induced by structural forces, in particular high resource prices and the end of successful investment cycles, increasing production and reserves. State-owned enterprises tend to play a dominant role in the region, which is magnified during the resource nationalism episodes. During such episodes, governments increase taxes and renege on contracts with private investors. Ideology and institutions can limit or exacerbate the intensity of these events in each country, but the cycle is largely driven by the structural factors. The reverse occurs with resource price busts and when a new investment cycle is needed, countries liberalize the oil sector and the state retreats. Between 2002 and 2012, the production boost produced by the liberalizations of the 1990s, combined with the oil price boom, led to a powerful wave of resource nationalism, including contract renegotiations and nationalizations, in Argentina, Bolivia, Ecuador, and Venezuela. Even in Brazil, the country with the most successful and stable oil policy in the region, state-control increased. In contrast, after 2014, a new liberalization period has been prompted throughout the region by the decline in commodity prices, the financial weakness of state-owned companies, and the need for a new private investment cycle. Understanding the dynamics behind resource nationalism in the region is crucial for designing institutional frameworks that limit the cycles and induce long term resource policies that foster the development of the abundant resource endowments in the region. Keywords: resource nationalism, nationalization, expropriation, Latin America, Latin American politics, oil extractives The economic history of Latin America has included many prominent episodes of conflict between governments and extractive industries. Of most significance have been those related to the oil sector, such as the oil nationalizations in Mexico (1938), Venezuela (1976, 2007), and Argentina (2012), but it has also happened with the extraction of other mineral resources like copper (Chile, 1969, 1971) and gold (Venezuela, 2011). In fact, in many countries there have Page 1 of 21

been many episodes of forceful contract renegotiation, expropriation, or nationalization. This set of phenomena has been generally labeled as resource nationalism (Haslam & Heidrich, 2016; Joffé, Stevens, George, Lux, & Searle, 2009). Even though each event has specific characteristics, there seems to be some common patterns. In most episodes the government s objective has been to increase its share of the revenues generated and/or to increase its regulatory, equity, or operational control over the sector. In a few cases, the state took full control over the extraction of the resource establishing a state-owned enterprise as a monopoly (full nationalization), but in many other cases there was an increase in the government share of profits (the government-take), partial state ownership, or enhanced regulatory control (Arbatli, 2018; Berrios, Marak, & Morgenstern, 2011). Approaches to Resource Nationalism Resource nationalism has often occurred in waves across the region (and sometimes the world) and also in recurrent patterns in some countries; the literature refers to these as resource nationalism cycles. There is a strong consensus in the literature that high resource prices tend to produce an increase in resource nationalism, particularly through an increase in the government-take, occasionally, but not necessarily, including nationalization (Guriev, Kolotilin, & Sonin, 2011; Manzano & Monaldi, 2008). In addition, after a significant cycle of investment in sunken assets, leading to an increase in reserves and production and/or a decline in the risks associated with finding and extracting the resource, the likelihood of resource nationalism tends to increase (Chang, Hevia, & Loayza, 2018; Haslam & Heidrich, 2016; Jaakkola, Spiro, & van Benthem, 2018; Vernon, 1971; Vivoda, 2008). Vernon (1971) coined the term obsolescing bargain to refer to the fact that once investments are deployed and geological risks decline, the government is in a stronger bargaining position and wants a larger take of revenues (for a classic application of the concept, see Moran s (1974) seminal work on the copper nationalizations in Chile). Nolan and Thurber (2012) refined the ways in which project risks affect the government s decision to operate or outsource to the private sector. Hogan and Struzenegger (2010) edited a volume on the many ways that high sunk costs, a reduction in risk, and, particularly, a resource price hike make resource contracts obsolete (see, for example, Manzano & Monaldi, 2010 in that volume). Thus, both high commodity price cycles and successful investment cycles fuel resource nationalism, providing a rationale for the cyclical nature of the phenomenon. In fact, the volatile history of resource policy in the region has been a major factor in the relative underdevelopment of its abundant resource base (Monaldi, 2014, 2017). Ideology and institutions appear to influence the degree and form in which resource nationalism gets translated into policy, but in general, structural cycles are behind the surface. For example, given favorable conditions to do so, a leftist government would be more likely to fully nationalize rather than just increase the government-take, than a neoliberal one. But in general, as Berrios et al. (2011) show, ideology is a poor predictor of the rise of resource nationalist policies in Latin America. Mares (2010) proposes that a combination of ideology and institutions (inclusiveness) affects the way resource nationalism manifests in different countries during structurally induced cycles. Page 2 of 21

