THE WALL STREET JOURNAL: Chávez Plans to Take More Control Of Oil Away From Foreign Firms

Apr 24th, 2006

Chávez Plans to Take More Control
Of Oil Away From Foreign Firms

By DAVID LUHNOW and PETER MILLARD
April 24, 2006; Page A1

Venezuelan President Hugo Chávez is planning a new assault on Big Oil, potentially taking a major step toward nationalization of Venezuela's oil industry that could hurt oil-company profits, reduce production and put further pressure on global oil prices.

Venezuela's Congress, made up entirely of Mr. Chávez's allies, is considering sharply raising taxes and royalties on foreign companies' operations in the Orinoco River basin, the country's richest oil deposit. Major oil companies like Exxon Mobil Corp. and ConocoPhillips of the U.S. and Total SA of France have invested billions of dollars there to turn the basin's characteristically tar-like oil into some 600,000 barrels a day of lighter, synthetic crude.

Mr. Chávez, a left-wing populist who favors greater state control of the economy, also wants to seize majority control of the four Orinoco projects and force private companies who run them to accept a minority stake, according to a top executive at state-run oil company Petróleos de Venezuela SA, known as PdVSA.

The moves would up the ante in Mr. Chávez's long-running battle with foreign oil companies, which he accuses of making outsize profits amid high oil prices at the expense of a poor nation. The stakes are high because Venezuela, the world's fifth-largest oil exporter, holds the world's biggest oil reserves outside the Middle East and is the third-biggest supplier of crude to the U.S.

The Orinoco plan mirrors the terms of a recent takeover by PdVSA of some 32 smaller conventional oil-production projects previously run by private companies. That effort culminated in the seizure of two fields run by Total and Italy's ENI SpA. Yesterday, Oil Minister Rafael Ramirez said Venezuela has no plans to compensate Total and ENI for the lost fields.

If the latest initiative succeeds, it would eliminate the country's remaining privately managed oil fields.

“We would like all of the [Orinoco] associations to migrate to mixed companies,” said Eulogio del Pino, the executive in charge of PdVSA's relations with private companies, in an interview published Saturday in Venezuelan newspaper El Universal. Mixed company is the government's term for an enterprise in which it owns 51%.

Under terms of the government's plan, oil royalties in the Orinoco region also would rise to 30% from the current 16.7% and taxes would jump to 50% from 34%. Higher royalties translate into less revenue for private companies and taxes take a bite out of their remaining profits.

Action could come as soon as this week, when the country's lawmakers are scheduled to review the results of a congressional investigation into the country's decision in the 1990s to open up parts of the oil industry to private investment. That policy has been steadily rolled back by Mr. Chávez.

Oil companies reacted cautiously to the latest signals from Caracas. A spokesman for ConocoPhillips declined to comment, and Exxon Mobil spokesman Mark Boudreaux said: “It's not uncommon for us to have difficult issues that we have to work with the government to resolve, and we take a long-term view of that.”

Any final congressional action could be weeks or months away, but analysts expect lawmakers to take a tough line against foreign companies ahead of December elections, in which Mr. Chávez is running for a third term.

Whatever the final plan adopted by Congress, any move against the Orinoco projects would have significant effects, both on the global market and on the dynamics of Venezuela's oil industry.

For starters, it could cost oil companies like ConocoPhillips billions of dollars in lost profits. The big Houston-based company has a controlling stake in two of the four existing Orinoco projects, an investment value of about $7.5 billion, according to Deutsche Bank.

The four projects cost a total of about $17 billion to set up, but are valued at much more these days because of the high price of oil. On Friday, oil prices rose $1.48 to settle at $75.17 a barrel in trading on the New York Mercantile Exchange.

At a time when new oil supplies are harder to find, Venezuela's moves could also slow the development of what is believed to be one of the world's largest remaining pools of oil. Venezuela says the Orinoco's 235 billion barrels of extra-heavy crude make the Andean nation's reserves the largest in the world, a claim that hasn't been independently verified.

Less investment means less oil reaching international markets in coming years, keeping pressure on prices. Growing output from the Orinoco area has recently been making up for a decline in production elsewhere in Venezuela, where exports are falling about 1% a year.

“The stakes are clearly rising in this game because of the value of the Orinoco projects,” said Paul Sankey, an oil company analyst at Deutsche Bank in New York.

When oil prices were low in the mid-1990s, Venezuela opened up its industry to private companies in a bid to ramp up production to produce more revenue. But as the price of oil has gone up, the profitability of the private companies' investments has risen, as has Mr. Chávez's incentive to claim more of the spoils.

The Orinoco area was identified as a vast source of oil as far back as the 1920s, but development there didn't start until the late 1990s. In contrast to conventional fields, the oil deposited in the area is so thick it is as much a solid as a liquid. Because processing the oil is costly and complicated, Venezuela initially gave foreign companies favorable terms: Under the original contracts, the companies paid a 34% tax rate and a modest 1% royalty on their Orinoco projects.

But Mr. Chávez has been changing the rules of the oil game since taking power in 1999. In 2001, his government tightened the terms on new investments in conventional oil fields, cutting the tax take to 50% from 67% but raising royalties to 30% from 16.7%, as well as limiting private companies to a minority stake. In 2004, the government unilaterally raised the royalty on the Orinoco heavy-oil projects to 16.7% from 1%.

Last year, the Venezuelan leader angered oil companies by ruling that the non-heavy-oil projects signed in the 1990s — some 32 conventional oilfield deals — had to retroactively comply with the 2001 law, forcing the companies to hand over a greater share of the profits as well as give up control over the fields.

Now it appears the Orinoco projects are back on the target list. Rodrigo Cabezas, the head of the influential congressional finance committee, said he will present a report this week on all of Venezuela's 1990s oil deals. The report contains a chapter on the Orinoco projects and also includes personal attacks on former officials responsible for offering cut-rate taxes to foreign firms.

“There are moral and political sanctions against those who managed the oil opening,” Mr. Cabezas said in an interview.

Some of the companies pumping heavy oil in the Orinoco basin are already calculating 2006 tax payments based on the higher tax rates.

If Venezuela raises taxes and royalties as well as reducing private companies' stakes in the four Orinoco projects, it will cost oil companies dearly. According to recent estimates by Deutsche Bank and consulting firm Wood Mackenzie, changing the terms of the Hamaca project alone to comply with the 2001 law would cost ConocoPhillips an estimated $4 billion in lost profits over the life of the project. In that project, ConocoPhillips has a 40% stake, together with a 30% stake for Chevron Corp. and a 30% stake for PdVSA.

So far, Mr. Chávez's moves against private companies have provoked a limited response. Exxon Mobil sold out of one of its 32 operating deals, rather than submit to the new conditions and Total and ENI also resisted, leading to the recent seizures. But analysts have said foreign companies need Venezuela's reserves too much to abandon the nation altogether.

“Some oil companies may walk away, but others will stick around because they need Venezuela's reserves,” said Matthew Shaw, a Wood Mackenzie analyst. Besides, he added, because of high prices the oil companies have been making much more money off the heavy-oil projects than they initially expected.

Write to David Luhnow at [email protected] and Peter Millard at [email protected]