Venezuela industry: New blows for oil firms
FROM THE ECONOMIST INTELLIGENCE UNIT
Foreign oil companies operating in Venezuela have been hit with new contracts, new tax bills and in two cases, a takeover of oilfields by the nationalist government of President Hugo Chávez. With world oil prices still near record highs, in the last year the Chávez administration has moved to put the vital oil industry under tighter state control. This week it culminated the process of agreeing new joint-venture contracts that give a majority stake to the state-owned company, Petróleos de Venezuela (PDVSA). The two firms that could not come to terms with the government by the April 1st deadline, France’s Total and Italy’s Eni, have seen their fields seized.
Foreign firms operate a total of 32 oilfields in Venezuela, which together account for about 500,000 b/d, or nearly 20% of the country’s total output of 2.7m b/d. Most companies have agreed to negotiate the new contracts on the government’s conditions. The previous arrangements, negotiated during the 1990s when the oil sector was first opened up to foreign investment, were deemed by the Chávez government to be too favourable to foreign operators. The new ones not only reduce these firms to minority status but also increase the royalties and taxes to be paid to the state.
The fields operated by Total and Eni, the only firms to refuse the new contracts, were small (producing 33,000 b/d and 50,000 b/d, respectively). The government promises it will compensate them for their lost investment, but no details have been made public.
Meanwhile, Exxon Mobil, the world’s largest publicly trade oil company, earlier opted to sell its stake in one Venezuelan oilfield to Repsol (Spain) rather than agree to a new contract. (Exxon still retains a minority position in the Cerro Negro oilfield and the La Ceiba bloc on the shore of Lake Maracaibo.)
Venezuela has been a tough operating environment for Exxon, which was taken off a US$3bn petrochemical project in February and a US$5bn project to export natural gas in 2002. Recently, Venezuela’s energy minister, Rafael Ramírez, even publicly said of Exxon, “We don’t want them to be here,” in response to questions about the firm’s decision to sell to Repsol. But a downsizing of its presence in Venezuela is less of a burden for Exxon than it would be for other firms, as the country accounts for just 1-2% of Exxon’s total oil output. By contrast, ConocoPhilips, another US firm, gets some 7% of its production from Venezuela.
Good gamble
With oil prices high and new sources of global supply rare, the Chávez government bet correctly that most foreign firms would accept lower profits, higher royalties and less control rather than abandon their investments in Venezuela. Many have also acquiesced to paying back taxes, which the government has recently assessed, arguing that the companies paid less than they should have in 2001-04. The 32 operating contracts were originally signed at a 34% income-tax rate, but tax authorities later ruled that they should have paid a rate of 50% during that four-year period.
On March 31st the government announced that Chevron, the US’s second-largest oil company after Exxon, had agreed to pay US$50.2m in back taxes (and US$75m in total when late fines are included). BP (UK) will pay about US$14m. Others will have to cough up similar amounts.
It might be assumed that, given the obligatory contract changes and other demands being placed on big oil firms by the government, many would grow wary of operating in Venezuela and be discouraged from making new capital outlays.
However, Venezuela still presents a friendlier operating climate than many other countries, particularly in the Middle East, according to industry specialists. According to a report issued by the US Energy Department, it has a more favourable investment environment for US companies than Saudi Arabia, or even nearby Mexico—where the constitution does not allow foreign firms to explore for oil.
In addition, Venezuela is close to the critical US market, and its geology is not particularly difficult for oil exploration and exploitation. Foreign firms are also keenly interested in Venezuela’s abundant heavy oil deposits, which, though once deemed uneconomical because of the high cost of refining heavy crude, offer attractive profit potential at current oil price levels.
Risks for Venezuela
Problems for Venezuela will arise when and if global oil prices decline substantially, which might reduce the allure for private investors of exploring and operating in the country. Political risk might then begin to outweigh commercial attractiveness.
Were foreign capital to become less available, PDVSA, the state company, would have to pick up the investment slack. However, PDVSA’s ability to invest has been much eroded, as the Chávez administration has used the company’s revenues to fund a range of government social programmes. Any eventual deterioration of PDVSA’s production capabilities would also have major implications for the overall economy and the government’s fiscal position, as the oil sector accounts for more than three-quarters of export revenues, one-half of government revenues and about a third of GDP.
In the long run, Venezuela might have more to lose than oil multinationals should market conditions turn sour and government relations with the companies deteriorate severely. For the moment, however, big oil is not likely to give up on Venezuela.
