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Oil law in force

THE NEW OIL law, which gives the state greater control over oil activities and toughens the operating environment for private-sector companies, came into effect on 1 January. Critics of the legislation, passed by presidential decree in November, say it will discourage private investment in the liquids segment of the upstream sector.

Following a nationwide strike in the first half of December, which paralysed the economy for a day, opponents of the oil law had hoped it would be made more palatable for private investors. But in remarks made on 2 January, President Hugo Chávez' enthusiasm for the controversial legislation, one of a package of 49 new laws in his 'revolution', which aims to redistribute the country's wealth to the poor, appeared undimmed.

'The [strategy] we have had up until now has not been a success,' Chávez told supporters at a rally in the western state of Táchira, adding that the change in strategy would re-establish 'national sovereignty over mines and hydrocarbons, which are Venezuelan and will always be the property of Venezuelans'.

Alvaro Silva, the energy minister, said: 'The aim ... is for Venezuela to reassume true control over its hydrocarbons.'

These statements are bad news for private investors, local and foreign. Under the law, the state will have a stake in upstream and midstream joint ventures (involving exploration, exploitation, transportation and delivery activities) of over 50%. Technically, this makes joint-venture companies public enterprises, exposing them to public laws. In addition, it raises the cash-strapped state's share of the budget for projects giving rise to doubts over whether it will be able to provide its share of investments.

The fiscal terms for private-sector firms have also deteriorated—at 30%, the new royalty rate is 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.

In addition, there is no grandfathering provision and international arbitration is prohibited. Companies and lawyers agree that the law will deter private investment.

But government officials, including Luis Pacheco, director of planning for PdV, the state-owned oil company, argue that the law enhances liberalisation because it allows privately held companies to own downstream operations, including new refineries, for the first time. In addition, the law applies only to the development of liquids.

Non-associated gas is covered by separate legislation, which permits private-sector companies to own 100% of non-associated gas resources.

'The gas sector is where the real opportunities lie. Onshore and offshore gas should be the playing fields of the futureboth for PdV and private investors,' Pacheco told Petroleum Economist.

But another weak point of the law is its failure to define the rules for exploiting associated gas, which is not properly covered either by the new oil law or by the separate gas law.

The deterioration of the operating environment for privately owned companies has been exacerbated by Opec's latest round of production cuts. At the end of December, Opec said it would proceed with a group output reduction of 1.5m barrels a day (b/d), in response to cuts from non-Opec countries. Venezuela was supposed to cut output by 173,000 b/d, from 2.670m b/d to 2.497m b/d, from 1 January. Private ventures have been asked to contribute to the cuts, including the four extra-heavy oil joint ventures in the country's Orinoco Belt.

The timing is ironic. The upgrader for one of the projects, Sincor, is starting up, according to TotalFinaElf, the main shareholder. The upgraders at the Conoco-led Petrozuata and the ExxonMobil-led Cerro Negro heavy-oil developments are already in operation. The Phillips-led Hamaca project's upgrader is due on stream in early 2004.

At its peak, Sincor will produce 200,000 b/d of 8-8.5°API extra-heavy crude. Overall investment in the project amounts to $4.2bn. Initial production at Sincor began in December 2000 and over 15m barrels of extra-heavy crude oil have already been produced and blended with lighter crude to obtain a 16°API oil for export. With the completion of the upgrader, at José, the entire integrated chain will be gradually started up. Initial synthetic crude oil production is scheduled for February 2002.

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