Government actions cut Pdvsa's tax bite, improve climate for foreign investment in petroleum sector. Outgoing Pdvsa Pres. Chacin sees need for more economic reforms. Clash over Orimulsion highlights business and government conflict.
Venezuela's government has begun a series of reforms designed to boost economic prospects for the country's petroleum sector.
In addition to improving the economic situation for state oil company Petroleos de Venezuela SA (Pdvsa), the reforms aim to improve the climate for foreign participants in Venezuelan petroleum.
The new government of President Carlos Andres Perez recently reversed almost 25 years of policy in allowing Pdvsa to seek international participation in Venezuelan upstream projects.
Although the reforms will help Venezuela's petroleum sector, retiring Pdvsa Pres. Juan Chacin Guzman thinks there is still much more reform needed.
The reforms were quickly followed by a shakeup in Pdvsa's board amid mixed signals over the company's foreign investment activities (OGJ, Mar. 12, p. 18).
Meantime, Venezuelan industry officials have stepped up criticism of Perez amid gaffes in the board choices.
LIBERALIZED RULES
Venezuela's government has promulgated the most sweeping liberalization of its foreign investment code in the 30 years that the country has been a democracy.
In Decree 727, Perez has removed most of the restrictions affecting foreign investors. Among key reforms is elimination of the requirement that foreign investors obtain official permission before remitting profits to their parent companies.
The government also has:
- Opened the domestic capital market to foreign companies.
- Eliminated restrictions on foreign investment in certain sectors of the economy that hitherto had been reserved for Venezuelan nationals.
- Removed restraints on technology transfer.
- Trimmed government discretion and interference in foreign investment decisions.
Direct investment in Venezuela's petroleum and mining sectors is subject to laws that differ from others in the foreign investment code.
However, the Perez government is pressing for a joint venture for a foreign partner to participate in a new domestic refinery.
The Perez government also is reforming the country's outdated mining laws.
In addition to Decree 727, such moves are intended to attract foreign investment.
REDUCED TAXES
Venezuela's government cut Pdvsa's taxes by about $290 million/year.
The reduction followed shortly after Chacin complained publicly that the government's effective tax rate of 82% on Pdvsa's operating income was too high and would choke off future investments.
Pdvsa is still taxed under a system of export reference prices used when Venezuela's industry was dominated by international companies.
It must pay taxes based on an artificial figure-the reference price for each barrel of crude and products exported-rather than on the income it receives from those exports.
The government cut the reference price to 15% above real prices from 20%.
THE OUTLOOK
Pdvsa has a $15.8 billion capital spending program for 1990-95 that centers on an ambitious campaign of exploration and development to hike Venezuela's productive capacity to 3.5 million b/d of oil from 2.775 million b/d in 1990 and boost conventional crude reserves to 70 billion bbl from 59 billion bbl.
However, the company recognizes that it cannot carry out that program with international financing alone.
In addition to the tax burden, Chacin cited two other factors limiting Pdvsa's ability to finance new investments:
- Financial losses caused by too low prices for refined products sold domestically. Supplying Venezuela with 370,000 b/d of products this year will cause losses of about $236 million at current prices. A gallon of high octane gasoline in Venezuela costs only 16 despite price hikes averaging more than 100% for refined products a year ago.
- The slow process of making political decisions. Pdvsa executives say foot-dragging by the current and previous governments on approving large debt for equity swaps has slowed or canceled major joint venture projects in petrochemicals.
The government's recent moves to open the door to foreign joint ventures upstream as well as downstream represent steps to solve those problems.
Chacin points out, however, that before foreign investors make major commitments, Venezuela must improve current income tax legislation-foreign investors also must pay an 82% effective tax rate-and reform other laws seen as roadblocks.
Moreover, the present administration is moving away from the practice of keeping domestic oil prices low. Under pressure from the International Monetary Fund, the government plans to raise prices in stages.
However, last year's rioting and looting, which left about 300 people dead, were provoked by higher fuel prices and subsequent increases in public transportation fares. Venezuela politicians worry about the possibility of violent protests over higher fuel prices and may delay further price hikes, forcing industry to continue swallowing losses.
Another problem area that cannot be easily resolved is the conflict between Venezuelan politicians, generally committed to strengthening the Organization of Petroleum Exporting Countries despite dissension and cheating among member nations, and Pdvsa executives, who want to maximize the potential of the company's resources.
ORIMULSION CONTROVERSY
This conflict is illustrated by controversy over Orimulsion. Despite concerns over potential protests from other OPEC members, Venezuela is marketing the bitumen-water-chemical emulsifier (OGJ, Mar. 5, Newsletter).
Pdvsa and Venezuela need revenues, but the energy ministry's desire to go slow on Orimulsion exports until now has squeezed commercial development.
Developed jointly by British Petroleum Co. plc and Intevap, Pdvsa's research and development subsidiary, Orimulsion competes with coal and fuel oil as a fuel for electrical power plants.
Pdvsa officials say Orimulsion has the advantages of burning cleaner than coal and possesses a high heat value. It also can be transported and stored like fuel oil, is much cleaner to handle than coal, and is priced less than fuel oil. Pdvsa carried out tests of Orimulsion in the U.K., Canada, and Japan and set up a joint venture with BP to sell the product in western Europe.
Pdvsa recently signed an Orimulsion sales agreement with a British company and is seeking another in Sweden (OGJ, Mar. 5, Newsletter). It also is pursuing sales in Japan and Canada.
Venezuela possesses the world's largest deposits of extra heavy crude oil and bitumen in the Orinoco Belt and uses bitumen from this region to make Orimulsion.
Pdvsa usually quantifies Orimulsion in metric tons to set it apart from conventional liquid fuels and thus avoid problems in OPEC.
However, Minister of Energy and Mines Celestino Armas and other politicians worry about repercussions within OPEC when Venezuela begins exporting big volumes of Orimulsion.
The government and Pdvsa refer to Orimulsion as a nonconventional hydrocarbon fuel and don't plan to count bitumen and extra-heavy crude output in Venezuela's OPEC quota.
Venezuela recently had a problem with OPEC over its production of condensates and consequently was forced to reduce production under a new technical definition of condensates.
PEREZ'S PROBLEMS
Perez swore in new Pdvsa Pres. Andres Sosa Pietri and the company's board of directors Mar. 11 after scrambling to find replacements for two choices who declined directorships.
The two declinees and their replacements are considered petroleum industry outsiders.
Perez has come in for heavy criticism for his board choices, which were seen as creating a greater politicization of the state oil company.
Carlos Castillo, president of Pdvsa unit Maraven Sa, called Sosa's appointment "wrong and unfortunate."
Chacin called the "broadening" of the board "an undeserved punishment" and the "burial of meritocracy in Venezuela's oil industry."
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