[Marxism] Chávez Plans to Take More Control Of Oil Away From Foreign Firms

[Andrew Pollack <acpollack2@xxxxxxxxx>]

      Wall Street Journal
      Chávez Plans to Take More Control Of Oil Away From Foreign  Firms
      By DAVID LUHNOW and PETER MILLARD
      April 24, 2006; Page A1

      Venezuelan President Hugo Chávez is planning a new assault  on Big Oil, 
potentially taking a major step toward nationalization of  Venezuela's oil 
industry that could hurt oil-company profits, reduce production  and put 
further pressure on global oil prices.


      Venezuela's Congress, made up entirely of Mr. Chávez's  allies, is 
considering sharply raising taxes and royalties on foreign  companies' 
operations in the Orinoco River basin, the country's richest oil  deposit. 
Major oil companies like Exxon Mobil Corp. and ConocoPhillips of the  U.S. and 
Total SA of France have invested billions of dollars there to turn the  basin's 
characteristically tar-like oil into some 600,000 barrels a day of  lighter, 
synthetic crude.

      Mr. Chávez, a left-wing populist who favors greater state  control of the 
economy, also wants to seize majority control of the four  Orinoco projects and 
force private companies who run them to accept a minority  stake, according to 
a top executive at state-run oil company Petróleos de  Venezuela SA, known as 
PdVSA.

      The moves would up the ante in Mr. Chávez's long-running  battle with 
foreign oil companies, which he accuses of making outsize profits  amid high 
oil prices at the expense of a poor nation. The stakes are high  because 
Venezuela, the world's fifth-largest oil exporter, holds the world's  biggest 
oil reserves outside the Middle East and is the third-biggest supplier  of 
crude to the U.S.

      The Orinoco plan mirrors the terms of a recent takeover by  PdVSA of some 
32 smaller conventional oil-production projects previously run by  private 
companies. That effort culminated in the seizure of two fields run by  Total 
and Italy's ENI SpA. Yesterday, Oil Minister Rafael Ramirez said  Venezuela has 
no plans to compensate Total and ENI for the lost fields.

      If the latest initiative succeeds, it would eliminate the  country's 
remaining privately managed oil fields.

      "We would like all of the [Orinoco] associations to  migrate to mixed 
companies," said Eulogio del Pino, the executive in  charge of PdVSA's 
relations with private companies, in an interview published  Saturday in 
Venezuelan newspaper El Universal. Mixed company is the  government's term for 
an enterprise in which it owns 51%.

      Under terms of the government's plan, oil royalties in the  Orinoco 
region also would rise to 30% from the current 16.7% and taxes would  jump to 
50% from 34%. Higher royalties translate into less revenue for private  
companies and taxes take a bite out of their remaining profits.

      Action could come as soon as this week, when the country's  lawmakers are 
scheduled to review the results of a congressional investigation  into the 
country's decision in the 1990s to open up parts of the oil industry  to 
private investment. That policy has been steadily rolled back by Mr. Chávez.

      Oil companies reacted cautiously to the latest signals from  Caracas. A 
spokesman for ConocoPhillips declined to comment, and Exxon Mobil  spokesman 
Mark Boudreaux said: "It's not uncommon for us to have difficult  issues that 
we have to work with the government to resolve, and we take a  long-term view 
of that."

      Any final congressional action could be weeks or months  away, but 
analysts expect lawmakers to take a tough line against foreign  companies ahead 
of December elections, in which Mr. Chávez is running for a  third term.

      Whatever the final plan adopted by Congress, any move  against the 
Orinoco projects would have significant effects, both on the global  market and 
on the dynamics of Venezuela's oil industry.

      For starters, it could cost oil companies like  ConocoPhillips billions 
of dollars in lost profits. The big Houston-based  company has a controlling 
stake in two of the four existing Orinoco projects,  an investment value of 
about $7.5 billion, according to Deutsche Bank.

