Venezuelan government points to in-depth oil policy changes

A little over a year after Venezuelan President Hugo Chávez took office, a wide range of in-depth changes in oil policy is emerging.

That can be seen as state petroleum company Petroleos de Venezuela SA (PDVSA) slashes its 2000-09 business plan, reshapes its strategies, and offers a greater role to private investors in the gas and petrochemical industries (see related story, p. 26).

The Chávez administration also has raised some serious concerns regarding the future of the so-called oil opening (apertura) and internationalization policies that were put in place by previous administrations.

Meanwhile, Venezuela's new Constitution, overwhelmingly approved in a popular referendum on Dec. 15, flatly bans the sale of part of PDVSA, an idea that previously had been suggested in some private and political quarters (OGJ, Apr. 10, 2000, p. 27).

Private, mostly foreign oil investors have expressed some concern regarding the nation's oil policy and have largely followed a kind of "wait and see" approach to further involvement in the industry.

The oil opening policy launched by the previous administration of former President Rafael Caldera generated billions of dollars in joint venture deals by foreign oil companies, when the goal was to significantly jack up Venezuela's oil production. But since Chávez took office, Venezuela has abandoned its aggressive production expansion policy and returned to the fold of the Organization of Petroleum Exporting Countries, strictly complying with the organization's production quotas and even orchestrating some cuts that have helped world oil prices rebound from the depressed levels of a year ago.

Aside from revising the oil opening policy, the Chávez administration also is taking a closer look at PDVSA's so-called internationalization strategy, under which the corporation had invested in a wide range of projects in other countries, such as Citgo Petroleum Corp. in the US and Veba Oel AG in Germany.

Rodríguez views

In a recent interview published in the local newspaper El Universal, Energy and Mines Minister Ali Rodríguez says Venezuela "will scrupulously respect" all obligations it has undertaken as part of the oil opening, adding that "the only thing that is going to be done is to introduce corrections to negative things that occurred during the [apertura] negotiationsellipse."

He said a new scheme of oil opening is being sought to stimulate the formation of national capital in the industry and improve the country's revenues. Foreign companies, he added, will have an ample field of action in areas such as gas, mining, and electricity.

"The oil strategy in Venezuela under the previous government generated sad results. The two main arms of that strategy were internationalization and the oil opening policy. Allegedly, refineries that were purchased abroad were aimed at processing Venezuelan heavy crudes. Veba Oel, for example, has not refined one single barrel of Venezuelan oil, and, in the same situation, there are many others-not all of course.

"In addition, giving these companies capacity to process heavy crudes created a debt for them that, among other things, required the placement of oil at a discount that has bound PDVSA to this day."

Asked whether the sale of those offshore refineries is being considered, Rodríguez said, "All, absolutely all, the companies are being evaluated. That is a very tough job. Afterwards, we are going to make decisions. We expect that during the course of this year, we will have completed this entire process, both outside the country as well as inside. Given the importance of this, it will be the president of the republic [who will] make the decision and announce it."

Regarding the oil opening, he said, "There, you will find that the majority of those contracts are not in conformity with Venezuela's international commitments. If we want to reduce production, they are not obliged to do so. Some allow lowering it through an extension of the contract, but not the majority. The result is that third-party production increases more than our own.

"To that, one has to add that almost all the oil opening activities pay less taxes than does PDVSA. All that brings, as a consequence, a per-barrel cost that is more expensive when PDVSA extracts [oil] than when private companies do the same. That is why I was so annoyed when Conoco [Inc.'s] production manager said that Venezuela was one of the countries that had hardened the fiscal oil burden in recent years. That is untrue.

"Yes, in this ministry, we have been working on a fiscal reform; there is no reason to hide that. The move is to create a more-transparent tax scheme."

While ruling out the possibility of changing the tax terms for those contracts already in place under the old oil opening policy, he said that "any future contract that Venezuela signs" will be subject to a new tax regime.

"Internationalization and the oil opening have led to making the cost per barrel of Venezuelan oil more expensive, on average."

