Latin America Advisor
Venezuelan President Hugo Chavez earlier this month used new powers given to him by Venezuela's National Assembly to decree the transfer of control of four heavy oil projects from private foreign companies to state-owned oil company PDVSA, pending negotiations with the companies. What is the future of the projects? Is a conflict between the companies and the government on the horizon? What will it take to convince the companies to accept a loss of operational control and to continue to invest in the projects?
Patrick Esteruelas, Latin America Analyst at the Eurasia Group: A large majority of investors in Venezuela's heavy oil projects are expected to abide by new tougher terms to ensure future revenues and recoup the value of their original investments, but will look to extract as many concessions from the Venezuelan government as possible over compensation and additional opportunities going forward. The incentives to remain are still strong, with attractive rates of return on all four projects and huge extra-heavy crude reserves that remain largely unexplored. All foreign heavy crude producers will try to obtain some material compensation, although the government will be reluctant to offer anything other than crude oil or reserves. They will also use this as an opportunity to secure additional acreage in the future, although the government has so far not responded to their proposals to expand existing operations and has only invited state-owned companies from diplomatically aligned nations to quantify the Orinoco Belt's untapped extra-heavy crude reserves.
Nelson Altamirano, Visiting Scholar at the University of California at San Diego's Center for Iberian and Latin American Studies: It has to be clear that there is room for negotiation. The recent announcement calls multinationals to sit at the negotiation table, and Chavez seems to be asking 60 percent ownership. Remember that PDVSA today is a minority partner with ownership between 30 percent and 49.9 percent, depending on the project. On the other side, firms do not want to lose control of production, development, and marketing if these changes reduce their current profitability. The four projects in the Orinoco Belt produce 0.6 million barrels per day today, and without new investment this output cannot be increased. Given the downward trend in international prices, Chavez needs to increase crude oil output to continue funding his social programs ($26 billion by 2005), and PDVSA along with the invited national oil companies are not able to do it in the short run. If he is pragmatic, as he has been in the past, he will negotiate economic returns in exchange for new investment and output increases. Firms do not want to leave Venezuela because of the oil potential in the Orinoco Belt, their accumulated experience there, and current high oil prices. The negotiations will be case-by-case and difficult, and the outcome will depend on the evolution of international oil prices.
Carlos Miranda Pacheco, La Paz-based private consultant and a former Superintendent of Hydrocarbons in Bolivia: Without knowing the decree in detail, the news of the obligatory transfer of control of the projects in Venezuela sounds very similar to some measures in the May 1 Bolivian oil nationalization. Among other regulations, the [Bolivian] nationalization decree introduced the transfer of 50 percent plus one share of two producer companies, Andina S.A. and Chaco S.A., majority controlled by Repsol and British Petroleum, respectively; of transportation company Transredes S.A., currently under the control of Shell and Ashmore; and of Transportadora Logistica Boliviana S.A., controlled by Grana Montero and Manquard y Bahls A.G, to [Bolivian state-owned oil and gas company] YPFB. Up until now, the Bolivian government has given signs of attempting a kind of 'hostile takeover' on the basis of the value of the companies to be made by investment banks that it is thinking of inviting and selecting through an international bidding process. The government has indicated it is disposed to concede general and technical management of the companies to minority partners. The companies have not taken a position yet on whether they would continue as minority shareholders. To date, the takeover process has not begun. A first invitation to investment banks has been abandoned and a new one is awaited. The Bolivian government plans to use this method to obtain control of Bolivian refineries that are owned by [Brazilian state-owned oil and gas company] Petrobras. For these reasons and others, as well as the close relations between Evo Morales and Hugo Chavez, there is speculation that Bolivia is being used as a test ground or test tube for nationalization measures.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.