Venezuela Takes Over Two Foreign Operated Oil Fields

Two oil comapnies, Italy's Eni and France's Total have refused to migrate their oil production to joint ventures with Venezuela's state oil company and so now the state company, PDVSA, took over their production. 16 other companies in a similar situation, though, agreed to the joint ventures.

Caracas, Venezuela, April 5, 2006—Venezuela’s state-owned oil company PDVSA took over seven oil fields last weekend, which were previously run by foreign oil companies. Five of these fields were ceded to PDVSA intentionally and two, run by the Italian oil company Eni and the other by the French oil company Total, PDVSA took over without the companies’ agreement.

The takeovers were the result of the cancellation of so-called “operating agreements,” whereby foreign oil companies pumped Venezuelan oil under contracts with PDVSA. Last year, PDVSA, though, informed the companies that they would have to transition their operating agreements to joint ventures if they wanted to continue pumping oil in Venezuela.

Italy’s Eni said it is considering challenging the takeover in court, reported AFP. “Eni believes that PDVSA’s decision constitutes a violation of its contractual rights. Eni will give PDVSA some time to find an agreement that covers all of Eni’s rights,” said a communiqué from the company. Eni produced 50,000 barrels of oil per day in Venezuela.

Venezuela’s Minister of Oil and Energy and PDVSA President, Rafael Ramirez, said that Total and Eni are resisting compliance with Venezuela’s new hydrocarbons law, which only allows for joint ventures, not operating contracts. “We were very flexible, with the understanding that the old PDVSA signed agreements, in the name of the state. But this is not a confrontation, it’s what the law says,” said Ramirez.

“We’re not going to trample over anybody but we can’t accept being trampled on either," he added. “Companies that don’t adjust to our laws, we don’t want them to continue in the country.”

Venezuela’s Ambassador to Spain clarified that Eni and Total are still involved in oil production in Venezuela, despite the takeovers of some of their fields. “Total maintains a 47% participation in the Orinoco Oil Belt,” said Ambassador Arévalo Mendez. Also, Eni is, “participating in two exploratory projects that are broadly promising in Venezuela.”

Venezuela’s Ministry of Oil and Energy announced early last year that all companies involved in oil production operating agreements in Venezuela would have to initiate a transition to joint ventures with PDVSA. Towards the end of the year the ministry announced that agreements had been reached with nearly all companies. The agreements were finalized April 1 of this year, right after the deadline for the transition ran out on March 31st.

Aside from forcing companies to share risks and profits with the state-owned oil company, the new legal framework, which had been passed in November 2001 with the new Hydrocarbons Law, also changed taxes and royalties. While foreign oil companies previously had to pay a maximum of 36% taxes, they now are required to pay 50%. Royalties, which mainly affect oil production in the Orinoco Oil Belt, were increased from 1% to 30%. Also, the law specifies that PDVSA has a minimum participation of 60% in all joint ventures.

ExxonMobil is another company that announced early on that it would not accept the new legal framework. A few months ago ExxonMobil announced that it would sell its stake in one of the operating agreements to Spain’s Repsol. Minister Ramirez’s response to the move was, “We don’t want them here then.” Nonetheless, ExxonMobil is still actively producing 120,000 barrels of extra-heavy oil in the Orinoco Oil Belt, where it has a 42% stake in a joint venture.

Of the 32 operating agreements with 18 oil companies, 22 joint ventures with PDVSA have been created, involving 16 oil companies. The oil production volume of these joint ventures will be 600,000 barrels per day, representing 18% of Venezuela’s total production of about 3.3 million barrels per day. PDVSA will have an average participation of 63% in these joint ventures.          

Rafael Ramirez said that the joint ventures would allow PDVSA to make sure that the oil is produced far more efficiently than under the old arrangement. Previously oil companies merely billed PDVSA for their costs of producing the oil, which, according to PDVSA, inflated their costs tremendously. We estimate that the production cost per barrel will drop from $22 to $7 and the goal is to level off at $4, which is what our own production [now] costs,” said Ramirez.

PDVSA has justified its demand that companies transition to joint ventures by saying that the original agreements violated both Venezuela’s old 1961 constitution, under which the agreements were signed, and the new 1999 constitution. Venezuela’s National Assembly passed a new law today, which clarified the requirement for companies to be only involved in Venezuela as minority stake holders in joint ventures.

Another move that has caused unease among foreign oil companies doing business in Venezuela is that Venezuela’s tax collection agency, SENIAT, has stated that many companies owe back taxes. Last week, SENIAT’s director José Vielma announced that ChevronTexaco had accepted to pay $50 million in back taxes, interest, and fines. BP, the British oil company, would pay $14 million and France’s Total already paid $19 million. According to SENIAT estimates, foreign oil companies still owe as much as $2 billion in back taxes covering the past ten years.

With the price of Venezuelan oil, which generally sells for less than many other types of oil due to its high viscosity and sulfur content, exceeding $50 per barrel, oil companies in Venezuela have complained relatively little about the changing conditions.

Also, according to a recent U.S. Department of energy report, investing in Venezuela is still much easier than in Mexico or Saudi Arabia, both of which practically prohibit foreign oil companies from producing any oil.