Rodríguez said PDVSA and his ministry are studying "company by company" under the internationalization policy and "afterwards, we'll see if it is convenient to make adjustments, buy the entire company or sell, and, if we sell, under what conditions. It is not easy to sell."

Turning to the issue of crude oil production, Rodríguez said, "Last year, a decrease in output, in addition to that of 1998, was inevitable. But potential production remains at a correct relationship with that of real production. We are now producing about 87% of the potential production level we have. It makes no sense to maintain a production capacity much higher than what we really extract. It is very costly. We can affirm with full responsibility that current production potential is the correct level. Potential production at this moment is above 3.5 million b/d, and nothing indicates that this year we will be above that," he said.

Regarding the oil opening and the internationalization policies, Rodríguez said the final outcome of those two strategies would have been "to make PDVSA absolutely inoperative by a sustained and irreparable increase in costs.

"At the end of the day, what would have been achieved through those policies was that PDVSA would have had to get rid of a large chunk of bad deals and of the company itself. It was not a mere accident that many high-ranking PDVSA executives proposed selling [PDVSA]," he said.

He noted that both the oil opening and internationalization strategies will have to be dismantled but cautioned that such a move would be "a long-term task, perhaps many years."

Conoco blast

Lingering private sector concern regarding the government's new approach on oil policy surfaced at a recent Caracas seminar organized by the Venezuelan-American Chamber of Commerce and Industry, when a Conoco executive urged government officials to articulate a policy that would make the country more attractive to potential investors.

Reading from a statement prepared by Conoco Exploration & Production Executive Vice-Pres. Rob McKee III, Gary Merriman, the company's exploration and production president for the Americas, said, "Potential investors in Venezuela have received few, if any, positive signals recently about the future climate for investment in the country."

He said, "The past framework has been dismantled but as yet has not been replaced. This void is a powerful agent of paralysis to new investment. We all struggle to define the changes that may be coming, but, for now, we just don't know.

"Speaking emotionally, the international oil industry came with the sincere belief that the projects we were embarking on were in the Venezuelan people's best interest. Today, we're not even sure we are welcome."

Under the oil opening policy of the government of former President Rafael Caldera, Conoco, whose relationship with Venezuela spans about 50 years, committed to a $2 billion project in 1990 known as Petrozuata, which was designed to produce, upgrade, and market heavy crude oil from the Orinoco heavy oil belt. Several other foreign oil companies also entered similar joint venture deals during the 90s. The Conoco executive told the business forum that the Petrozuata association agreement "means that there can be no doubt we want to be a long-term player in this economy."

Noting that the outlook for petroleum investment in Venezuela "is different today than it was in the early 1990s," he said, "among other things, the changes that cause us concern today are a deterioration in exploration prospectivity, escalation in costs, the uncertainty that surrounds the current political transition, and low confidence throughout the financial community."

He also said, "The market's perception of risk with respect to investment in Venezuela has increased, resulting in a higher premium being required to lend money for projects here."

Looking to the future, the Conoco executive said, "Venezuela must articulate its desire for foreign investment by demonstrating an ability and a willingness to do what is necessary in a highly competitive market. Second, it will require access to decision-makers. In our experience, both before and since the Chávez administration [took office], not having this access has not only been frustrating, it has impacted our ability to come to an expedient resolve around issues."

"And last, it will require focus on why Venezuela wants foreign investors here in the first place and maintaining the kind of stable environment it will take to attract and keep them here. Keeping that focus and working together will help to minimize the risk factors and make Venezuela competitive," he added.

The executive also cautioned, "These changes must occur with some urgency. As the alternative opportunities in countries such as Indonesia, Nigeria, Russia, and the Middle East mature and attract investment, the capital available for Venezuelan opportunities will be reduced. The chances will be fewer."

Shortly thereafter, Rodríguez responded to the criticism, calling on Conoco leaders to explain complaints about lack of access to government officials. In a Jan. 21 letter sent to Conoco Pres. Archie Dunham, the Venezuelan minister reiterated that President Chávez had said Venezuela "would scrupulously respect" all obligations contracted under the oil opening policy.

