PDVSA SEEKS FOREIGN INVESTMENT HIKE

Looking at a protracted cash crunch, state oil company Petroleos de Venezuela SA plans to encourage accelerated investment by foreign companies in Venezuela's oil sector.

Pdvsa late last month sliced about $1 billion from its capital and operating budget for 1992 (OGJ, July 27, Newsletter).

In the medium term, Pdvsa plans to focus on investment in quicker payout projects in oil production and refining while seeking foreign capital for as many projects as possible in oil and gas exploration and development, petrochemicals, and coal. And it will continue to expand its presence in other countries, especially the U.S., to maintain market shares of crude and refined products exports.

Those are among the business strategies outlined by new Pdvsa Pres. Gustavo Roosen after his first 100 days on the job.

PRODUCTIVE CAPACITY KEY

Roosen, meeting with foreign journalists in Caracas late last month, said Pdvsa will concentrate its investments heavily in exploration and production to boost productive capacity and meet needs of international customers.

Pdvsa sees a key window of opportunity in gaining part of the market share lost by U.S. crude producers as their production continues to decline. Pdvsa production outlays this decade are estimated at $4.4 billion.

Pdvsa continues to hold to its target of crude productive capacity at 3.3 million b/d by 1996. The company wants to jump capacity as quickly as prudently possible from the yearend 1991 level of 2.83 million b/d. Currently, Pdvsa must buy 600,000 b/d of oil on the U.S. market to meet all of its commitments.

FOREIGN INVESTMENT PUSH

Pdvsa is homing in on an expanded role by foreign investment in Venezuela's oil sector because it assumes there will be little growth in real terms in world oil prices in the medium term as well as little likelihood of significant tax relief from the Venezuelan government in years to come.

Outside of "basic" investments in production and refining that Pdvsa will undertake itself, the state company plans to encourage private capital, especially from foreign sources, to invest in all areas of petroleum activity.

Roosen is advancing this politically contentious strategy with the stance that it is much more risky for Venezuela to go into debt than to accept foreign investment, particularly in the petroleum sector. He cites the debt crises that crippled Venezuela's economy during the 1980s.

ROOSEN STRATEGIES

Among other business strategies, Roosen emphasized:

Heavy oil projects. Pdvsa expects to have some proposals on the table this year involving "strategic associations" with international companies on heavy oil refining/upgrading projects. Preliminary results of feasibility studies done with Veba Oel, Conoco Inc., Mobil Corp., and Ste. Nationale Elf Aquitaine suggest some heavy oil projects are economic on their own, although the payout is likely to be very long term.
Attracting foreign investment. In order to make heavy oil project cash flow prospects attractive to foreign investors in the near and medium term, Pdvsa is considering some type of associated business arrangement involving light and medium crudes. The company is working on a proposal that will be acceptable to potential foreign investors and Venezuela's political community at the same time.
Financial concerns. Although Pdvsa and its petrochemical subsidiary Pequiven have been authorized to borrow as much as $3.9 billion this year, Pdvsa has voluntarily capped its borrowings at $2.83 billion in 1992. Most of that debt will be incurred in maintaining crude and refining market shares. Meanwhile, in a step to save money for core investments, Pdvsa told its operating units to begin preparing 1993 budgets under a zerobase accounting system.
Petrochemicals. Pdvsa and Pequiven have decided to shift Pequiven's role to a promoter of future investments from its current role of an equity investor.
Oil prices. Roosen contends 1993 will be "a very complicated year for oil companies" with abundant crude production worldwide and oil prices expected to remain constant or slightly lower than 1992 in real terms.
Exports. Venezuela's 1992 oil exports to date have earned an average $14.23/bbl for crude and products combined. It expects higher prices in the second half will result in a 12 month average of $15.25/bbl. Pdvsa projects oil export revenues for the full year at about $11.5 billion. For the first half, Venezuela earned about $5.6 billion in oil revenues.

BUDGET CUT

Roosen's new emphasis on foreign investment in Venezuela's petroleum sector is emerging amid a heightened sense of austerity at a state oil company that estimates it must spend $27 billion during 1992-97 to meet its operating goals.

The company last month sliced 10.5% from its 1992 capital budget and 10.2% from its operating budget to $4.5 billion and $4.3 billion, respectively.

Roosen contends Pdvsa will maintain its 1992 targets of keeping crude productive capacity at 2.8 million b/d and combined production of crude, condensate, and natural gas liquids at about 2.5 million b/d.

Pdvsa's budget cuts don't mean the company is making major changes in its 1992-97 investment program. Basic goals in exploration, production, refining, and other areas remain the same, but the timeframe has been changed. The timetable for certain projects is being stretched out, or, as in the case of the $5 billion Corpoven refinery planned for eastern Venezuela, deferred. And the $3 billion upgrade planned at Maraven's Cardon refinery, originally scheduled for fast track completion at yearend 1994, is now to be complete at yearend 1995.

