Oliver L Campbell : Carabobo
block needs to be renegotiated
In November 2008, 40 companies were named as being invited to take part in the auction of seven of the Carabobo Blocks. The list was notable for including a hotchpotch of private and state companies, and of companies with and without experience of producing extra-heavy oil. The list was subsequently reduced to 19 companies which, having paid for the geological information, were qualified to bid. Two years later, after several postponements, bids have been opened and firm offers received from two consortia: 1) Repsol of Spain, ONGC of India and Petronas of Malaysia, the last two being state companies, and 2) Chevron of the USA, Mitsubishi/Impex/Jogmec of Japan, and SueloPetrol of Venezuela. Total, Statoil and BP, which already operate in the Orinoco Belt, may still bid and Shell is another, more remote possibility. The winners will be announced on 10th February.
The lack of interest has taken everyone, including the Ministry of Energy and Petroleum (MEP), by surprise. No exploration risk exists because the Orinoco Belt has been explored and the huge reserves quantified. The area is easily accessible and the production technique well developed, so why did the multinationals not rush to bid? Venezuela's history of changing the rules of the game, together with the expropriation of ExxonMobil's and ConocoPhillip's assets, did not help but the real reason is that the economic conditions were not attractive.
Even if PDVSA had the technological and operational capacity to go it alone, the company does not have the capital required and this is the crux of the problem for Venezuela. The multinationals have both the know-how and the funds for the huge investment, so it must be in the interest of each side to reach an agreement. However, it is clear some concessions will have to be made, and below I list various possibilities I believe the MEP should consider.
1) Maintain the income tax rate at 50%. An equal division of the pre tax profit has been a norm accepted by the oil industry.
2) Reduce the royalty rate from one third to one sixth. The rate had been 16.67% for many years prior to January 2002 when it was doubled under the new Organic Hydrocarbons Law. The intention was that the State would be assured a reasonable take even if pre tax income was low. However, 33% is probably the highest rate imposed by any country.
3) Increase from $70 to $100 the price which the Brent marker crude must reach before the windfall tax comes into play. Brent has already exceeded $70 and an increase to $100 will compensate for the very high production and upgrading costs associated with the Oil Belt.
4) Place a maximum of 60% on PDVSA'S shareholding in a company.
This will reduce the large inequality between PDVSA and the other shareholders. When there is a consortium of just two shareholders, the individual shareholdings will already be low e.g. 60% PDVSA, 20% company A, and 20% company B.
5) Allow the foreign participants, instead of just being minority shareholders, to become partners in a joint venture. This was the case originally with the four operating companies in the Oil Belt. It is common practice in the oil industries to create joint ventures and its advantage is that all important decisions must be unanimous. As the structure now stands, PDVSA can impose its decision on the other shareholders.
6) Eliminate the obligation to finance PDVSA'S share of the investment. This is not only abnormal but it is a lamentable and brazen approach. The companies do not look kindly on financing 100% of the investment but only receiving 40% of the profits. The possibility of such financing, though excluded as a condition, can be something that is negotiated with each consortium.
7) Recognise the right to international arbitration. Venezuela has signed 28 Bilateral Investment Treaties with other countries--the last one was signed with Russia and only came into force on 2nd June, 2009. This treaty states "When a dispute cannot be resolved amicably, a tribunal for international arbitration may be chosen." The Arbitration Institute of the Stockholm Chamber of Commerce is specifically mentioned. Since provision for arbitration already exists in practice, there seems little point of not recognising it in the contracts.
8) Allow accelerated depreciation, for income tax purposes, on the capital expenditure incurred up to the first sale of oil. This incentive recognises the long period between the capital outlay and receipt of the first income from the Oil Belt operations.
Of course, MEP will not make all these concessions. They can pick and choose the ones they are willing to consider and negotiate them with the multinationals. Two of them, the return to joint ventures and the acceptance of international arbitration, cost nothing in monetary terms.. The concession that costs the most is the reduction in the royalty rate.
If the MEP make no concessions, the most likely outcome is that PDVSA will have to develop most of the Carabobo Blocks on its own. The problem with this is the very long time it will take. Perhaps PDVSA can buy the technology, perhaps it can contract specialised technicians, but where will the money for the investment come from? The sums required are huge and the company already has outstanding debt of over $20 billion so its financing capacity is limited.
In retrospect, an idea that seemed good at the time may have turned out to be a mistake. Asking the companies to finance the PDVSA investment share was to reveal your hand. The companies saw PDVSA was short of funds and kept that ace up their sleeve to negotiate a better deal. Obliging the companies to spend money on agriculture and cattle raising in the Orinoco Belt area was also a doubtful idea. They believe they have enough problems producing oil without dedicating managerial time to farming and livestock.
In brief, Venezuela does not have the funds to develop the Orinoco Belt on its own and needs the participation of the multinationals. The latter want to participate but only if the conditions are improved. The answer must be a return to the negotiating table.
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Petroleumworld News 02/04/2010
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