Global Insight Perspective

Significance

The joint ventures (JVs) are seen as another way for the government to maximise its revenues from the oil sector, even though the move will increase the level of political risk for foreign investors.

Implications

JVs would comply with the 2001 hydrocarbons law that anticipates a 51% stake for PDVSA in the mixed companies and the payment of higher royalties.

Outlook

Concerns about increased state interference in the oil sector and the state's use of PDVSA's cash flow for non-commercial purposes, as well as its ability to maintain investments, will continue.

Eight Companies Agree to Migrate to Joint Ventures

The Venezuelan state oil company PDVSA has announced that it has signed an accord with eight companies that have agreed to migrate their 13 operating service agreements to mixed companies: Repsol-YPF; China National Petroleum Corporation (CNPC); Harvest Vinccler; Hocol; and Venezuelan companies Vinccler Oil and Gas, Inemaka, Suelopetrol and Open. The new contracts will comply with the controversial hydrocarbons bill of 2001 that limits private-sector participation in exploration and production (E&P) projects to a 49% stake. PDVSA will have the remaining 51%, and the JVs are expected to be subject to a higher royalty rate.

Ramirez had announced in April that the government wanted foreign companies to switch from operating contracts to JVs with PDVSA within six months, claiming that the existing contracts had resulted in losses of US$260 million for PDVSA and that some of the private operators did not pay taxes. The announcement of a review of operating contracts, coupled with the difficulties that a number of companies experienced at the beginning of this year in having their investment plans for 2005 approved and an investigation by the tax agency Seniat, have been seen as an attempt to pressurise private companies to move over to new contracts.

The first company to agree to migrate to a new contract was Repsol-YPF, which signed a memorandum of understanding (MoU) in March to form a JV with PDVSA that will allow Repsol-YPF to increase its net production in Venezuela by 60% to 160,000 b/d from 100,000 b/d and double its volume of reserves in the country.

Outlook and Implications

Venezuela signed 32 operating contracts in the 1990s with companies such as Repsol-YPF, Total, BP, Eni, Chevron, ConocoPhillips and Statoil. They currently produce around 500,000 b/d, and PDVSA has become increasingly dependent on foreign-operated projects to increase production in order to offset the fall in its own production capacity following a two-month strike that ended over two years ago. Venezuela is currently producing below its OPEC quota, and there are ongoing concerns that not enough of the oil windfall generated by higher oil export revenues is being reinvested in the oil sector and that this is impairing the company's ability to restore its pre-strike production capacity. The government has become increasingly reliant on oil export revenues to fund its social programmes, and there are worries that this might constrain PDVSA's ability to implement its spending plans. With some of the company's older fields declining at a rate of around 25% per year, Venezuelan oil is more expensive to produce than that of most other countries, and it is estimated that around US$2.5 billion per year needs to be invested just to maintain oil production. 

The government is therefore taking a risk in putting pressure on these companies to move over to JVs and pay higher taxes at a time when greater foreign investment is needed in the oil sector.

Nevertheless, higher international oil prices, combined with limited opportunities for new investment in other major oil producing regions in the world and Venezuela's proximity to the US, mean that a group of core investors appears to be prepared to accept less favourable fiscal terms in order to maintain their investments in Venezuela. The MoU with Repsol-YPF suggested that in some cases, the government might be prepared to offer some reward to companies that agree to migrate to new contracts that would allow the state to take a larger share of revenues. However, it is not yet clear whether any of the other companies that have agreed to migrate contracts have seen their acreage expanded.