Governments are typically pragmatic when they need to attract private investors and openly ideological when it is beneficial to renege on deals with investors. In fact, sometimes causality could be reversed and the structural conditions for resource nationalism could prove fertile ground for the success of leftist or nationalist governments, for example a boom in mineral rents allows governments to be more radically leftist or nationalist. In contrast, a low price environment or declining production forces them to be more moderate and pragmatic (Monaldi, 2014). Domestic and international institutions play a role, framing the costs and benefits of government reneging on contracts. However, in general, domestic institutions, such as independent courts and regulatory agencies, have been unable to constrain resource nationalist policies when the structural incentives to implement them have been significant enough, as was illustrated by the resource nationalist wave of 2005 2012. Still, countries with stronger domestic political institutions and rule of law reduce the likelihood of opportunistic expropriation, as the cases of Colombia and post-dictatorship Chile illustrate. International institutions, such as investment treaties and international arbitration, have also proven to have limited capacity for deterrence when incentives are strong enough, as the cases of Argentina, Bolivia, Ecuador, and Venezuela during the resource boom demonstrate. However, in more normal times they could alter the cost-benefit analysis of governments (Barma, Kaiser, Minh Lee, & Vinuela, 2012; Manzano & Monaldi, 2008). Defining Resource Nationalism Even though there is an extensive literature on the nationalization and expropriation of extractive industries (see Arbatli, 2018 and Joffé et al., 2009 for a good overview), and these events are generally described as a manifestation of resource nationalism, there is no agreed upon definition. Arbatli (2018, p. 102), in a valuable definitional effort, conceptualizes resource nationalism as: the complete set of strategies that a host state uses to increase control over natural resource wealth at the expense of foreign participation and investment. In this definition two elements are emphasized: increased state control and a diminished role of foreign investors. Mares (2010) offers a more normative definition that emphasizes the use by the state of its natural wealth for the national good. In this article, resource nationalism is defined as: the set of government policies aimed at appropriating a larger share of the resource revenues and obtaining more control over the extractive sector. In particular, the focus is on a crucial aspect of resource nationalism: investment expropriation, meaning any significant change in the deal offered to investors that does not allow them to recover their investments. This definition includes revenue expropriation, discriminatory changes in taxation (royalties, income taxes, and the contractual government share), but also regulatory changes that severely affect the cash flow kept by the investor (for example, foreign exchange repatriation rules, local content rules, and domestic energy subsidies). Of course, it also includes the nationalization and confiscation of assets, which are more visible, though less common, events. As Arbatli (2018) proposes, resource nationalism typically affects foreign investors, since they are by far the most important private investors in the extractive sectors, but it could also occasionally affect private domestic investors. In fact, it could even affect state-owned enterprises, when the government overextracts resources from them or forces them to fund Page 3 of 21

nonresource activities, at the expense of recovering their investments and being able to purse a long-term investment strategy. Here, the focus is mostly on understanding why governments act in ways that are generally harmful to long-term development but which provide short-term political benefits. However, the definition presented here also covers more moderate versions of resource nationalism in which increased state control and government-take are compatible with the development of the sector. A Turbulent History Figure 1 presents some of the major policy shifts in oil policy in the region. The 1938 nationalization of the Mexican oil industry is one of the most iconic events in the history of the oil industry. Mexico had been one of the major oil producers in the world. Even though the industry was in decline, mostly as a result of a lack of new geological discoveries, the expropriation of all U.S. and British companies by President Lazaro Cardenas constituted a major landmark. The Soviet Union had done it before, but as part of the establishment of a communist model. Mexico was the first relevant producer that did it specifically to the oil sector and not to the rest of the economy. It was not until 2014 that the Mexican oil sector was reopened to private investment (Monaldi, 2017). Bolivia had nationalized Standard Oil in 1937, but that was a relatively minor event, due to the very limited size of its oil sector. Bolivia went on to do it again in 1969 (to Gulf Oil) and more importantly in 2006, when President Evo Morales partially renationalized the booming natural gas industry (Jaakkola et al., 2018). Argentina repeatedly expropriated oil concessions that were then operated by its national oil company (NOC) Yacimientos Petrolíferos Fiscales (YPF) (Philip, 1982). In 1968 President Frei of Chile, one of the largest world producers of copper, initiated the partial nationalization of the largest copper mines, operated by U.S. companies. They were subsequently fully expropriated, with very limited compensation, by socialist President Allende in 1971. In the 2000s, these mines were still operated by the state-owned Codelco, but Chile has been very aggressive in attracting private investment to other mines, which constituted the largest share of production (Campodónico, 2008). In the 1960s the Organization of Oil Exporting Countries (OPEC) led a push to increase oil taxes and renegotiate contracts in its member countries. This push culminated in the 1970s during the first oil (and other commodities) price boom, when all OPEC countries nationalized their oil industries and many others followed suit. In Latin America, Venezuela, an OPEC founding member and one of the world s largest exporters, fully nationalized in 1976. Ecuador also expropriated some oil contracts in the 1970s. Brazil and Colombia did not expropriate but created NOCs taking the operation of oil concessions when they expired (Philip, 1982). The long wave of resource nationalism culminated in the 1970s. In the 1990s, characterized by low oil prices, declining investment, and fiscal deficits, there was a wave of liberalization and privatization in the extractive sectors, largely oil, but also in mining. Argentina privatized many oil fields and later fully privatized its NOC, YPF. Bolivia (Yacimientos Petrolíferos Fiscales Bolivianos, YPFB) and Peru (Petroperu s upstream) did the same. Brazil partially privatized its national oil monopoly, Petrobras, and opened up the sector to private Page 4 of 21

