Venezuela's 1991 foreign investment reforms did little to encourage U.S. oil companies to invest there despite the overall investment attractiveness of the country's oil sector, says the U.S. General Accounting Office.
In a report to Congress, GAO noted Venezuela's oil production peaked in 1970, declined through 1985, and since then has increased by about 21% through 1990.
"The primary factors affecting continued increases in production through 1996 include Petroleos de Venezuela SA's ability to encourage investment capital, the cost of producing and refining heavy and extra heavy crude oil, and the level of production quotas imposed by the Organization of Petroleum Exporting Countries, of which Venezuela is a member.
GAO noted Venezuela implemented policy reforms in 1991 to encourage some foreign and private investment petroleum related ventures.
"However, these reforms have not yet succeeded in attracting U.S. investment in oil exploration, production, or refining in Venezuela."
INVESTMENT OBSTACLES
GAO, a congressional watchdog agency, surveyed 22 U.S. oil companies on investing in Venezuela. The companies complained Venezuela needs to give them clear guidelines explaining what activities they can engage in and the contractual terms they must abide by.
The oil companies also were deterred by a requirement that Venezuela's congress must approve foreign investments and the high tax rate on petroleum related activities.
GAO said other obstacles were the lack of a U.S.-Venezuelan tax treaty, concerns over security of foreign assets in Venezuela's petroleum sector, and the absence of effective judicial protection against actions taken by the Venezuelan government, such as the lack of international arbitration for settling disputes between the government and foreign investors.
"Should the investment impediments identified by theses U.S. companies be resolved, several conditions provide strong incentives for U.S. investment in Venezuela's petroleum industry. Venezuela offers abundant oil reserves, an established petroleum infrastructure, a favorable location, a reliable source of oil, and a stable democratic government."
PDVSA INVESTMENT PLANS
GAO said Pdvsa plans to increase its production to 3.3 million b/d by 1996 from 2.1 million b/d in 1990, but that goal will be affected by its ability to obtain investment capital, the cost of producing and refining heavy crude, and OPEC production quotas (OGJ, Jan. 13, p. 17).
It said Pdvsa plans to meet its production goals primarily by increasing heavy and extra heavy crude output by more than 140% to about 1 million b/d.
Pdvsa budgeted 40% of its oil investment capital to increase domestic and international refining of its crude, with the goal of increasing its overall refining capacity about 34%. Most of the capital would be used to expand heavy and extra heavy crude oil refining by more than 380%.
GAO said Pdvsa also intends to expand its exploration activities to add about 5 billion bbl of lighter crudes to its proven reserves and intends to buy 22 oil tankers to increase earnings by transporting its own crude and products.
"Pdvsa plans to finance its investment needs through internal cash flow, international borrowing, and investment capital obtained from foreign or Venezuelan private investors. Pdvsa will assume direct international debt for the first time since the company was founded in 1975."
HEAVY OIL
GAO said for Pdvsa to more than double its heavy and extra heavy crude production, it must develop and secure additional domestic and international refining capacity because there is a lack of worldwide refining capacity for those crudes.
"Achievement of this goal is also contingent upon Pdvsa's ability to cover the higher costs of producing and refining heavy and extra heavy oil," GAO said, noting it is more expensive to produce heavy oil, remove sulfur and metals, and provide the specialized refinery processes needed.
It said Pdvsa's average production cost for heavy crude was $2.07/bbl in 1990 vs. $1.40/bbl for light crude and $1.05/bbl for medium crude.
Pdvsa officials estimate production costs for extra heavy crude to be about $2.80/bbl. That crude must be upgraded into a lighter crude at a cost of $68/bbl before it can be refined. A 100,000 b/d upgrading plant would cost about $2.5 billion.
GAO said Pdvsa officials think it would be profitable to produce and upgrade the extra heavy crude on the basis of current world oil prices and estimated production and upgrading costs. "However, the economic viability...would be very sensitive to changes in world oil prices and processing costs," GAO said.
INVESTMENT REFORMS
GAO noted the administration of President Carlos Andres Perez, who took office in February 1989, has taken significant steps to liberalize foreign investment. Now foreign investors are permitted to hold 100% equity in projects and are free from government authorization requirements.
But those reforms do not extend to the oil industry, which still is subject to the Nationalization Law of 1975.
Under that law, foreign companies may participate in a joint hydrocarbon venture if it is found to be in the public interest, is controlled by the state, is limited in duration, and is authorized by the Venezuelan congress.
In 1991, Venezuela tried to encourage foreign investment in oil joint ventures by creating the Office of Strategic Associations. The office is charged with obtaining access to foreign markets and attracting investment for building or upgrading refineries to process Venezuela's heavy and extra heavy crude.
Pdvsa is willing to be a minority shareholder in joint ventures and supports allowing foreign companies to explore for light and medium crude if certain requirements are met and congress approves. However, GAO said, "The Venezuelan congress' willingness to allow foreign investments in petroleum related joint venture is still unproven."
It noted that Pdvsa subsidiary Lagoven SA has formed a joint venture to develop offshore natural gas for a liquefied natural gas export project in which it would own 33% with other interests held by Royal Dutch/Shell Group 30%, Exxon Corp. 29%, and Mitsubishi Co. 8%. Lagoven would have to consent to all key decisions, giving it effective control.
GAO said as of November 1991, six foreign companies, including two U.S. firms, have signed letters of intent to study feasibility of participating in joint ventures for, among other things, marketing and refining of heavy and extra heavy oil.
It noted that last year the Venezuela congress reduced the tax rate to 30% from 67.6% on joint ventures between Pdvsa and foreign companies for producing and refining heavy and extra heavy crude.
IMPEDIMENTS REMAIN
GAO said the 22 companies it surveyed still are reluctant to invest in Venezuela's petroleum industry.
"A number of the companies said they were not interested in producing and refining heavy and extra heavy crude because they believed heavy oil activities were economically marginal, they lacked the experience of producing heavy and extra heavy oil, and/or they considered the technology for refining extra heavy crude to be commercially unproven."
But GAO said some companies said they might be interested if Pdvsa provided an incentive in the form of increased opportunity to explore and produce light and medium crude oils.
Currently, any joint venture opportunities in Venezuela related to light and medium crudes involve some shutin and marginal fields targeted for reactivation (OGJ, Aug. 19, 1991, p. 14).
Some companies said Venezuela needs to clarify contractual terms of joint ventures, specifically ownership rights to oil production and reserves, repatriation of profits, and tax and accounting rules.
Companies also said the requirement for congressional approval is an impediment, since it adds the the risk that the project might be rejected for political rather than economic reasons or that the congress might alter the agreement.
The firms said U.S. and Venezuela need to negotiate a tax treaty that would eliminate double taxation of U.S. firms. Such negotiations are under way.
The U.S. firms are concerned "Venezuela nationalized petroleum assets in the past and could take future actions or decisions that could adversely affect foreign investments.
For example, a number of U.S. company representatives were concerned that Venezuela might undertake a de facto nationalization by dramatically increasing taxes in the future," GAO said.
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