VENEZUELA POSITIONING ITSELF TO TAKE KEY MARKET ROLE IN WAKE OF GULF WAR

Venezuela continues efforts to position itself in world markets to capitalize on fallout from the Persian Gulf war.

The central government and state oil company Petroleos de Venezuela SA have accelerated already ambitious plans to expand activities in upstream and downstream oil and gas sectors (OGJ, Jan. 14, p. 35).

Pdvsa has sharply increased its 1991-96 investment program from the level planned at the end of last year. The goal is to put Venezuela on a par with major Persian Gulf oil exporters in terms of productive capacity.

Linchpin of those efforts could well be further steps toward privatization of Venezuela's oil sector. For the first time since nationalization in 1976, private foreign and domestic companies are being permitted to participate in Venezuelan exploration and development.

In addition, the government is trimming the onerous tax burden the oil sector has carried in Venezuela, as well as its heavy subsidy of domestic petroleum products.

'SUPPLIER OF CHOICE'

It is no coincidence that Venezuela has meticulously detailed its advantages as the crude supplier of choice-notably to the U.S.in the wake of another oil supply disruption emanating from the Middle East.

Accordingly, it also is no surprise that the high profile president of Pdvsa, Andres Sosa Pietri, has taken up the banner of oil producer-consumer dialogue first unfurled by Venezuelan President Carlos Andres Perez. Pdvsa has long chafed under constraints of the quota system imposed by the Organization of Petroleum Exporting Countries, a stance often putting it at odds with Venezuela's minister of energy.

Earlier this year, Perez said he will set up a high level commission to review Venezuela's petroleum policy. Presumably, this panel will make recommendations to the executive branch concerning policy changes that might require legislative action.

Perez also is in the forefront of the movement toward Latin American regional economic integration, keeping a hemispheric cast to the issue of oil supply security.

In visits to Mexico and Central America last month, Perez was to have signed letters of intent with Nicaragua, Costa Rica, Honduras, Panama, Guatemala, and El Salvador to form closer trade ties that could lead to development of a free trade zone. Similar talks were held with Mexico's and Colombia's leaders. Perez wants to develop a trilateral economic development program that includes the "Group of Three"-Colombia, Mexico, and Venezuela-Central America, and the Caribbean nations.

Venezuela thus presents an anomaly in the world oil market: a key OPEC member crafting for itself an image of long term stability as a source of oil exports apart from the OPEC mainstream and following that up with aggressive capital spending and incentives for foreign investment to underpin that status.

SOSA'S VIEWS

In an interview with Oil & Gas Journal, Sosa said the recent Paris conference between oil consuming and producing nations, as well as later meetings, will be useful for both sides in avoiding conflicts and oil price shocks.

"Today we have price stability, and we're interested in maintaining price stability," he said.

In other areas affecting his company, Sosa said:

• Pdvsa plans to hike crude productive capacity to 2.97 million b/d by yearend from 2.77 million b/d last year. Production the first 4 months of 1991 averaged 2.484 million b/d, including condensate and natural gas liquids. Pdvsa has not produced at this high a level since 1976.

• Despite the ambitious scope of this year's investment program, the company is "100% on target for execution" the past 6 months.

• The $491 million cut in Pdvsa's operational and capital budget this year (OGJ, July 8, Newsletter) was part of a general reduction in spending by Venezuela's government suggested by the International Monetary Fund and did not reflect any weakness in Pdvsa's ability to generate cash this year. Even though Pdvsa is run as a commercial entity apart from its owner, the government of Venezuela, IMF lumps together Pdvsa outlays under general government spending. Thus, when the central government has a deficit, budget cutters also look at Pdvsa, which nevertheless is running a strong financial surplus. Pdvsa's overall 1991 capital and operational budget now stands at about $7.4 billion, down from the original $7.89 billion.

• The debate in Venezuela over whether Pdvsa should go into debt to finance part of its $48 billion total capital spending program for 199196 has been "exaggerated." Pdvsa has borrowed abroad before to finance specific projects or to obtain working capital for its international operations. Sosa said earlier this year the company may need to raise $8 billion the next 5 years for its investment plan (OGJ, June 24, Newsletter).

• Venezuela's government is studying Pdvsa recommendations to reduce the corporate tax rate, now more than 82%, applied to Pdvsa's operating profits. The company's recommendations are that the 67.7% tax on production operating profits would remain in place-except for oil of 10 gravity or lower, where the maximum rate would be 30%-the current 20% tax levied on export values would be reduced in phases to 5% by 1994, and the levy on refining activities would be reduced from the current 67.7% to 30%. These tax reductions would not only affect Pdvsa but also hold for any private companies working in upstream or downstream areas in oil and gas. Petrochemical earnings are taxed under normal corporate rates, which are also being reduced to a maximum of 30%.