investment. Ecuador and Venezuela did not privatize their NOCs but liberalized the oil sector, attracting significant private investment in new contracts. The new cycle, of largely private investment, significantly increased oil production and reserves in Argentina, Bolivia, Brazil, Ecuador, and Venezuela. Consistent with this regional trend, Guriev et al. (2011) report that worldwide there were no expropriation events in the oil industry between 1986 and 2005. This contrasts with 89 expropriations between 1960 and 1979. The first decade of this century witnessed one of the largest resource windfalls for commodity exporters. Latin American countries benefited tremendously from the large and persistent increase in commodity prices. The price of oil rose from a low of $10 in 1998 to more than $100 per barrel ten years later, generating a revenue boom for the region s net exporters of hydrocarbons: Venezuela, Mexico, Ecuador, Colombia, Bolivia, and even Argentina, a declining net exporter on the way to become a net importer. It also significantly benefited Brazil s oil industry, the third largest producer but still a net importer (Monaldi, 2014). As in the 1970s, the oil boom was accompanied by a wave of resource nationalism government encroachment on the property rights of foreign investors and an increase in state ownership and control. In the period 2002 2012, taxes were significantly increased, contracts forcefully renegotiated, and foreign investors outright nationalized. Four out of the five hydrocarbon exporters with foreign investment in oil and gas Venezuela, Bolivia, Ecuador, and Argentina decided to nationalize their resources during this period; whereas, the other one, Mexico, until recently the largest oil producer in the region, maintained the oil industry as a state monopoly until 2013 (Hogan & Struzenegger, 2010; Manzano & Monaldi, 2008). As recently as 2012, the Argentine government renationalized YPF, the formerly privatized NOC, culminating a decade of eroding conditions for oil investors in the region. There were some exceptions. Brazil and Colombia, for instance, did not follow the same expropriation pattern. Still, Latin America was the leading example of a global phenomenon of increased state intervention and nationalization. Outside the region, Russia was the most notable example, but many others could be found throughout the world. The government-take on profits increased in most oil-exporting countries (Guriev et al., 2011). In fact, even Brazil, a model of long-term energy policy in the region, showed clear symptoms of resource nationalism (Monaldi, 2014). Page 5 of 21

Figure 1. The expropriation/liberalization in the Latin American oil industry. Source: The author. Since 2012, but more dramatically since the fall in oil prices in 2014, a new wave of liberalization has swept the region. Almost all countries have given increased access to the private sector and have improved investment terms. Mexico approved a landmark energy reform and successfully attracted companies from all over the world that were assigned 107 contracts in nine bidding rounds. Brazil, after reversing some of its resource nationalist policies, was also very successful in attracting new investment commitments in multiple bidding rounds. Argentina, Colombia, Cuba, Ecuador, Guatemala, Dominican Republic, Panama, Paraguay, Peru, and Uruguay have all executed or have plans for bidding rounds. Even the resource nationalists Bolivia and Venezuela are offering deals to investors, although with limited success. Through history, resource nationalism has evolved from the use of outright nationalization to a more subtle use of regulations and taxation to extract more revenues and exert more control. It has also evolved from being largely driven by national governments to having some role for regional governments and local communities. This evolution requires further study (Arbatli, 2018; Monaldi 2014). Structural Sources of Resource Nationalism: The Characteristics of Oil (and to Some Extent, Mining) The resource sectors have some peculiar characteristics that in some circumstances generate powerful incentives for resource nationalism and particularly for increasing the governmenttake, reneging on the deal made with investors: 1) the significant rents in the extraction of oil, and some minerals, which are variable and volatile; 2) the high proportion of sunken Page 6 of 21

