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

Andrew Pollack acpollack2 at yahoo.com
Mon Apr 24 11:29:52 MDT 2006

      Wall Street Journal
      Chávez Plans to Take More Control Of Oil Away From Foreign  Firms
      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.
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