March 28, 2005
PDVSA's policy in marginal fields
Published by Oxford Analytica

"SUBJECT: Changes in state oil company, PDVSA's strategy towards its partners in marginal fields (...).

ANALYSIS: In the 1990s, Venezuelan state oil company, PDVSA, signed 33 operating and services contracts and strategic association contracts with foreign companies, for the exploration and exploitation of both marginal fields and the Orinoco oil belt (...). Those companies are currently producing some 600,000 barrels per day (b/d) in the marginal fields, and approximately 500,000 b/d in the Orinoco belt, implying that foreign companies account for around 1.1 million b/d of Venezuela's total production, while PDVSA itself accounts for around 1.6 million b/d.

In December, most of the parties to these agreements received a letter from PDVSA rejecting their proposed investment budgets for 2005. This was one of the first decisions taken by Energy Minister Rafael Ramírez in his new additional post as head of PDVSA (...)

New rules. The government had repeatedly criticised these association contracts in recent years, arguing that terms do not benefit Venezuela. The new rules are in line with that criticism:

Cost control. Until recently, PDVSA apparently exercised little vigilance over the figures presented by foreign partners. The government is now questioning some of the financial statements presented by those companies, asking them to justify what it alleges may be inflated extraction costs.

Tax control. Venezuelan tax authority SENIAT has apparently failed to exercise strict control over foreign companies in the past. Recently, SENIAT has announced that it will try to determine whether the foreign and domestic oil companies involved in the production contracts have been evading taxes: despite higher production and higher-than-expected profits, they have reportedly not paid significant income tax in the years they have been involved in these operating agreements, even reporting losses linked to exploration.

National capital. PDVSA has consistently asked international companies to buy locally produced supplies and goods wherever possible. However, non-compliance with this objective was never seen as an issue that might jeopardise a project. The government is now seeking to send the message that the level of national purchases is a significant factor which can determine the acceptance or rejection of a project.

Legal status. PDVSA had asked foreign companies to convert their current operating agreements into joint ventures with the state oil company under the 2001 Hydrocarbons Law. Thus far, with the exception of one major international oil company, they have refused. PDVSA is now pressing the issue (...).

Apparent motives. The government is sending a political message to its supporters, to the effect that PDVSA will no longer establish policies strictly with a view to its own interests and those of its foreign partners: The government is now managing PDVSA, and its policies should benefit the state, and consequently, the 'people'. The same message is also being sent to foreign companies: they are welcome if their businesses benefit the state in some way.

However, there is also a more economic rationale behind these pressures. The conditions established under the contracts signed in the 1990s have proved economically beneficial to foreign companies, but not to the state. At that time, the marginal fields were considered risky and costly, and PDVSA did not have the financial resources to undertake the investments itself. As such, international companies were offered excellent conditions. At present, these companies have overcome most technological risks, have produced more oil than expected, and have enjoyed the benefits of the rise in oil prices.

Under the services and operating contracts, foreign partners receive a fee from PDVSA for each barrel produced, which is independent of real extraction costs. According to 2002 figures, the average fee was twelve dollars per barrel in marginal fields, and nine dollars per barrel for producing and upgrading production of the extra-heavy oil from the Orinoco belt, while extraction costs are generally between three and five dollars per barrel. The payments of these so-called 'cap fees' would exceed 3 trillion Bolívars in 2004 (1.4 billion dollars), making them the fourth largest expense line in PDVSA's budget. In addition, production from the marginal fields tends to be heavy crude, whereas PDVSA could get a higher return on investments if it were to invest in light oil production.

Underlying issue. In 2005, PDVSA's production capacity could be increased to exceed the OPEC quota, which might justify a reduction in production from the least profitable fields. Venezuela also wants Chinese and Russian companies to produce in the country (...). Because Venezuela works within the OPEC quotas, new concessions to those countries could mean new limits on the production from existing fields".