investments; 3) the significant variation in risk across projects and different stages of investment; and 4) in the case of oil and gas, the widespread consumption of products that represent a relevant part of a household s expenditure. In addition, the concentration of significant reserves in high political risk developing countries, which have weak institutions and ineffective taxation regimes, implies that foreign investors have limited capacity to fully avoid these risks (Manzano & Monaldi, 2008). Oil extraction, and to a lesser extent hard minerals and diamond extraction, are different from other industries in that they generate significant rents, that is, profits in excess of those which make it attractive to invest in the long run. In other words, returns above the opportunity cost of the labor and capital invested. Thus, by definition the state can capture all rents and an investor would still be attracted to invest in the long run. As an example, many oil fields in Latin America and elsewhere have costs of production lower than $20, while the price of oil was well above $100 until 2014. Similarly, although non-oil rents are generally smaller, at peak levels, the rents on copper and gold production in Chile and Peru were estimated to be more than 90% of the price (Campodónico, 2008). However, rents are very volatile, largely because the price of oil, and other commodities, is highly volatile and often moves in cycles. In addition, rents can vary considerably between projects depending on the characteristics of the reservoir, its location, the quality of the mineral, and so forth. There are projects, currently in production, which can make profits at a price of $10 per barrel (e.g., in Kuwait and Saudi Arabia) and projects that would require a price greater than $100 to make a profit (e.g., in Kazakhstan and Canada). The same variation in profitability is common in the mining sector. The volatility and variability of rents pose a challenge for the government to capture them (Hogan & Struzenegger, 2010). Oil extraction projects are generally characterized by high sunken investments meaning assets that once deployed cannot be used for a different purpose or have very low value outside of the project. So the opportunity cost ex-post, after investment is immobilized, is significantly lower than ex-ante, when there were many uses for the capital. The implication is that once these assets are deployed, the government can change the deal and the investor will have incentives to continue operating as long as it covers operational costs and non-sunk investments, even though it may never recover the sunken assets. The sunk costs constitute what the literature denotes as appropriable quasi-rents, which are crucially different from rents, because if taken away from the investor, she will not recover the initial investment (Hogan & Struzenegger, 2010; Manzano & Monaldi, 2010). The geological and economic risk of oil and gas projects differs significantly among projects and between the different stages of a project s lifecycle. In highly prospective areas with wellknown geology and well-developed infrastructure, the risks are much lower than in unexplored areas that are difficult to access. Uncertainty is high in the exploration phase, in some areas more than 7 in 10 exploratory wells do not find commercial hydrocarbons. Once discovered, the development phase in a new area could also entail risking large capitals with some significant uncertainty. However, during the exploitation phase of an already well-known field, the risks decline dramatically. Again, the evolving risk generates incentives for contract renegotiation and expropriation. Governments have incentives to offer very attractive conditions for exploration to compensate the risk, but once there is a major discovery, there are powerful incentives to renegotiate. The difference in value of the project can be very large Page 7 of 21

before and after winning the geological lottery. Of course, a lottery ticket has very little value before it wins and zero value if it does not win anything, but if it gets the prize it is a different story (Nolan & Thurber, 2012). Finally, the oil products are politically salient because they are needed for transportation, heating, and cooking, representing a relevant share of household consumption. As a result, there are incentives for governments to force producers to sell in the domestic market below the international price. This could constitute a form of revenue expropriation that is different from tax increases. In addition to geological and price risk, oil exploitation often has significant fiscal, regulatory, and political risks. A significant proportion of oil resources are located in developing countries with weak institutions. Therefore, domestic institutions are often not strong enough to protect the property rights of investors when the rulers have strong incentives to renege on deals, as is often the case in the oil industry for the reasons mentioned in this section. In fact, historically, foreign investment in oil was protected largely by external enforcement mechanisms rather than domestic courts (Lipson, 1985). The Cycles of Investment and Expropriation The aforementioned characteristics of the resource sectors generate the tendency for expropriation cycles. Governments have incentives to attract investments, particularly in order to reap the future fiscal benefits, but once investments are sunken, they have incentives to renege on the original deal and capture a larger share of the revenues. The short-term benefits of expropriation can be high, while its costs, in terms of production decline and foregone revenues, are often paid in the distant future. The mismatch between political incentives with short-term horizons and investment incentives with long-term horizons are a source of significant conflict (Manzano & Monaldi, 2008). The timing of expropriation is highly influenced by the evolution of incentives. When a resource basin has not been developed, and the geology is unknown, expropriation is unlikely. However, after a significant cycle of investment has been completed, adding substantial reserves and production, and the risks significantly decline, the conditions are ripe for expropriation. Similarly, when resource prices go up significantly, and the fiscal and contractual regimes are not able to sufficiently capture the additional rents, there are strong incentives to expropriate. The history of the oil industry in Latin America, other developing regions, and even in some advanced economies is full of examples of this phenomenon during price booms (Guriev et al., 2011). Rents can also rise due to a decline in costs. Those are less observable than price hikes by the government (they are also less observable by analysts, and thus have been less well studied). The likelihood of expropriation also varies with other structural characteristics. Countries that are significant net exporters and more fiscally dependent on resource revenues tend to view the resource sector largely as a source of fiscal rents and are thus more likely to be resource nationalist. Depending on the time horizon of rulers, rent maximization could be short-sighted or have a more long-term perspective. In contrast, in the case of hydrocarbons, net importers are usually more focused on incentivizing production and reaching energy self-sufficiency and therefore are less likely to be resource nationalists. Page 8 of 21