Since the interview with Sosa, the government has taken steps to reduce taxes on oil sector operations, although it remains unclear how that will affect Pdvsa.

VENEZUELAN EXPORTS

Sosa contends the Bush administration's new national energy strategy is favorable for Venezuela because it is a politically stable oil supplier close to U.S. ports on the Gulf of Mexico.

In addition, Pdvsa has substantial refining capacity on U.S. soil, Sosa noted. Further, Pdvsa is emphasizing an effective international marketing strategy to maintain or raise Venezuela's market share, even if the overall market stagnates or declines, he said.

Venezuela used to be the largest supplier of U.S. oil imports, and Pdvsa today is in a position to recover some of the market it has lost to Saudi Arabia, Sosa said.

Venezuela last year exported 1.85 million b/d of crude and products, with most of this going to the U.S.

Pdvsa late last year outlined a $25 billion program direct investment program for 1991-96, most of which is aimed at raising crude productive capacity to about 3.6 million b/d by 1996 from 2.8 million b/d.

The company hopes to reach productive capacity of 5 million b/d, including heavy crude, by 2000.

STRATEGIC POSITION

The Persian Gulf war has not altered Pdvsa's plans but has added a note of urgency.

The war involving key Persian Gulf oil exporters underscored the importance of Venezuela as a major world oil producer and a stable exporter outside the politically volatile Middle East, Sosa said. Although Venezuela currently cannot match the productive capacity of OPEC's biggest producers Saudi Arabia, Iran and, before the war, Iraq-it is spending heavily to approach parity with Iran and Iraq.

It also is seeking international partners to help finance development of its heavy oil and bitumen reserves, the world's largest.

Venezuelan officials cite a number of advantages their country has in comparison with Middle Eastern oil producers:

• It is a stable, democratic state, and Pdvsa is a highly professional, profitable commercial enterprise.

• Its oil terminals are close to U.S. ports on the Gulf of Mexico and provide easy access to clients in western Europe.

• The flow of oil from Venezuela to importers has never been halted by regional wars or crises, political instability, or strikes.

• Even though Venezuela is a founding member of OPEC, it continued to supply oil to the U.S. during the Arab oil embargo in 1973, thus incurring the wrath of its Arab partners in OPEC.

• It possesses the largest proved reserves of crude oil outside the Persian Gulf: about 59 billion bbl, larger than those of Mexico or the U.S.S.R. and 57% greater than those of the U.S. Pdvsa also has identified other potential reserves of more than 140 billion bbl of crude and has more than 100 tcf of proved natural gas reserves.

SINCE THE WAR

Since Iraq invaded Kuwait in August 1990, Pdvsa has increased crude oil production by almost 500,000 b/d.

International oil companies are aware of Venezuela's value as a potential alternative to a share of Middle East oil production.

They are also aware that, despite the current surplus on world oil markets, oil consuming nations must identify stable, long term sources of oil supplies for the future.

Several important international companies have focused their attention on Venezuela's petroleum development plans, with an eye toward investing in areas such as production and refining. These sectors had been closed to foreign investment since nationalization, but the current government has decided to adopt a more liberal stance.

Last year Robert Horton, chairman of British Petroleum Co. plc, said during a visit to Caracas his company was interested in spending as much as $1 billion in projects with Pdvsa. Exxon Corp., Royal Dutch/Shell Group, and Mitsubishi Corp. have a preliminary agreement with Pdvsa on a $3 billion joint venture Cristobal Colon project to produce Venezuelan offshore natural gas and export it as LNG (OGJ, Mar. 18, p. 135).

A long line of other international investors has been knocking at Pdvsa's door, and interest has risen sharply since Iraq's blitz of Kuwait.

However, international investors are worried about some important problems. For example, the 82% corporate tax rate for Venezuela's petroleum industry is unacceptable to investors.

In addition, potential investors-especially in a risky area like exploration-want the Venezuelan government to clearly define the rules of the game.

There also is concern that the next government, to begin a 5 year term in 1994, may not share the current administration's liberal attitude toward foreign investment in the oil sector and may decide to change the rules.

SPECIAL LAW?

A member of Venezuela's most important opposition political party said in order to carry out the Cristobal Colon project, a special law may be required.

Sen. Valmore Acevedo of the Christian Democrat Copel party said the joint venture Pdvsa wishes to set up for the LNG project is not covered by either the oil industry nationalization law approved in 1975 or the law approved in 1971 that gave the Venezuelan government control over all natural gas activities.

