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Oliver L Campbell :
Carabobo block--stalled negotiations


We know the delay in awarding the licences for the Carabobo Block, in the Orinoco Oil Belt, has nothing to do with the oil companies’ needing more time to study the technical data and contract conditions since they have had the package in their hands since last November. We also know the holdup in not due to any lack of interest on their part. An impasse exists because the bidders are unwilling to accept all the conditions PDVSA wishes to impose, and PDVSA is unwilling to give ground. However, if progress is to be made, PDVSA needs to sweeten the pill and consider what concessions it can make.

I suggest there are two types of concessions: a) those which involve giving way on desired criteria but which cost nothing in terms of the country’s income, and b) those which reduce the country’s income because they increase the bidders’ take.

Relaxation of the criteria

1.- International arbitration. Because of globalization and the increase in business dealings between countries, it is now common to include clauses of this nature in contracts. Countries seek to protect their foreign investments and consequently there has been a surge in Bilateral Investment Treaties (BITs) so that, worldwide, they now exceed 2,000. Venezuela has signed 28 of these treaties and the last one with Russia was only ratified in June this year. The question is if the country can accept international arbitration, why is PDVSA so opposed to it? It seems illogical for one to accept it and the other to reject it.

2.-Mixed companies. When the so-called Strategic Associations were formed back in the 1990s to develop the Orinoco Oil Belt, the four consortia were joint ventures. The peculiarity of such structures is that there exists a joint control. Although PDVSA had a minority shareholding--49.9% in Petrozuata, 38% in Sincor, 30% in Hamaca and 41.7% in Cerro Negro--it exercised joint control with the other partners. However, when PDVSA acquired a majority shareholding in 2008, it decided to eliminate the joint venture model so that the other companies, instead of being partners, just became minority shareholders in the so-called mixed companies. It would be possible to return to the previous situation--status quo ante--only for the companies in the Orinoco Oil Belt. This would give them confidence their opinions would count when major decisions were taken.

Improvements to the economic package

 1.- Royalties. The great difference between oil produced from the Orinoco Oil Belt and other areas of Venezuela is that it needs to be upgraded to make it commercially attractive. This is costly since the upgraders, that are akin to small refineries, are expensive to build. To compensate for the additional cost, it would be possible to reduce the royalty rate from 33% to 16.67%. The latter rate was in existence for very many years until 2002 when it was doubled. If PDVSA consider a rate of one sixth the oil’s value is too low, then an option would be one fifth i.e. 20%.

2.- Windfall tax. The law passed last year imposes an additional charge when the price of the Brent marker crude exceeds $70 a barrel. The oil minister Rafael Ramirez, the president of OPEC and the president of BP, among others, have all affirmed a minimum price of $80 is required in order to maintain adequate investment. If that is so, the price at which the additional charge kicks in could be increased to, say, $100 precisely as an incentive to invest in the Orinoco Oil Belt.

What does PDVSA gain by adopting an attitude of no negotiation if the result is that the bidders will not invest? Oil under the ground does not produce the extra income the country sorely needs. Surely PDVSA’S goal should be to restore and then increase production capacity for the benefit of all the Venezuelan people. I put forward these suggestions to the state company as a possible way to break the current impasse.

 

 

Oliver L Campbell , MBA, DipM, FCCA, ACMA, MCIM was born in El Callao in 1931 where his father worked in the gold mining industry. He spent the WWII years in England, returning to Venezuela in 1953 to work with Shell de Venezuela (CSV), later as Finance Coordinator at Petroleos de Venezuela (PDVSA). In 1982 he returned to the UK with his family and retired early in 2002. Petroleumworld does not necessarily share these views.

Editor's Note: This commentary was originally published by The Independent on August 03, 2009 . Petroleumworld reprint this article in the interest of our readers .

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Petroleumworld News 08/13/09

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