Figure 2. The liberalization/expropriation cycle. Source: The author. The size and trend of the resource endowment, as well as its type, also matters. Countries with increasing production and reserves are less likely to care about the costs of expropriation, but countries with small or rapidly depleting reserves are compelled to be less resource nationalist. Similarly, if the country is endowed with easy-to-extract, low-cost, and low-risk oil reserves, it can afford to be more resource nationalist, since investors are willing to take more risks to operate there. However, if developing its reserves requires taking high geological risks and sophisticated technology, it may be forced to be more pragmatic. Figure 2 summarizes the structural logic of the cycles. When investments are needed because production and reserves are declining, prices are low, and national oil companies are in difficult financial shape, a liberalization cycle occurs, like the ones that took place in the 1990s and after 2014. When a successful investment cycle leads to increased production and reserves and the oil price goes up, and expropriation cycle tends to occur, as it did in the 1970s and 2000s. Institutions and Resource Nationalism The likelihood of expropriation is also contingent on the institutional setting of the resource sector and on the wider political regime. In particular two aspects are especially important: 1) the progressivity of the fiscal and contractual framework; and 2) the political constraints to contractual and fiscal reneging. A progressive system is one in which the government-take increases as the profits from resource extraction increase. The fiscal and contractual regimes Page 9 of 21

in Latin America and many other developing countries have tended to be regressive or mildly progressive. As a result, when prices go up the government-take does not increase proportionally and governments become dissatisfied with their share of profits (Barma et al., 2012). The wider institutional setting is clearly also relevant. How easy is it for the executive to unilaterally change the government-take? And if it does, which costs does it have to face? If the institutional framework generates checks and balances to constrain the executive, expropriation is less likely. For example, countries like Brazil, Colombia, and recently Mexico created autonomous regulatory agencies to govern the hydrocarbons sector. However, as mentioned before, in weak institutional environments with few political constraints external enforcement is typically what provides credibility. The Role of State-Owned Enterprises State-owned enterprises, usually labeled national oil companies (NOCs), are a dominant force in the oil sector. Outside of hydrocarbons, there are few other sectors in the economy, especially tradable sectors, in which state companies have such a large share of production. With the notable exception of the Anglo-Saxon producers, United States, Canada, United Kingdom, and Australia, all the major oil producers (particularly exporters) in the world are dominated by NOCs, concentrating their production and even more their oil reserves (Victor, Hults, & Thurber, 2012). More than 70% of the world s oil proved reserves are controlled by NOCs. In the 1960s more than 80% of the world reserves were in the hands of private companies. In the 1970s most of the reserves were nationalized. In Latin America, NOCs dominate in Argentina, Brazil, Bolivia, Colombia, Ecuador, Mexico, and Venezuela, all the relevant oil producers. NOCs tend to dominate particularly in low-risk projects with high rents. Governments see no reason to share ownership of those projects. Rents are easier to capture, and inefficiencies are easily obscured by the naturally high profits. So they prevail in easy-to-produce areas with proved reserves, which are geologically well known. In contrast, governments are less willing to go into frontier developments, such as unexplored areas, with high geological uncertainties and requiring large investments like deep-offshore and unconventional or depleted fields requiring tertiary recovery techniques. Most of the oil reserves in the world were originally discovered by private firms and later handed to NOCs through nationalization, contract expiration, or cancelation. In the life of an oil basin, private companies dominate the early stages of discovery and development, are displaced in the stage of extraction of proved reserves and come back at depletion to apply secondary and tertiary recovery techniques. Private companies also dominate operations in less developed countries that do not have the state capacity to manage an NOC (Nolan & Thurber, 2012). In the 1990s while most other state-controlled sectors were privatized, in the oil sector this ownership swing was less pronounced (Manzano & Monaldi, 2008). One possible explanation is that due to the size of the rents in oil extraction, NOCs rarely lost money, and this made privatization less compelling. In addition, NOCs can be very attractive tools for politicians to appropriate and manage oil rents. Nevertheless, the role of the private sector in deep-offshore and unconventional has continued to be significant and as a result, as oil exploitation has Page 10 of 21

