Venezuela's New Strong Negotiating Position Shocks Oil Companies

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Researched by Industrial Info Resources (Sugar Land, Texas). Venezuelan President Hugo Chavez has decided to put pressure on the petroleum industry to receive a greater share of revenue from its worldwide influential oil and gas industry. Since June 2005, the Venezuelan government has enacted a law that was originally proposed in 2001 which increased the tax rate up to 50% (from the previous 36%) to foreign oil companies working within their borders. According to estimates under the provision of this law, foreign operating companies owe Venezuela's government a total of $2 billion from which Venezuela has already received $54 million since the law first went into effect. Venezuela has begun to put this pressure on major oil companies at a time when rising oil prices, political instability in the Middle East, and new buyers in Nigeria and Asia have put the world's fifth-largest oil exporter in a strong negotiating position. At the same time, Venezuela's state-owned oil company, known as PDVSA, controls almost every barrel of oil produced in the country, thus placing the company in a very important and influential position.

Companies operating in Venezuela, which have invested over $10 billion in the country's 32 field operation contracts and are currently pumping about 460,000 barrels of oil per day, will have to consider becoming minority partners with PDVSA if they are looking to continue operation. The joint venture between PDVSA and foreign companies requires handing over a minimum of half of its revenues to the state. Even though foreign companies know Venezuela is not considering the cost of production in their decision to increase "regalia," which is the amount of money paid by those companies to the Venezuelan State for the use of its territory and resources, they accept it as the cost of merely holding onto the possibility of having a part of Venezuela's important and powerful future.

Venezuela's Oil Reserves Surpasses Saudi Arabia's

During the 1990's, the price of oil was around the $20 mark and also fell as low as $10 a barrel in early 1999. Ever since the passing of the hydrocarbon law in 2005, President Chavez has been willing to set the price at $50 a barrel. Moreover, the U.S. Department of Energy (DOE) estimates that the Venezuelan government controls about 1.3 trillion barrels of oil, which is more than the entire declared oil reserves of the rest of the planet. It is even said that Venezuela's deposits alone could extend the oil age for another 100 years. During the upcoming OPEC meeting in Venezuela on June 1, 2006, it is said that President Chavez will ask OPEC to formally accept that Venezuela's reserves are now bigger than that of Saudi Arabia's.

PDVSA is hoping to turn Venezuela into the country with the most crude oil reserves in the world. Over the last few years, the Venezuelan petroleum industry has been trying to increase its crude oil production since it is estimated that Venezuela's crude oil reserves could be greater than 77 million barrels. Lately, the high price of oil, uncertainty about worldwide oil reserves, increases in the demand for energy, and recent initiatives to increase regional integration in South America have convinced Venezuela that now is the time to undertake an aggressive expansion project to become the world's oil superpower. For details view related January 11, 2006, news article - Venezuela: The New Saudi Arabia.

PDVSA has announced plans to reach crude oil production levels of 5.8 million barrels per day by 2012 and 7.5 million barrels per day by 2020. This petroleum industry will concentrate on increasing the crude oil processing capacity through the expansion of existing refineries and investments in plants within the Caribbean and South America. For details view related March 22, 2006, news article - The economy in Latin America: Refinery Perspective for 2006.

Joint Venture with PDVSA

Among the terms stated on the guidelines approved by the Venezuelan Congress on March 24, 2006, companies faced a minimum of 60% stake for PDVSA in each field as well as a jump in royalties from 16.6% to 33.3%. Chavez´s declaration on Friday April 7, 2006, explained, "Now that PDVSA and foreign companies have built partnerships, all parties involved are more committed to the cause, thus creating a more solid framework. It's no longer a contract for doing a service, it's a strategic alliance."