Even with the cut, 1992 planned outlays outstrip the amount of money Pdvsa spent in 1991.

NOW AUSTERITY

Roosen is trying to keep a lid on Pdvsa debt and boost cash flow as he implements a strategy of austerity.

To fund its capital investment program, Pdvsa so far this year has raised $1.4 billion from foreign sources and plans to secure another $1.2 billion the next few months. That will leave it shy of its self-imposed ceiling. Most of these new obligations are supplier credits with guarantees from export-import institutions. U.S. bankers have suggested Pdvsa wait until Venezuela's tense political climate has calmed before trying to raise more money on foreign capital markets. An aborted military coup aimed at the government of President Carlos Andres Perez earlier this year has increased the investment risk factor for Venezuela, thus increasing the cost of borrowing.

The state company also is taking some alternate routes to financing. Pdvsa's Corpoven SA recently asked CS First Boston to raise $300 million to help finance expansion of its Eastern Cryogenic Complex a major natural gas processing plant near Jose in eastern Venezuela. First Boston advised Corpoven to establish a separate Bermuda subsidiary to receive revenues from the expansion and repay the debt and interest. Corpoven has a long term sales agreement with Dow Chemical and Enron Corp. covering added volumes of propane resulting from the expansion. The complex was built for Corpoven by Brown & Root at a cost of $1 billion.

Meanwhile, Roosen is working quietly to recover hundreds of millions of dollars owed Pdvsa by various Venezuelan government agencies, often slow payers. He is seeking to collect a total of $363 million the government and government controlled entities such as electric power company Cadafe owe Pdvsa for gasoline and fertilizer subsidies. At the same time, Roosen wants to exercise the company's option of drawing down $209 million from the government's Economic Stabilization Fund, which was designed to provide a cushion for Pdvsa and the government when oil prices fall below specified levels.

NEW SWEETENERS

Perhaps the most intriguing aspect of Pdvsa strategy under Roosen is a new flexibility in joint ventures involving foreign investors.

During the past 18 months, Pdvsa has signed letters of intent with 10 international oil companies studying feasibility of new joint ventures, especially in refining and/or upgrading Venezuela's heavy and extra heavy crudes and bitumen from the Orinoco belt. Until now, however, no international company has demonstrated a firm interest in heavy oil because upgrading and processing costs are so high.

In an effort to attract foreign companies to invest in heavy oil strategic associations, Pdvsa and its operating units are reportedly considering an investment package that would include the right to develop deposits of fight and medium crudes in the part of the Delta Amacuro territory in eastern Venezuela.

Details of any such proposal have not been made public. But the overall plan apparently would involve setting up a joint venture between a Pdvsa operating unit-probably Corpoven or Lagoven-and an international company or group under which a major project involving processing/upgrading would proceed. At the same time, the partners would explore for light and medium crudes in parts of the delta where prospects are good for finding extensions of the large oil structures in Monagas and Anzoategui states.

Pdvsa currently has plans on tap for exploring parts of the delta itself, if necessary. However, it does not have the funds to begin a substantial exploration program there at present.

The lure for foreign partners is that they would gain access to high value crudes to help offset the high costs of refining/upgrading low quality, high impurity crudes in Venezuela.

POLITICAL CONCERNS

It is not clear how foreign partners would acquire title to the light and medium crudes they discover in partnership with the state oil companies under current Venezuelan law.

Until now, Venezuelan petroleum law has prohibited anyone but the state from owning hydrocarbons in the country. There is, however, a provision that permits joint ventures approved by Venezuela's congress.

Pdvsa will want foreign partners to provide virtually all the investment capital required for exploration and development. Because multinational companies generally want crude sources at the lowest possible price, an operating contract arrangement, such as that devised recently for reactivating inactive marginal fields, would not be acceptable. Under such arrangements, the foreign investors are compensated for the volume of crude and natural gas produced and do not own the crude.

Under some future exploration/production agreements, the participating multinationals would either own part of the crude production at the wellhead or be able to purchase it at an attractive price under long term contracts. This kind of agreement is covered by Article 5 of the Oil Industry Nationalization Law of 1975 and would have to be approved by congress.

Venezuelan oil executives are considering such a proposal after seeing multinationals show no interest in making multibillion dollar investments in a refinery for heavy crudes or an upgrader for heavy/extra heavy crudes or in just developing heavy oil.

One executive at a company that signed a letter of intent with Pdvsa said, "We've been quite clear about our position on heavy oil from the start. If the economics look good, we would be interested in examining a joint venture.

"But we simply can't justify the costs of building a new refinery in Venezuela for heavy oil unless we are allowed to participate in a business - like gaining access to light crudes - that offers much better profit potential now and in the future.