moved to riskier areas, the share of production operated by private companies has increased, even though in aggregate the proven reserves are still heavily dominated by NOCs (Palacios, 2002). NOCs are, somewhat counterintuitively, the most common victims of revenue expropriation in the sense that governments have an easier time extracting rents from them and not allowing them to recover their sunken investment or fulfill their long-term investment plans (Monaldi, 2014). The investment horizons of the oil industry are long compared to the political cycle, and there are often other uses for financial resources that are more urgent or politically beneficial in the short term. As in the case of private operators, the likelihood of NOC expropriation is largely determined by the type of institutional framework in place, in particular, the financial and operational autonomy of the NOC, its governance, the fiscal stability of the country, and the capacity of the political institutions to deliver long-term intertemporal commitments. Countries which are highly dependent on oil revenues and lack effective stabilization mechanisms; in which the executive controls the finances of the NOC; in which the government faces few political constraints; and in which politicians have short-term horizons are more likely to expropriate the NOC. Contrary to private operators, NOCs are also very vulnerable when oil prices decline and governments are financially desperate (Victor et al, 2012). Case Studies This section briefly presents case studies of the Latin American region in order to discuss the factors which induce expropriation cycles. Countries in the region have used a variety of contractual and tax systems to regulate hydrocarbon activities and collect the revenues that are generated thereby. Within such diversity, the majority of the systems have had in common that they have been regressive or slightly progressive. Monaldi and Manzano (2008) show that the government-take did not initially increase as a result of the increase in prices since the 2000s; as a matter of fact, in some countries it decreased. This contributed to the renegotiation of contracts, tax changes, and the creation of windfall profit taxes. Argentina, Bolivia, Ecuador, Venezuela and, more recently, Brazil increased their government-take. In the case of Brazil, such an increase did not apply retroactively, to existing contracts. In the other cases, it was applied retroactively, which meant the cancelation, forced renegotiation, or expropriation of already existing contracts. For example, in Venezuela, the royalty rate was increased from 1% to 33% for contracts covering the extra-heavy Orinoco Oil Belt, and the income tax rate was raised from 34% to 50%. Additionally, a new windfall profits tax was implemented. In Bolivia, royalties for gas were increased substantially, and in Argentina, a new export tax was applied at a rate of 30%. In Ecuador, forced renegotiation transformed all projects into low-profitability service agreements, although before that, an aggressive windfall profits tax had been implemented (which collected 99% of the profit at high oil prices). In Argentina, Bolivia, Ecuador, and Venezuela, several projects were partially or entirely nationalized. In Brazil, after the successful pre-salt discoveries, the government decided to increase the state share via taxes, shareholding, control of operation, and local content. Page 11 of 21

Venezuela Venezuela was, until the 1970s, the largest exporter in the region and also has a long tradition as a producer. The case of Venezuela illustrates the dynamics of resource nationalism, showing how expropriation cycles follow successful cycles of investment and cycles of high prices provide incentives for expropriation. Venezuela has behaved as could be expected of a typical net exporter with high discount rates, with the clear goal of maximizing revenues in the short term and subsidizing the internal market of oil products, such as gasoline. Likewise, the case of Venezuela also shows the conflicts which are created between governments, companies, and other players when inflexible fiscal systems do not allow governments to collect rents resulting from price increases. Throughout the history of the Venezuelan oil industry, there are two investment cycles followed by expropriation cycles. During the first cycle, we find that, after decades of investment, predominantly by international companies, taxes imposed on these companies increased significantly in the 1960s and 1970s, and petroleum concessions were not renewed. As a result, oil investment declined from 1958 until 1976. On the other hand, production continued to increase until the early 1970s, when it abruptly dropped, although much later than the drop in investment as tends to happen in these type of industries, with high sunk costs reducing the political costs of decisions which adversely affected the industry. Afterwards, in 1976, the petroleum industry was nationalized. Petróleos de Venezuela, S.A. (PDVSA), the national oil company (NOC), increased investment significantly, favored by high oil prices. PDVSA was designed with a system of governability which minimized political interference and the excessive extraction of revenues by the government, which guaranteed its financial and operational autonomy. The second cycle of investment started at the beginning of the 1990s, within a context which required enormous new investments to increase production. Under these circumstances, PDVSA significantly increased capital expenditures to handle such investments. At the same time, the fiscal difficulties experienced by the Venezuelan government led to the opening of the petroleum sector to private operators, initially in areas with little profitability and with significant technological and operational challenges, which required high investments which PDVSA did not want to make alone. The government opened the sector to private investment using a special contractual framework which provided important guarantees against the reneging of commitments assumed by the government, using PDVSA and its assets abroad as a guarantee. As a result of these contracts, private investment increased substantially toward the end of the 1990s and privately operated production rose to 1.1 million barrels per day by 2005, more than a third of total production (Manzano & Monaldi, 2010). When President Chávez, a harsh critic of opening the industry to private capital, came to power in 1999, the government began to extract more resources from PDVSA. However, until 2005, the executive branch did not adopt any measures to change contracts and tax conditions or to nationalize the capital of companies. Why did it take the government almost six years after coming to power to once again nationalize the industry? The explanation seems to lie in the guarantees and conditions established in the contracts, which made it difficult to breach them, without significant costs incurred to the national budget; the difficulty of getting rid of the institutional autonomy of PDVSA; and the fact that significant investments by private parties were still planned for the period 1999 2004 (Manzano & Monaldi, 2010). Page 12 of 21

