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Caracas Pursues Control of Oil

Venezuela is preparing to convert four privately run crude projects into entities majority-owned by the government.

April 25, 2006|From Reuters

CARACAS, Venezuela — Venezuela is preparing to convert four heavy crude-oil projects valued at about $33 billion to state-majority joint ventures, another step in President Hugo Chavez's effort to assert control of the oil industry and boost government revenue.

Venezuela's legislature today will issue a report that is expected to raise royalty rates to 30% from 16.6% on the four projects, which turn tar-like Orinoco crude into 600,000 barrels a day of conventional oil.

The deals on the projects were reached in the 1990s with oil companies including Exxon Mobil, ConocoPhillips and Chevron.

State oil company PDVSA will seek to boost its stake in them from an average of 40% to at least 51%, as required by the Hydrocarbons Law decreed in 2001.

Chavez wants to roll back the private investment spree of the 1990s and boost government revenue amid record-breaking energy prices. His battle with oil companies over control of a group of oilfield subcontracting agreements made headlines last year.

Venezuela successfully converted 32 privately run subcontracting deals known as operating service agreements to joint ventures with a majority stake held by PDVSA.

Despite complaints that Venezuela had violated companies' contractual rights, nearly all of the operators agreed to the new terms rather than abandon the country.

But analysts said negotiations to convert the Orinoco projects to state-majority joint ventures would be more complex.

The four projects are valued at $33 billion, according to estimates by Deutsche Bank, compared with a $10-billion value for the operating service agreements.

Much of this investment was made possible through Wall Street financing -- both project finance and publicly traded debt.

"It's going to be complicated and will take a long time," Paul Sankey, an analyst with Deutsche Bank in New York, said of the coming Orinoco negotiation.

Two of the projects -- Petrozuata and Cerro Negro -- currently have outstanding bonds totaling close to $1.4 billion.

In addition, the Orinoco projects were allowed to control the marketing of their crude, but under the current legislation the Venezuelan state must control crude oil marketing.

Two of the Orinoco projects sell their production on the spot market, and the other two have supply contracts over the majority of their output.

This issue did not come up as part of the operating service agreement negotiations because those operations only pumped crude on behalf of PDVSA but never actually owned it.

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