      The four projects cost a total of about $17 billion to set  up, but are 
valued at much more these days because of the high price of oil. On  Friday, 
oil prices rose $1.48 to settle at $75.17 a barrel in trading on the  New York 
Mercantile Exchange.

      At a time when new oil supplies are harder to find,  Venezuela's moves 
could also slow the development of what is believed to be one  of the world's 
largest remaining pools of oil. Venezuela says the Orinoco's 235  billion 
barrels of extra-heavy crude make the Andean nation's reserves the  largest in 
the world, a claim that hasn't been independently verified.

      Less investment means less oil reaching international  markets in coming 
years, keeping pressure on prices. Growing output from the  Orinoco area has 
recently been making up for a decline in production elsewhere  in Venezuela, 
where exports are falling about 1% a year.

      "The stakes are clearly rising in this game because of  the value of the 
Orinoco projects," said Paul Sankey, an oil company  analyst at Deutsche Bank 
in New York.

      When oil prices were low in the mid-1990s, Venezuela opened  up its 
industry to private companies in a bid to ramp up production to produce  more 
revenue. But as the price of oil has gone up, the profitability of the  private 
companies' investments has risen, as has Mr. Chávez's incentive to  claim more 
of the spoils.

      The Orinoco area was identified as a vast source of oil as  far back as 
the 1920s, but development there didn't start until the late 1990s.  In 
contrast to conventional fields, the oil deposited in the area is so thick  it 
is as much a solid as a liquid. Because processing the oil is costly and  
complicated, Venezuela initially gave foreign companies favorable terms: Under  
the original contracts, the companies paid a 34% tax rate and a modest 1% 
royalty  on their Orinoco projects.

      But Mr. Chávez has been changing the rules of the oil game  since taking 
power in 1999. In 2001, his government tightened the terms on new  investments 
in conventional oil fields, cutting the tax take to 50% from 67%  but raising 
royalties to 30% from 16.7%, as well as limiting private companies  to a 
minority stake. In 2004, the government unilaterally raised the royalty on  the 
Orinoco heavy-oil projects to 16.7% from 1%.

      Last year, the Venezuelan leader angered oil companies by  ruling that 
the non-heavy-oil projects signed in the 1990s -- some 32  conventional 
oilfield deals -- had to retroactively comply with the 2001 law,  forcing the 
companies to hand over a greater share of the profits as well as  give up 
control over the fields.

      Now it appears the Orinoco projects are back on the target  list. Rodrigo 
Cabezas, the head of the influential congressional finance  committee, said he 
will present a report this week on all of Venezuela's 1990s  oil deals. The 
report contains a chapter on the Orinoco projects and also  includes personal 
attacks on former officials responsible for offering cut-rate  taxes to foreign 
firms.

      "There are moral and political sanctions against those  who managed the 
oil opening," Mr. Cabezas said in an interview.

      Some of the companies pumping heavy oil in the Orinoco basin  are already 
calculating 2006 tax payments based on the higher tax rates.

      If Venezuela raises taxes and royalties as well as reducing  private 
companies' stakes in the four Orinoco projects, it will cost oil  companies 
dearly. According to recent estimates by Deutsche Bank and consulting  firm 
Wood Mackenzie, changing the terms of the Hamaca project alone to comply  with 
the 2001 law would cost ConocoPhillips an estimated $4 billion in lost  profits 
over the life of the project. In that project, ConocoPhillips has a 40%  stake, 
together with a 30% stake for Chevron Corp. and a 30% stake for PdVSA.

      So far, Mr. Chávez's moves against private companies have  provoked a 
limited response. Exxon Mobil sold out of one of its 32 operating  deals, 
rather than submit to the new conditions and Total and ENI also  resisted, 
leading to the recent seizures. But analysts have said foreign  companies need 
Venezuela's reserves too much to abandon the nation altogether.

      "Some oil companies may walk away, but others will  stick around because 
they need Venezuela's reserves," said Matthew Shaw, a  Wood Mackenzie analyst. 
Besides, he added, because of high prices the oil  companies have been making 
much more money off the heavy-oil projects than they  initially expected.


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