Venezuela: Majors' need to secure reserves put to the test
President Hugo Chávez has flexed his muscles once again as he seeks a better deal with foreign investors in the country's oil sectors. His government announced in mid-April that 32 marginal field reactivation contracts (OSAs) awarded in the 1990s would be abolished at least seven years before they were due to expire. A day later, he imposed the second tax increase in six months on four foreign-operated synthetic oil operations.
The announcements underline the widely held conviction within the Chávez administration that the investment terms that were awarded to foreign investors in the 1990s were too generous, but they also reflect a growing opportunistic streak within the government. Venezuelan officials are well aware that Western oil companies now scrambling to find new fields to replace their dwindling oil reserves in developed countries are in a very weak position to oppose the latest tax increases, especially if they want further access to the country's huge oil and gas resources.
The foreign companies that hold the 32 OSAs are being offered the chance to negotiate new joint ventures with the state, but they face a looming end-of-year deadline as well as unsettled allegations that they underpaid income taxes for the last four years. The government has said that companies must settle outstanding tax claims for a "reasonable" amount before talks on new contracts can begin. Making matters worse for investors, ambiguities in the law passed by the Chávez government in 2001 cast doubt on whether foreign investors, which will be minority partners of the state, will be able to book reserves under any new joint venture.
The four extra-heavy oil projects – Sincor (200,000 b/d), Hamaca (190,000 b/d), Cerro Negro (120,000 b/d) and Petrozuata (120,000 b/d) – will remain, for now, in their present form, although the latest changes represent another significant erosion of project economics. The income tax increase, which boosts rates from the 34% set out in the extra-heavy oil development contracts to 50%, coupled with the decision last October to abolish a royalty holiday enjoyed by the four projects, has significantly reduced the profitability of the four ventures, which have largely been enjoying profits that were unimaginable when they were drawn up in the 1990s.
The government's handling of the tax and royalty increases has raised serious doubts about its commitment to the sanctity of contracts. No attempt has been made on any occasion to seek a negotiated solution, nor did the government consult investors before imposing the increases. The energy minister, Rafael Ramírez, was unrepentant last month, saying "no contract is above the law", suggesting further tax increases have not been ruled out.
The two firms hardest hit by the government's decision are ConocoPhillips, which operates two of the four extra-heavy oil projects that in total account for 0.57m barrels a day of Venezuelan production, and ChevronTexaco, the largest producer by volume in the country. The two companies' wider interests in Venezuela have already played a significant role, as ConocoPhillips and ChevronTexaco failed to join ExxonMobil in threatening to sue Caracas over the government's decision in October to increase heavy-oil royalties. Unlike ExxonMobil, the other two US majors' growth plans are exposed to Venezuela. ConocoPhillips hopes to build on its presence in heavy oil and is also developing the Corocoro offshore oilfield. ChevronTexaco has made a considerable bet on a potentially large liquefied natural gas play.
The government's decision to increase royalties is likely to have a considerable effect on its latest attempt to attract bidders into its domestic gas sector. Caracas hopes to award six gas-exploration blocks in the Gulf of Maracaíbo this summer, but investor interest is likely to have been sapped by the government's latest unilateral tax changes.