Pdvsa officials expect a political fight over the LNG export project, the first of its kind in Venezuela.

However, they hope the project can be approved by Venezuela's Congress under existing law. The executive branch recently approved it (OGJ, Newsletter, June 17).

This warning shot from the political opposition could be the prelude to a battle over the gas project, as well as other joint ventures Pdvsa wants to set up with international partners in the oil sector.

NEW UNIT

At the same time, Pdvsa is increasing its profile on international joint ventures.

It has set up a strategic negotiating unit in Caracas to cover future joint ventures in exploration, production, and refining. Heading the new unit is Jorge Zamella, formerly vice-president of Pdvsa petrochemical subsidiary Pequiven.

This move gives Pdvsa a high level, clearly designated group to carry out negotiations with international companies on the many upstream and downstream joint ventures the state oil company hopes to develop.

Pdvsa plans to nail down as many ventures as possible this year and early next year so the projects can be presented to Congress for approval before the campaign for a new president begins in 1993.

The company believes it will be much harder to obtain congressional approval of politically sensitive joint ventures in the oil sector once the presidential campaign is in progress.

REACTIVATION PROGRAM

Perhaps even more dramatic than the inclusion of huge multinationals in a frontier project such as Cristobal Colon is the international tender Venezuela has put out to companies to participate in reactivation of idle oil fields throughout the country.

The initiative on marginal fields appears to be an effort by Pdvsa to speed foreign participation in Venezuela's upstream operations as well as allow a quick increase in production without tying up Pdvsa resources in marginal projects.

Venezuela's minister of energy and mines, Celestino Armas, said his agency had prequalified 97 companies out of 227 that applied to operate 55 inactive oil fields in Venezuela (OGJ, Newsletter, Aug. 5).

The prequalified list includes firms from the U.S., Europe, Japan, Venezuela, Argentina, Colombia, and Trinidad.

When those operators start to work it will be the first time private companies-notably foreign oil companies-have participated in Venezuelan oil production activities since nationalization.

The 55 fields, divided into nine production units under the responsibility of Pdvsa subsidiaries Corpoven, Lagoven, and Maraven, hold proved reserves of 357 million bbl of crude, with another 1.169 billion bbl of combined probable and possible reserves, Pdvsa data show.

The units cover about 2.5 million acres in different parts of Venezuela, including one offshore site. Most of the fields are shut in, but some wells are still producing in eastern Guarico state.

Of the nine units, six have reserves of light and medium crude and some condensate, while three have heavy crudes. In addition, there reportedly are significant volumes of gas in some fields.

Cumulative production from all 55 fields totals more than 1 billion bbl. The government hopes private operators will be able to produce 200,000 b/d from the fields.

Some of the fields involved were discovered in the 1920s and 1930s. Most were shut in during the past 30 years.

Armas noted some of the 97 companies chosen to operate the fields would consolidate, with the final figure probably 88.

Energy Ministry figures show Venezuela had a total 26,505 wells capable of production at the end of 1989. Of those, 9,557 were active and 16,948 shut in. Some shutin wells were reactivated last year as Pdvsa raised production.

CONTRACT TERMS

Prequalified companies can obtain technical information packets from a ministry data center in Caracas for $30,000 for one production unit, $40,000 for two units, $55,000 for as many as five units, and $75,000 for all nine units. Contracts awarding specific fields to operators will be signed at a later, unspecified date.

The full terms of the "operating contracts" to be signed by private companies and Pdvsa units have not been disclosed.

Armas said the Venezuelan government will maintain full ownership of all oil and gas while it is in the ground and after it is produced. Private companies will act as contractors for Corpoven, Lagoven, and Maraven.

The private operators will make all necessary investments to reactivate the fields, and their investments and operating expenses will be recovered in terms of how much oil they produce. Operators will be required to present a work program and estimates of investments and expenses.

It is still not clear whether operators will receive a fee for each barrel of crude oil produced or if some other type of remuneration formula will be used.

JOINT VENTURE TAXES

Venezuela's Congress, in approving major reductions in corporate and individual tax rates, provided significant tax relief for private companies involved in oil and gas joint ventures.

The general maximum corporate tax rate on operating profits in Venezuela was reduced to 30% from 50%. At the same time, rates of 60% or more applied solely to mining and oil and gas activities were reduced to the new maximum corporate rate of 30%.

The full effect of these changes is still not entirely clear because the government has not published the full text of the tax reform in its Official Gazette.