Source: ViewsWire Latin America
Foreign oil companies operating in Venezuela have been hit with new contracts, new tax bills and in two cases, a takeover of oilfields by the nationalist government of President Hugo Chávez. With world oil prices still near record highs, in the last year the Chávez administration has moved to put the vital oil industry under tighter state control. This week it culminated the process of agreeing new joint-venture contracts that give a majority stake to the state-owned company, Petróleos de Venezuela (PDVSA). The two firms that could not come to terms with the government by the April 1st deadline, France’s Total and Italy’s Eni, have seen their fields seized.
Foreign firms operate a total of 32 oilfields in Venezuela, which together account for about 500,000 b/d, or nearly 20% of the country’s total output of 2.7m b/d. Most companies have agreed to negotiate the new contracts on the government’s conditions. The previous arrangements, negotiated during the 1990s when the oil sector was first opened up to foreign investment, were deemed by the Chávez government to be too favourable to foreign operators. The new ones not only reduce these firms to minority status but also increase the royalties and taxes to be paid to the state.
The fields operated by Total and Eni, the only firms to refuse the new contracts, were small (producing 33,000 b/d and 50,000 b/d, respectively). The government promises it will compensate them for their lost investment, but no details have been made public.
Meanwhile, Exxon Mobil, the world’s largest publicly trade oil company, earlier opted to sell its stake in one Venezuelan oilfield to Repsol (Spain) rather than agree to a new contract. (Exxon still retains a minority position in the Cerro Negro oilfield and the La Ceiba bloc on the shore of Lake Maracaibo.)
Venezuela has been a tough operating environment for Exxon, which was taken off a US$3bn petrochemical project in February and a US$5bn project to export natural gas in 2002. Recently, Venezuela’s energy minister, Rafael Ramírez, even publicly said of Exxon, “We don’t want them to be here,” in response to questions about the firm’s decision to sell to Repsol. But a downsizing of its presence in Venezuela is less of a burden for Exxon than it would be for other firms, as the country accounts for just 1-2% of Exxon’s total oil output. By contrast, ConocoPhilips, another US firm, gets some 7% of its production from Venezuela.
Good gamble
With oil prices high and new sources of global supply rare, the Chávez government bet correctly that most foreign firms would accept lower profits, higher royalties and less control rather than abandon their investments in Venezuela. Many have also acquiesced to paying back taxes, which the government has recently assessed, arguing that the companies paid less than they should have in 2001-04. The 32 operating contracts were originally signed at a 34% income-tax rate, but tax authorities later ruled that they should have paid a rate of 50% during that four-year period.
On March 31st the government announced that Chevron, the US’s second-largest oil company after Exxon, had agreed to pay US$50.2m in back taxes (and US$75m in total when late fines are included). BP (UK) will pay about US$14m. Others will have to cough up similar amounts.
It might be assumed that, given the obligatory contract changes and other demands being placed on big oil firms by the government, many would grow wary of operating in Venezuela and be discouraged from making new capital outlays.
However, Venezuela still presents a friendlier operating climate than many other countries, particularly in the Middle East, according to industry specialists. According to a report issued by the US Energy Department, it has a more favourable investment environment for US companies than Saudi Arabia, or even nearby Mexico—where the constitution does not allow foreign firms to explore for oil.
In addition, Venezuela is close to the critical US market, and its geology is not particularly difficult for oil exploration and exploitation. Foreign firms are also keenly interested in Venezuela’s abundant heavy oil deposits, which, though once deemed uneconomical because of the high cost of refining heavy crude, offer attractive profit potential at current oil price levels.
Risks for Venezuela
Problems for Venezuela will arise when and if global oil prices decline substantially, which might reduce the allure for private investors of exploring and operating in the country. Political risk might then begin to outweigh commercial attractiveness.
Were foreign capital to become less available, PDVSA, the state company, would have to pick up the investment slack. However, PDVSA’s ability to invest has been much eroded, as the Chávez administration has used the company’s revenues to fund a range of government social programmes. Any eventual deterioration of PDVSA’s production capabilities would also have major implications for the overall economy and the government’s fiscal position, as the oil sector accounts for more than three-quarters of export revenues, one-half of government revenues and about a third of GDP.
In the long run, Venezuela might have more to lose than oil multinationals should market conditions turn sour and government relations with the companies deteriorate severely. For the moment, however, big oil is not likely to give up on Venezuela.
Source: ViewsWire Latin America
posted by Marko at 4/08/2006 06:00:00 PM
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