Profile X: Professor Julian Cardenas, University of Houston

In this issue, The Daily Dynamo met with Professor Julian Cardenas, a law professor at the University of Houston, Director of the University’s U.S-Mexico Law Center and a member of the Ad Hoc Board of Directors that oversees PDVSA assets abroad. As an expert on transnational petroleum law and arbitration, he has taught across Latin America and in Europe, and is now working in the United States, sparking dialogue between important stakeholders in the hydrocarbons industry.

Growing up in Venezuela at a time where the nation was flourishing in its hydrocarbon wealth, Cardenas became cognizant of the industry at a young age. With his father and uncle working as diplomats at the Venezuelan Ministry of Foreign Affairs, he was educated on the connection between foreign policy and energy early on, allowing him to form a precocious understanding of the field. Later, he followed in his father’s footsteps into the foreign service, where his first mission immediately immersed him in energy. “[I] work[ed] on [an] international treaty that dealt with transborder reservoirs between Venezuela and Trinidad and Tobago related to the exploitation of gas reservoirs.” Later on, when Cardenas studied arbitration in France, energy was once again of crucial importance.  “Oil [and] international law arbitration were all over the place in a city like Paris, because Paris was the seat of arbitration cases or the seat of law firms that were involved in those arbitration cases,” he explained, noting that expropriations of Russian oil giant Yukos had made the city an even bigger hotspot for such activity during his time there. 

Having studied and worked with arbitration across the world, specifically across France and Latin America, Cardenas understands that the different legal systems pose challenges to those who navigate them. Despite Venezuela and France’s key differences in energy resources, there actually exists a legal framework that allows transactions in the business to seamlessly occur:

In the energy sector, there are standards and global practices that are applicable to multiple jurisdictions [and] create a global type of regulation that governs investments in the energy sector. So, transnational corporations and governments… have created a system of standards of international law that apply almost to all countries involving the production of energy, Cardenas explained. 

For him, that is ‘transactional law’, a discipline he teaches to students and lawyers alike. While standardization in energy and international law creates similarities between starkly different legal systems, there is a vastly different environment at the national scale. For example, Venezuela’s energy environment is heavily influenced by Article 12 of the country’s constitution, which grants ownership over hydrocarbon and mineral resources and deposits to the state. While such a principle may come as a shock to some, Cardenas contended that such an article is more common than it may seem. “That type of provision, you will find it all along Africa, Asia or Latin America. [There], the state is the administrator of natural resources,” he said, noting that most hydrocarbon/mineral-rich nations are likely to have such rights entitled to the government. However, the United States is somewhat of an anomaly. “That is unique in the United States,” Cardenas posited. “The mom and pop projects that you can find in Texas, Oklahoma or Louisiana  [don’t] exist in other countries. In general, it's a special case.” While the United States maintains a healthy amount of both large- and small-scale oil producers, nations like Venezuela are mainly powered by the state-owned oil companies like Petróleos de Venezuela, SA (PDVSA).

However, PDVSA does not maintain a complete monopoly over the nation’s hydrocarbon sector, allowing private companies and foreign investors into the industry. That process, nevertheless, introduces a layer of uncertainty into how that private sector integration is executed.  “[The] article [will] match with another provision that will allow the state to grant joint venture contracts,” the professor explained, though such contracts can come in many forms. However, that specific type of contract has proven to be especially detrimental. “Joint ventures [where] the national company will be the majority stakeholder and the investor, the minority stakeholder, is not a very efficient way [because] investors… like to get control of the operations,” Cardenas said. In the professor’s eyes, it was that model that led to Venezuela’s downfall. “Having the majority of shares and the project management control comes with its equivalent burden, and PDVSA should pick strategically the projects where that’s appropriate, and not just be forced by law,” he said, “There are projects where it might be more convenient to have the private investor assuming most of the risks.” he added.  He recounted that Hugo Chavez, the president during the 2000s, changed the model for oil investment between 2005 and 2007. In the early 2000s, “the country was producing 3.4 millions of barrels, as a result of the 1990s oil opening and a PDVSA that was a world-class oil corporation.” As Cardenas put it,

[Chavez’] model put PDVSA as the majority shareholders in these projects, [and] production declined  progressively to 2.6 millions of barrels of oil a day. As PDVSA evolved over the years, now with Maduro, the Venezuelan oil industry [became] even more inefficient. Now, the production has collapsed to 800,000 or 900,000 barrels of oil a day… 20% of what it used to be.    

While Venezuela’s model has created less than hospitable terms for foreign and private investment, legal provisions commonly used in places such as Brazil, Colombia or Mexico create an investment model where private parties may act as majority or even absolute shareholders. Those reforms are only part of a larger set that the government must execute in order to reverse the path of its hydrocarbon industry. “During the last two decades, Venezuela shows how not to do things,” Cardenas lamented, stressing that the issues it must combat are institutional rather than in ‘the subsoil’ of the country. “[They’re] all related to the legal system and the political crisis that exists in the country with Maduro's regime,” he contended, adding that the recent electoral fraud the dictator perpetrated creates an untenable environment for any further investment. For Cardenas, a democratic government must be instituted for any permanent change. “A new government may gain more credibility towards investors and [the] international community,” he said, stressing that such a government must “invite foreign investors, establish the appropriate conditions for investment, rule of law, sanctity of contracts.”. As an expert on transnational arbitration, Cardenas sees that as vital to effective reform. “Offering international arbitration will be necessary to offer a legal system that will allow the attraction of investors,” the professor contended.

While many of those reforms are dependent on political upheaval occurring, the seeds of change are being sown in other manners already, according to Cardenas. “The national assembly has an energy commission that [has] already made remarkable progress in terms of being ready for that moment,” the professor asserted. Ultimately, he believes there are a number of key areas of reform when that time comes:

Changing the hydrocarbons law in a way in which there's no limit for private investment in this project; reform[ing] the fiscal system, the participation of foreign contractors; and creating an independent agency that will launch bid rounds [and] work on transparent, direct adjudication of projects in order to invite these investors [in the short term].

The agency, in particular, is especially important. The leading producer of oil in Latin America, as Cardenas noted, is Brazil, who he believes has “a very professional National Petroleum Agency.” As a result, they’ve been able to keep up with investment despite the government's political swings since its inception. Using the frameworks of nations like Brazil, as well as what worked in twentieth century Venezuela, can be integral to a successful reform effort. To Cardenas, Venezuela must “not only have the geology that favors the production of minerals or hydrocarbons [or industry] technology, but the technology [in regards to its] law, regulation, policies and institutions.”  From the “rule of law, sanctity of contract, transparency [to] institutions that work and respect private ownership, all that add an enormous value to a nation,” in the professor’s eyes.  

However, Venezuela will return to a global oil industry far different from the one of its heydays. “It's not the same environment for Venezuela now”, Cardenas contended, citing competition from thriving sectors in Brazil, Guyana, and other Latin American nations; policies regarding climate change, and changes in the global market. With its many challenges, Venezuela finds an uncertain road ahead. Like everyone else, Cardenas will have to wait and see, though he remains uniquely optimistic.