Between 2002 and 2003, the initiatives of the government to eliminate the autonomy of PDVSA resulted in a massive strike which dramatically decreased public investment and production. The government laid off half the workforce and the majority of managers, taking over complete political control of the company. By 2004, the cycle of private investment had been completed, and high international prices provided incentives for expropriation. During the following two years, the petroleum contractual framework changed significantly, and both the government-take of profits as well as control over private investment increased significantly. In 2007, the government nationalized the petroleum industry and took majority control over all projects operated by private parties without offering market compensation (Monaldi, 2014). Since 2009 although much more pronounced since 2014 the collapse in oil production in Venezuela and the drop in oil prices have once again caused the Venezuelan government to want to attract investors to initiate a new investment cycle in the Orinoco Oil Belt and for the offshore extraction of natural gas. Only one major, entirely private natural gas project, developed by Spain s Repsol and Italy s ENI, has been fully executed, but many other jointventure deals have been signed. Due to the high political risks, a macroeconomic collapse, and the imposition of U.S. financial sanctions (since 2017), investments have largely not materialized, but the government has been offering a variety of sweet deals to try to entice investors, including prominently those from allied countries such as Russia and China, but also to international oil companies from Europe and the United States. Mexico Mexico was an exception to the liberalizing trend of the 1990s. Historical and ideological reasons help to explain this exceptionalism, but the major factor behind the lack of reform is that Mexico s production kept increasing without significant new investments. The giant oil field of Cantarell, which produced more than two million barrels a day at its peak (or close to two-thirds of the country s production), allowed the government to overtax, and conceal the significant inefficiencies of the national oil monopoly, Pemex. The future costs of the lack of investment were not perceived by the political leadership and even less by the general public, so there was no rush to reform (Monaldi, 2017). Once Cantarell s production started to collapse in 2005, the need for reform became clearer but high oil prices made it initially less urgent. However, as Pemex s capital expenditures dramatically increased but only barely slowed declining output, the case for reform became much stronger. Cantarell s production declined more than 80% from its peak. With Peña Nieto s election in 2012, institutional gridlock eased, and reform was finally passed. Mexico, like Venezuela in the past, is opening the riskier less profitable projects that require large investments and complex technology. In contrast to Venezuela, it is building a much more robust institutional framework to support reform. This may provide a longer life to the investment cycle. However, if the incentives for expropriation appear in the future, one cannot discard the possibility of a partial reversion of reform, especially given the enduring strength of nationalistic ideology in Mexico (Monaldi, 2017). Page 13 of 21

Mexico s new framework includes low minimum royalty rates, which contrast with the very high levies paid by Pemex, and progressive contractual terms, in which the government-take rises with profits. In addition, the government-takes offered in the bidding rounds have been generally high. The progressive framework and contractual high government-take may dampen incentives for expropriation, but if politicians are impatient, they still may have incentives to extract revenues earlier than scheduled. The election of the resource nationalist President López Obrador in 2018 is putting that reform to test. Even though he has announced that he will respect existing contracts, he has criticized them and has stopped any additional bidding rounds. Ecuador Historically, the NOC of Ecuador has had limited financial and operational autonomy. The government, rather than the company, collected the petroleum revenue, transferring to the NOC limited resources intended for investment. Therefore, the company experienced persistent difficulties in terms of complying with its expansion plans. Due to the financial difficulties of the state company and the drop in the price of oil, attractive conditions were offered to private parties in the 1990s. In 1993, production-sharing agreements were signed, and in 1999, joint ventures were established. The reforms in the 1990s successfully attracted investment, and the private sector became the main producer of the country, overtaking the NOC. At the beginning of the 1990s, annual foreign investment in petroleum was less than US$200 million; in 2000, the number exceeded one billion dollars (Musacchio, Goldberg, & Reisen de Pinho, 2009). President Rafael Correa was elected in 2006 with a nationalistic platform, and he enacted a significant increase of state control of petroleum activities and an increase in the governmenttake. Initially, he increased the tax on profits applicable to petroleum companies from 30% to 50%; then, he established a windfall profits tax of 99%, and the contract with Occidental Petroleum was canceled. Likewise, the government accused several companies of tax evasion and demanded repairs. Finally, the government forced all companies to transform their profitsharing agreements and mixed companies into pure service contracts with limited appeal to operators. Several companies, among them Petrobras, abandoned the country (Musacchio et al., 2009; Valera, 2007). As with the case of Venezuela, Ecuador s success in attracting private investment in the 1990s together with the increase in the price of oil generated powerful incentives and opportunities to default on commitments. Likewise, as has been the case in Mexico and Venezuela, the structure of governability of the state petroleum company has favored excessive expropriation of profits by the government and has facilitated the drop or stagnation of investment in the sector. Later, Ecuador signed contracts to manage mature oil fields, with service companies such as Schlumberger, in highly attractive terms to the contractor. Once again, the NOC was short of cash and sheer pragmatism led to a larger role for the private sector. In addition, Chinese state companies have become key partners of the Ecuadorian state, not only as operators but also as lenders to the country, issuing loans that get repaid with exported crude oil. However, Page 14 of 21