Expressing surprise at the Conoco executive's remarks, Rodríguez said "I have no other option but to publicly ask you whether the opinion expressed is an official position or a personal opinion of the person who gave it. If it was an official company position, I want to offer you a very cordial invitation so that, together with PDVSA, we examine together all the objections you might make."

New business plans

While a new Venezuelan oil policy takes shape, PDVSA officials have unveiled their company's 2000-09 business plan, which involves a total investment of about $53.3 billion-an estimated $10-15 billion cutback from the original plan (see related story, p. 26).

PDVSA Pres. Hector Ciavaldini said the plan also is in line with goals laid down in the 2000-02 national economic plan designed by the Chávez administration.

PDVSA Vice-Pres. Aires Barreto emphasized that the change of course reflected in the business plan is aimed at maximizing the participation of private capital with particular emphasis on domestic private capital. He also pointed to other targets, such as changing the hydrocarbon reserves composition by increasing the portion of light and medium crudes and nonassociated natural gas, by improving overall productivity and competitiveness, and shifting the exports slate-in order to incorporate the maximum added value to exports-by boosting the production of refined products and increasing the output of gas-based petrochemicals.

Barreto also noted that, based on ministry guidelines, PDVSA has moved to concentrate on core activities such as petroleum refining and trade, promoting the maximum participation of both national and foreign private capital, and pushing the integral development of natural gas, chemical and petrochemical businesses, and Orimulsion.

In other areas, PDVSA has placed health, safety, and the environment high among its priorities and plans to spend about $2.5 billion in those areas, as the company moves to gain the position of "a company with a green conduct and image," he said. PDVSA, he added, plans to focus on its exploratory program, with a special focus on discovering oil fields with reserves in excess of 500 million bbl. That will not only bolster reserves but also help rein the firm's production costs, he said.

E&P

Regarding Venezuela's prospectivity, PDVSA Vice-Pres. Domingo Marsicobetre said, "We estimate that there are good probablities to corroborate the existence of huge oil fields. To explore extensive areas with limited geological information, we have proposed an aggressive seismic and drilling plan."

PDVSA's exploratory effort is aimed at adding about 10 billion bbl of light and medium crudes and about 38 tcf of gas to current reserves through its own efforts and by third parties through operating and risk-exploration contracts.

Companies holding operating contracts will maintain their exploratory programs and are expected to prove about 300 million bbl of crude this year. Those operating in the risk-exploration areas have the potential to discover about 2 billion bbl, Marsicobetre noted.

According to the guidelines set forth for PDVSA, production levels would depend on the dynamics of the market, which, in line with planning scenarios already considered, would focus on the short term within an environment of restricted volume growth. "That will force us to maximize the production of light and medium crudes through our own efforts and bring our heavy crude commitments in line with growth coming from efforts by third parties," said Marsicobetre.

At any rate, PDVSA's total production capacity would be about 5.8 million b/d by 2009, he added. Along those lines, PDVSA expects that, through its own efforts, will help it maintain a production capacity of 2.9 million b/d in traditional areas during 2000-05, in the hopes of expanding later to 3 million b/d basically with heavy crudes located in the eastern region of the country.

"With that goal, it contemplates the execution of focalized projects in the increase of production and also to optimize installations," said Marsicobetre. "In the west, [PDVSA] will concentrate on the area of automation, safety, and environment, while in the east, there are operational centers such as Carito and El Furrial, PIGAP II, and processing plants at Punta de Mata, among others."

Regarding operational contracts, an increase is expected in production capacity from 590,000 b/d this year to 950,000 b/d by 2006, then decline to about 790,000 b/d by 2009.

"However, these volumes do not contemplate the potential contribution from exploratory efforts that could be developed in operational agreements and the greater volume contribution that will come from agreements in the Third [marginal fields] Round, principally associated with light and medium crudes," he said.

In areas granted under shared-profits agreements, the first commercial developments are expected toward yearend 2002 and the beginning of 2003. Projected production capacity in those areas in 2009 is about 450,000 b/d.

