Venezuela to Change Agreements with Transnational Oil Companies

Venezuela’s Minister of Energy and Petroleum announced that Venezuela will require all transnational oil companies that are currently extracting oil from marginal fields to switch to joint ventures. The contracts will be revised because many currently produce losses.

Minister of Energy and Petroleum and PdVSA President Rafael Ramirez
Credit: ABN

Caracas, Venezuela, April 15, 2005—According to Venezuela’s minister of Energy and Petroleum, Rafael Ramirez, the operating agreements that exist between the state oil company PDVSA and various transnational oil companies caused $260 million of losses for PDVSA and will thus be revised. During a press conference yesterday, Ramirez said that the goal would be to change the operating agreements into joint ventures with PDVSA, where PDVSA would have a majority stake.

Ramirez, who also serves as president PDVSA, explained that there are 32 operating agreements with companies such as ChevronTexaco, Royal Dutch Shell, France’s Total, and Spain’s Repsol, which produce about 500,000 barrels of oil per day, mostly from marginal oil fields. The contracts were signed in the between 1992 and 1997, when the price of oil was very low and the government at the time was interested in opening up the country’s oil industry to foreign investors.

The operating agreements are service agreements, in which the Venezuelan state pays a fee for the production of the oil. According to Ramirez, in many cases the fees the state paid for this extraction service cost more than could be earned by the sale of the oil, thus leading to losses in many cases for the state-owned oil company. Ramirez says that it costs $14 per barrel to extract oil under the service agreements, while in other oil fields the PDVSA operates it costs only $4 per barrel.

The Energy Ministry’s new requirement is to have all operating agreements changed into joint ventures in the next six months, under which they would pay 30% royalties, as well as taxes of 50%. A royalty is the percentage of the extracted oil’s market value that an oil company must pay directly to the government, before it subtracts any of its expenses. The taxes are then applied to the profits that the oil company makes on the sale of the remaining oil (i.e., after subtracting its expenses).

According to the new law on hydrocarbons, which went into effect in late 2001, international investment project in the oil sector would take the form of joint ventures, with PDVSA maintaining a 51% stake in these ventures. The new law also raised royalties from 16.6% to 30% and lowered taxes from 67% to 50%.

A day earlier, on Wednesday, President Chavez had said during a speech that many of these oil companies declared losses in Venezuela and were thus not paying any taxes at all. Chavez announced that the state’s tax collection agency, SENIAT, would investigate these companies. “In some cases, and we already have the proof, that there are transnational companies that have not paid the taxes that they should have paid, so we will charge them,” said Chavez. “A country cannot allow itself to be looted in this way,” he added. Ramirez said that the back taxes could amount to as much as $2 billion.

The oil companies affected by this move have yet to comment on it. Industry analysts, however, say that it is unlikely that the companies will challenge the changes, since the oil price is expected to remain high and profits can still be made.

Last year, in a surprise announcement, the Chavez government had increased royalties that extra-heavy crude production projects pay in the Orinoco oil belt, from 1% to 16.6%. These extra-heavy crude production projects contribute another 500,000 barrels per day to Venezuela’s overall output. The extraction of extra-heavy crude is particularly difficult because the oil is so thick and thus needs to be processed with lighter forms of crude so it can be transported. The royalty rate for these projects was kept so low because when the contracts were signed, the price of oil was very low. However, the Chavez government says that the oil companies can afford to pay more, now that the price has reached new highs.

When the announcement of the royalty increase in the extra-heavy crude projects was made, all companies except for ExxonMobil accepted the change. ExxonMobil is currently engaging in negotiations over the increased royalties.

Venezuela is the world’s fifth largest exporter of oil and has the largest oil reserves in the Western hemisphere. If one includes the difficult to extract extra-heavy oil fields in the Orinoco Belt, Venezuela has the largest oil reserves in the world.