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Chavez’ oil law under pressure

Venezuela's new hydrocarbons law, approved by presidential decree in November and due to come into force at the start of this month, may, by now, be on hold. A nationwide strike on 10 December, in response to a package of economic reforms proposed by President Hugo Chávez – particularly concerning land reform, but also elements of the oil law – brought businesses to a grinding halt. Fedecamaras, the country’s largest business confederation, called the strike to protest at the proposed widening of the state’s role in various industries.

AFTER THE STRIKE, a so-called dialogue table (formerly known as a commission)a committee composed of a representative mix of relevant groups, such as politicians and industry professionalswas appointed by Congress to re-examine the oil law.

A senior Caracas lawyer specialising in energy says Chávez had not counted on the strength of opposition to his reforms and that letting Congress intervene to amend the oil law is a face-saving way for the president to backtrack on flawed legislation.

Speaking on condition of anonymity, the lawyer says there is a good probability that Congress will align the law's most controversial elements more with the needs of private investors. The private sector is particularly concerned about the high royalty rate and the increase in state participation in upstream and midstream activities.

'The government has to do something to recognise that 90% of people were against this law,' the lawyer says. 'The main pointsroyalty and state participationare going to be changed or made more flexible to make it saleable to private investors.'

Under the law, the state would have a stake in future upstream and midstream joint ventures (involving exploration, exploitation, transportation and delivery activities) of over 50%. The fiscal terms are also deemed to have deterioratedat 30%, the royalty rate would be the highest in the world (up from 16.67%), although there is scope for reduction to 20% for mature or extra-heavy oil fields and 16.67% for bitumen fields.

The lawyer says the law's implementation could be suspended while its content is reviewed. 'That's the ideal and that's what everybody's requesting.' 

'If the law is going to apply to every contract signed in the future, it will deter foreign investment,' says Alison Sheppard, an analyst at Wood Mackenzie. 'It appears to be a reversal of the apertura policy.' 

Sohail Barkatali, senior solicitor of Denton Wilde Sapte's energy and infrastructure group, says: 'Any investors looking at the law should approach it with tremendous caution.' He adds that the law also constitutes 'a shift away from the private sector and a drive towards greater state control'. The Caracas lawyer agrees that, as it stands, it would discourage foreign investment 'for sure'.

Conoco, which has a substantial upstream portfolio in Venezuela, including a majority stake in the Petrozuata heavy-oil project, says: 'Capital-intensive projects, such as the ones in the Orinoco Belt, will be uneconomic under the terms of the new law.' 

ExxonMobil has a similar view. At the inauguration of its Cerro Negro heavy-oil plant, in September, Mark Ward, the company's country manager for Venezuela, said a 30% royalty rate would make any project in the country 'very difficult' to pursue.

Private concerns

An additional concern for privately owned firms that have already invested in the country is the lack of a grandfathering provision to protect the terms of their investment. (Although the government has told firms it will respect the terms of their contracts.)

Contrary to general practice in the oil industry in most countries, the law also prohibits international arbitration. Disputes will have to be settled internallyanother blow to the confidence of potential investors.

Even before the law was drafted, private companies had routinely expressed frustration with aspects of the operating environment. Conoco says: 'It is a challenging environment. High local costs, a complicated labour situation and many administrative impediments make it difficult to operate.' 

The law was drafted under the auspices of a dialogue table that met regularly until it was finalised in November. However, the lawyer says the committee was not representative of foreign and private firms operating in Venezuela's hydrocarbons sector. 'Foreign producers weren't represented.'

Although PdV has had operational control in many projects in the past, the private sector is also concerned about state entities holding majority shares in individual projects. Technically, this would make joint-venture companies public enterprises, exposing them to public laws.

It would also raise the state's share of the budget for projects. Says the Caracas lawyer: 'The government will have to pay 50% of the costs of projects. We know it has no money to pay 50% of the costs, but we also know it will want its share of the earnings.' 

Another weak point is the law's failure to define the rules for exploiting associated gas. Non-associated gas is covered by separate legislation, but associated gas is omitted in both cases. 'No-one know what happens to associated gas,' he says. 'It's in limbo. It seems the government forgot the proposal from private firms to discuss associated gas.'

This is not the first time industrial action has caused a change in reform. Government plans to split off PdV's gas operations into a separate unit were abandoned in November following a backlash from workers.

LNG project stalled amid ownership uncertainty

SMARTING AT the success of nearby Trinidad and Tobago, Venezuela has been trying to establish a liquefied natural gas (LNG) project of its own for several years. Venezuela LNG (VLNG) has been subject to several delays, but the government hopes to have an agreement in place by March.

'The government's objective is to have [an agreement to start work] by the first quarter of 2002,' says Luis Pacheco, PdV's executive director of planning. Operations at the plant could start up in 2005, he adds.

A scaled-down version of the $5bn-6bn Cristobal Colón project (first put forward in the late 1980s), VLNG will cost an estimated $2bn and will have an initial production capacity of 4.0m-4.5m tonnes a year.

The plant would develop gas from fields offshore the Paria peninsula, near Trinidad and Tobago. The project would involve creating facilities for production, transmission, onshore liquefaction and export. Formerly, the partners were PdV (33%), Shell (30%), ExxonMobil (29%) and Mitsubishi (8% ). But the government wants to increase the state's stake to a controlling level, which has thrown plans into uncertainty.

As a result of its decision to redefine the project's framework, the government did not extend the preliminary development agreement for VLNG with PdV's foreign partners, which expired on 30 September.

The foreign partners are unwilling to go into detail on a sensitive issue. But Shell says the government 'has invited the former partners in VLNG to submit value-added proposals for further development of this objective'. This means the foreign firms have been asked to come up with a commercial development plan for a project in which they would have a vastly reduced share and the government has control of a majority share.

At the time of writing, a decision from the energy ministry on how the project would proceed was expected around the end of 2001, according to Shell.

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