service agreements make attracting investment in high-risk projects difficult; as a result, the new administration of President Lenin Moreno (in office since May 2017) has opened up the oil sector to private operators. Ecuador has once again gone through a full cycle. Bolivia Bolivia represents another typical case of a country which was widely successful in attracting investment and increasing production and reserves of gas with a tax system designed during a period of low international prices of hydrocarbons, but which was not sufficiently progressive over the short term. As a result, as soon as international prices increased and most of the investments had already been immobilized, strong incentives were generated to renegotiate contracts and nationalize the industry. Over the period between 1996 and 1997, the government put an innovative process into practice to privatize the state hydrocarbon company, Yacimientos Petrolíferos Fiscales Bolivianos (YPFB). During this process, Bolivia capitalized the pensions funds of the country with a part of the shares of YPFB and privatized the remainder. Making its fiscal and contractual framework attractive, it collected significant private investments in gas exploration and production. As a result, Bolivia managed to successfully increase foreign investment, production, exports, and its reserves of natural gas. Direct foreign investment in hydrocarbons reached US$2.5 billion over the period 1993 2002, which represented 40% of all foreign investment in the country. Proven reserves of natural gas increased sevenfold, and net exports quadrupled (Hogan & Struzenegger, 2010). The Bolivian tax system had characteristics which made it progressive in the long run, but not in the short term, and, as explained in the section of The Cycles of Investment and Expropriation, this creates tensions and conflicts of distribution among governments and companies as soon as prices increase. The increase in the international price of hydrocarbons and the fact that significant investment in the sector had already been completed created powerful incentives so that, in the first instance, the government renegotiated the price of gas under export contracts and its share in the profits from gas and, in the second instance, proceeded with a partial nationalization of the industry. These measures were overwhelmingly supported by the general public in a referendum. Royalties were raised from 18 to 50%, and the government obtained shareholding control over all hydrocarbon projects (Musacchio et al., 2009). As in the case of Argentina, Ecuador, and Venezuela, foreign investors were victims of their own success of generating growing income through exports. Argentina Argentina has a long history of expropriation and contract cancelation, but the last full cycle, from privatization in the 1990s to renationalization in 2012, and liberalization thereafter, constitutes one of the most dramatic examples of resource nationalism. Argentina went from being a relevant exporter of oil in the 1990s even surpassing Colombia to becoming a net importer in the 2010s, with declining production during the previous decade. Like Bolivia and Venezuela, Argentina was very successful in the 1990s in opening the sector to private capital and privatizing the state company, Yacimientos Petrolíferos Fiscales (YPF). However, with the macroeconomic crisis in 2001 2002, the country defaulted on all its Page 15 of 21

contracts, created an export tax, and forced companies to subsidize the local market. The profitability of the sector was severely affected, which led to a significant drop in investment and production and proven reserves. However, there were substantial discoveries of nonconventional resources in the area of Vaca Muerta which promised to make the country an energy powerhouse once again. Still, investment did not increase and imports of hydrocarbons grew, generating a crisis in the balance of payments. This prompted the government to renationalize YPF in 2012. However, in view of the need for a new investment cycle, the government immediately opened up again to private capital and changed the hydrocarbons law to make the conditions more attractive to investors. Chevron, along with other large international oil companies, has since become a key partner of YPF in Vaca Muerta. Again, the incentives provide a significant explanation of the development of the institutional framework (Maurer & Herrero, 2012). Brazil In spite of its recent difficulties, there is no doubt that Brazil has been one of the most successful cases in the region since the turn of the 21st century. The institutional framework projected credibility to investors and, over a long time, it seemed to have protected the state petroleum company from being expropriated. Brazil was the third largest producer of the region, although in 2015 it overtook Mexico, and in 2016 Venezuela. However, until 2015, Brazil was a significant net importer. It reduced its dependency on imports through a combination of long-term policies which permitted increases in production and the replacement of internal consumption of oil through ethanol and natural gas. The petroleum sector was opened up to private investment in 1995 1997, eliminating the constitutional monopoly of the state petroleum company, Petrobras. To provide more credibility to the regulatory framework, the government created an independent regulatory agency to supervise the petroleum sector. Furthermore, Petrobras was partly privatized. Even though the state maintains control over the majority of shares with voting rights, a significant portion of the capital of the company is in private hands. As a result of the reforms, the investment of Petrobras surpassed US$46 billion over the period from 1992 to 2002 and continued to rise during the 2010s. Since then, Brazil carried out multiple oil bidding rounds. As a result of these policies, large successes were achieved in exploration and production (Manzano & Monaldi, 2008). The discovery in 2006 of massive offshore reserves of pre-salt oil promised to make Brazil a relevant net exporter in the future and substantially changed the incentives of the government and of citizens. Even at a time when the production of the pre-salt deposits was still incipient, with the expectation of abundance, the country appeared to have assumed the attitude of a net exporter, focusing on collecting rents and its distribution. This caused changes within the institutional framework. Among them, the following should be mentioned: 1) the requirement that all new offshore projects must be operated by Petrobras and that the state company must have a minimum equity participation of 30% in the capital; 2) the increase of the state s share of equity in Petrobras in exchange for access to reserves, subject to terms which were considered by the market as expropriation of the minority shareholders, with the resulting drop in share price; and 3) the increase in the requirements of national content to very significant levels which greatly increased extraction costs. At the same time, a dispute broke Page 16 of 21