The already signed operating agreements are part of a plan that the Venezuelan government had during the 1990's to give incentives to private investments. They were subcontracting agreements under which private companies pumped around 500,000 barrels of oil per day for PDVSA. PDVSA will have a 70% stake in Teikoku, 75% in Chevron, 80% in Hocol (owned by Nightsbridge; London, England) and 75% in CNPC (China National Petroleum Corporation; Beijing, China). Also, PDVSA will also have 60% in these fields: Kaki, located southwest and southeast from the city of Anaco in the state of Anzoátegui, together with Inemaka (51% Inepetrol, 39% Polar, 10% EPIC; Venezuela); Cabimas, Maracaibo basin, with SueloPetrol (Caracas, Venezuela); Onado, located in Monagas state, with CGC (Argentina); Quiriquire and Mene Grande in the oriental coast, with Repsol; Casma Anaco, eastern Venezuela, with Open (Venezuela); Colon, Maracaibo Basin, with Tecpetrol (Argentina); Pedernales and Ambrosio, in the Orinoco River delta and Lake Maracaibo respectively, with Perenco; Campo Urdaneta, northwestern Venezuela in Maracaibo Basin, with Shell (NYSE:RDS-B); Monogas Sur with Harvest Natural Resources (NYSE:HNR) and Boqueron in eastern Venezuela with BP (NYSE:BP).

Most of the oil companies are operating in the Orinoco Belt located in eastern Venezuela, which holds the world's largest reserve of heavy crude oil. Sincor (Sincrudos de Oriente, Venezuela), which processes heavy crude into more marketable light oils, is also being jointly run by Total (Courbevoie, France). The relationship between Total and Venezuela began last year when the government decided to increase regalia for Sincor from 1% to 16% and then accused Sincor of overproducing and threatened to levy a surcharge of 30% on every barrel produced above the 100,000 barrel per day mark.

Moreover, Venezuela's government ordered BP, one of the world's largest energy companies, to pay $61.39 million in back taxes for 2001-2004. At the same time, ENI (NYSE:ENI)(Tripoli, Italy) will have to pay $46 million in unpaid taxes accumulated during this same period. These companies were given until the second week of April to either pay up or face fine increases of 25% to 200%.

PDVSA Takes Control Over Oil Fields

According to Oil Minister Rafael Ramirez, on April 1, 2006, Venezuela took control of two oil fields operated by Total and Eni since they failed to reach an agreement with President Chavez to transfer into a joint venture with PDVSA. Total (NYSE: TOT ) operated the Jusepin field in northeastern Venezuela, which was producing almost 35 million barrels per day of crude oil. Meanwhile, ENI ran the Dación operating contract, a field located in the northeastern region of Venezuela and produced almost 60,000 barrels per day. According to Christophe de Margarie, Total´s Director of Exploration and Production, even though the oil company is willing to negotiate with Venezuela's government, if they do not reach an agreement, Total will sell the activities in question. Due to the fact that ENI has delayed the payment of nearly $68 million worth of profit tax, Venezuela's tax authority known as Seniat will take the Italian oil company to international arbitration. Moreover, PDVSA has also taken over operations in the Maulpa field, which is operated by Inemaka, the Sanvi-Guere field by Teikoku, and the Guarico Occidental and Quaimare-La Ceiba fields by Repsol YPF.

Every company operating in Venezuela, with the exception of ExxonMobil (Irving, Texas), signed the deal before the imposted deadline on December 31, 2005. Exxon Mobil has been the challenger to the government since it was the only company to reject the new joint venture agreements. Exxon´s strong attitude is supported by the company's position in Venezuela since it continues to hold a 41.7% stake in the 120,000 barrel per day Cerro Negro heavy oil-upgrading project in the Orinoco belt with BP and PDVSA as partners.

In March 2006, Tillerson, Exxon´s Chief Executive, said that at least for this moment, he would avoid making any major investments in Venezuela. This country has repeatedly been a challenging operating arena for this company ever since they started with their $3 billion petrochemical project in February 2006.

PDVSA´s lawyers are drafting the final contract for each of the 32 new E&P joint ventures that have been established between PDVSA and the foreign oil producers after the national assembly approved a contract model on March 30, 2006. These contracts will last up to 20 years. The foreign oil companies participating in this joint venture are Royal Dutch Shell (NYSE: RDSB LN), Chevron (San Ramon, California), ENI, Total, Teikoku (Tokyo, Japan), Repsol (NYSE: REP España), West Falcon Samson (Tulsa, Oklahoma), Perenco (Caracas, Venezuela), Petrobras (NYSE: PBR)(Rio de Janeiro, Brazil), Vinccler (Caracas, Venezuela), China National Offshore Oil Corportation (Beijing, China), and Harvest Natural Resources (Houston, Texas).

Overall, President Hugo Chavez, driven by his desire to avoid multinational exploitation of Venezuela's resources and to create new markets for the countries benefit, it seems more and more like he is trying to change the country's investment plans towards those that fit with the Venezuelan government's foreign policy objectives.

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