However, two aspects related to the petroleum industry are apparent. Pdvsa will continue to pay the old, high tax rates applied to its oil and gas operations when it works alone. But the lower tax rate applies to Pdvsa for ventures in which it is a partner with other private or state companies.

The most important element for foreign investors is the fact that the new maximum rate of 30% applies to joint ventures in oil and gas, rather than the higher rates applied to Pdvsa.

Tax rates for companies working in petrochemical projects are based on normal corporate schedules rather than on special schedules applied to oil, gas, and mining. That cuts the maximum tax rate for petrochemical investors to 30% from 50%.

The Perez administration is considering sending the tax reform legislation back to Congress to secure the same, lower tax rates for Pdvsa whether it works alone or in a joint venture.

PRODUCTS PRICES RAISED

After months of internal discussion, the Perez government has increased retail prices for gasoline and other petroleum products despite strong objections from the public and political parties.

One time increases were ordered for most products, but the government chose to apply phased increases to gasoline, diesel, and kerosine.

The Perez administration has remained keenly sensitive to any price increases in refined products, especially gasoline and diesel oil, since a round of price hikes early in 1989 jacked up public transportation fares and provoked a week of riots and looting that left about 300 dead. In 1989, however, the government ordered increases that averaged more than 100%. This time, the price hikes are much more modest.

Retail prices for gasoline in Venezuela will rise 0.4/month from August 1991 through December 1992. This means the price of high octane gasoline will climb 116%, from the current level of 6/I. to 13.3/I. or less,

depending on how much Venezuela's currency is devalued in coming months. Venezuelan gasoline will still be the cheapest in the world after the price increases are implemented.

The new price increases will not help reduce Pdvsa's losses of about $200 million/year on domestic gasoline sales. The government decided virtually all added revenue from the gasoline price increases-projected at $102 million for the rest of this year-will go to a new government fund to build and maintain rural highways.

PDVSA SPENDING

Pdvsa will make domestic and international investments totaling $48 billion during 1991-96, a big jump from its previous investment projections.

This figure includes a 36% hike to $34 billion in direct capital outlays by Pdvsa and investments of $14 billion by joint ventures.

This is the first time Venezuela's national oil company has made public investment figures for its operations outside Venezuela (see table, OGJ, Jan. 14, p. 37).

Pdvsa's total investment program for 1991-96 now breaks out as exploration $1.7 billion, production $16.2 billion, refining $10 billion, petrochemicals $5.7 billion, international operations-mostly investments in existing subsidiaries-$4.5 billion, developing and marketing as a boiler fuel the heavy crude-water mix Orimulsion $2.5 billion, Cristobal Colon project $2.5 billion of a total cost of about $3 billion, tankers $1.4 billion, coal $1.9 billion, domestic marketing $900 million, and other areas $700 million.

Pdvsa also revised its exploration plans for 1991-96. The company now expects to drill 148 wildcats and conduct 90,000 line km of seismic surveys during the period. About 40% of the exploratory work will be in eastern Venezuela in northern Monagas and Anzoategui states and 30% in the Maracaibo basin. Target depths will average 16,000-21,000 ft.

It will also drill 9,080 delineation and development wells, including 1,520 in the Orinoco belt, and perform about 11,000 workovers, including 1,000 in the belt. For offshore operations, Pdvsa will use seven jack ups, including two currently working, and 11 drilling barges.

CRUDE REPAYMENT

Venezuela's government is studying several options to provide financing for part of Pdvsa's $34 billion 1991-96 direct capital investment program.

This move has sparked interest among international financial institutions because Pdvsa has not made any direct international borrowing since it was set up 16 years ago.

Two alternatives under study, Armas said, involve pledging future crude production as a guarantee for international loans and offering crude supply contracts to future investors as an incentive for their participation in joint venture projects with Pdvsa.

Although the government has until recently been quiet on the subject of Pdvsa seeking international loans, it is clear the state company will need some financial support to carry out its ambitious 6 year plan. Pdvsa is particularly eager to secure financing for its plan to raise crude productive capacity.

The Caracas press reported Pdvsa will raise $300 million soon via issues of bonds on the international market.

Pdvsa had no public comment on the report, but bankers in Caracas said the company is looking at financing options for the future.

Pdvsa has not assumed any direct international debt since it was founded in 1985. However, Pdvsa units such as Citgo Petroleum Co. and Champlin Refining & Chemicals Inc. have entered into a variety of credit or leasing arrangements. Last year, for example, a Pdvsa subsidiary sold 200 million deutschemarks in bonds on the international market to help finance purchase of a mothballed Chevron Corp. refinery in the Bahamas.

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