The four strategic association projects in the Orinoco oil belt that are currently in progress-Petrozuata, Cerro Negro, Sincor, and Hamaca-are estimated to reach a production capacity of 690,000 b/d by the end of 2009, which would mean a production of synthetic crude of some 630,000 b/d.

Total investments in exploration and production by PDVSA and private companies during the 10-year plan are estimated at $36-38 billion, of which 62% will be made in eastern Venezuela and 38% percent in the western part of the country. Of the total investment, about 46% will be made by PDVSA, 22% through strategic associations in the Orinoco, 22% in operating contracts, and 10% in profit-sharing contracts.

Other areas

Regarding Venezuela's trademark boiler fuel Orimulsion, the feasibility of growth in this sector will depend mainly on three factors: cutting costs faster than coal prices can decline, securing new stable and growing markets that allow the development of a marketing and commercialization strategy, and the participation of private capital to undertake the construction of two additional production modules that would allow production capacity to increase during 2000-09 to 20 million tonnes/year from 5 million.

Turning to another area, Marsicobetre said, "The strategic orientation of the gas business is based on the combined development of the supply of associated gas and nonassociated gas with the participation of private capital." That would include transmission and distribution systems, as well as the future expansion of capacity for processing, extraction, and fractionation of NGL. He also cited the gas development plan of the Anaco area in eastern Venezuela, which contains about enough to cover domestic gas demand.

PDVSA estimates investment in the gas sector at more than $4 billion, while another $8.7 billion is to be invested in the chemical and petrochemical industry under the 2000-09 business plan.

Regarding refining and marketing, PDVSA Vice-Pres. Carlos Jorda said, "The estimated commercial opportunities for Venezuela at the end of the plan amounts to about 5,585,000 b/d, which represents an increase of 2,330,000 b/d compared with our opportunities in 1998."

Jorda also underlined that Latin America and the Caribbean geographically constitute the biggest area of demand for products, because the commercial opportunities in those markets will increase by 75% from 1998. He also said the processing of crude in Venezuela is expected to increase to 1.3 million b/d from 1.1 million b/d.

Under the plan, PDVSA's investment this year will amount to an estimated $5.2 billion, of which $3.3 billion will be direct investments by the corporation while the remaining $1.9 billion will be investments in joint ventures. That represents an increase of $1.1 billion from 1999.

According to Ciavaldini, the company's new policy regarding debt generated a net reduction of $1.8 billion of its debt compared with the original plan of 1998. In addition to promoting the maximum participation of the private sector, PDVSA's 2000-09 business plan also encourages a greater incorporation of national goods and services offered by Venezuelan petroleum sector suppliers, he added. Also, there are ample opportunities for private capital to participate in telecommunications, gas compression, sulfur plants, oil pipelines, and refinery modernization, he said.

Key objectives

The 10-year plan provides for investment of about $32 billion in the first 3 years, Ciavaldini announced. He said some of the key objectives of his company's strategy are:

• Complying with OPEC's agreements on volumes of production.
• Expanding the range of relations with OPEC-for example, on matters such as technological cooperation, trade exchanges, and joint projects, among others.
• Promoting the widest participation of the private sector and the formation of national capital in gas, chemical, and Orimulsion sectors.
• Reshaping the structure of exports in line with increases in the yield of finished products at Jose, Anzoategui state; the utilization of existing refining capacity; and the development of refinery modernization projects.
• Improving the composition of our crude and gas reserves. "In this regard, we are dedicating our efforts to the incorporation of light and medium crude reserves through exploratory campaigns in the search for huge fields that allow us to increase the competitiveness of our reserves."
• Increasing productivity. "To do this, we will depend on the intense, efficient, and opportune use of the best technology, as well as a sharper reduction in costs."
• Contributing to a greater hemispheric energy integration through the strengthening of PDVSA's presence in Latin American and Caribbean markets. "On this, it is important to point out that we have identified business opportunities mainly in Brazil and Cuba, said Ciavaldini."