Mexico Business / October 1995
By Larry Luxner
CARACAS -- Watching the big American gas-guzzlers snake along Avenida Libertador, not far from Simon Bolívar's humble birthplace in downtown Caracas, it's hard to believe that this congested city of 5 million -- which boasts South America's most modern subway system, its largest luxury hotel and its tallest skyscraper -- could be in trouble. Yet Caracas is today the capital of the continent's only nation whose economy will actually shrink this year, some say by as much as 2%.
Indeed, while the Mexican economy may be bad, Venezuela's is in far worse shape.
"Under [ex-President] Carlos Andres Pérez, we had a far better climate for businesses, no foreign-exchange or interest controls, and free trade at the borders," laments Donald DeVost, chief financial officer at Cervecería Polar, the country's biggest brewery. "Now all these things are gone. I don't see any change of policy until we have another foreign-exchange crisis."
Adds Donald Williams, president of Caracas Wireless Vision: "Doing business in Venezuela is not for the faint of heart. Business is down and everyone projects declining economic growth for the next two to three years."
In an effort to reverse that trend, the Venezuelan government -- for the first time since 1975 -- plans to about to open its once-sacred petroleum sector to large-scale foreign investment. Following a July 4 vote in Congress and a road show that took officials of state-owned Petroleos de Venezuela S.A. to Los Angeles, Houston, New York and Tokyo, PDVSA has decided to offer joint ventures in 10 highly prospective oil basins -- stretching from Lake Maracaibo in the west to Río Orinoco in the east.
The 10 basins cover 4.5 million acres, and are all adjacent to currently producing fields. None have been explored very carefully, hence their categorization by PDVSA as "high-risk" properties. Yet together, they are believed to contain anywhere between 7 billion and 40 billion barrels of crude oil. And that's just a fraction of the 64 billion barrels of proven reserves under PDVSA's custodianship. Counting the 270 billion barrels of heavy oil in the Orinoco tar belt, Venezuela may actually have more oil than Saudi Arabia.
"When you're globalizing the world, it's ridiculous to have 20-foot walls around your country," observes Juan Szabo, PDVSA's exploration and production coordinator, in an interview here. "We think this is going to have ripple effects. The presence of large multinational corporations in Venezuela will let people know we're in an opening mood."
And not a moment too soon, considering the country's dire economic situation. Despite its petroleum wealth, Venezuela's 1995 gross domestic product is expected to drop for the third year in a row, and prices are now climbing by 70% a year. Thanks to runaway inflation, new 2,000-bolivar and 5,000-bolivar banknotes are already planned, according to Antonio Casas González, president of Venezuela's Central Bank. The 1,000-bolivar note -- the highest now in circulation -- is worth only $5.88 at current exchange rates.
Foreign investors have already been scared off by tight exchange controls instituted by President Rafael Caldera, a 79-year-old populist who has resisted putting into practice the kinds of reforms that investors like to see. In an ominous sign, two Swiss drug firms that have been doing business in Venezuela for years -- Ciba-Geigy and Sandoz -- have already announced they would pull out of the country by year's end. And Dallas-based GTE Corp., which heads the consortium that bought 40% of Venezuela's national phone company, CANTV, is engaged in a long-running battle with the government over fulfilling the terms of its concession -- spurring unfounded rumors that GTE is thinking of pulling out altogether.
Yet the oil economy remains a world apart. While the rest of Venezuela approaches economic chaos, Szabo predicts the country's petroleum industry will purr along at a healthy 6.5% this year. This will undoubtedly be helped by PDVSA's partial privatization, a move that comes exactly 20 years since the country nationalized its oil sector in the aftermath of the 1973-74 Arab oil embargo.
"The petroleum sector has engineered a complete reversal of its 1970s oil policy," says Williams, who believes the economy has already touched bottom and is now heading for a rebound. "This will nearly double current reserves and production by the year 2005. The return of foreign oil companies to Venezuela means the start of significant economic growth that we would all do well to heed."
Under the timetable approved in Venezuela's legislature by a 148-to-23 vote, interested companies -- which had until Aug. 22 to pre-qualify for bidding on the 10 sites -- will be selected as finalists Sept. 22. At that time, geological data packages will be available; those finalists will have all of October for field visits, while legal and technical bidders' conferences are set for Oct. 16 and 19. Final comments due Nov. 13 and the opening of bids, to take place in a nationally televised ceremony, is set for sometime in late January.
Observers say between 300 and 400 companies have shown interest in the oil auction, including Mobil, Conoco, British Petroleum and other giants of the petroleum industry. Anticipating the onslaught, Exxon Exploration Co. and Holland's Shell Exploration B.V. have agreed to jointly pursue onshore and offshore exploration, development and production opportunities in Venezuela. Under the terms of the Aug. 14 agreement, each company will have the option to participate jointly or individually in any acquisition associated with Venezuela's bidding round.
"The 10 blocks will go one-by-one, two per day," said PDVSA's manager of new ventures and exploration, Jorge O. Carnevali. "Companies are bidding percentages, not dollars. However, if there's a tie, we give them an hour to re-bid. If they tie again, they have to submit an envelope. Whoever offers a larger bonus gets the concession."
The tender participation fee is designed to dissuade all but the most serious: $50,000 per area, or $250,000 for all 10 areas. And that's not all. Winning companies will be expected to commit between $20 million and $60 million for the exploration program.
Yet the biggest shock is the Venezuelan government's take on oil-industry profits. Between royalties of 16.7% and income taxes of 67.7% will siphon off more than 83% of profits. In addition, a PDVSA special-purpose affiliate could hold between 1% and 35% of any new venture. Carnevali acknowledges that this a higher percentage than that taken by the governments of the United Kingdom, Ecuador, Colombia, Vietnam or Norway, but far less than that of Russia, Nigeria, Indonesia or Kazakhstan.
"Two things make Venezuela attractive: the size of our fields and the cost," he said. "So far, we have found 25 fields containing over 500 million barrels each (compared to 13 such fields in Mexico, four in Colombia, two in Ecuador and one in Argentina). And our costs are only $1.40 per barrel for operations, and $2.95 per barrel for development. It's extremely difficult to find a country with such good prospects and such low costs."
Yet others say PDVSA's take will be closer to 90%. "Some companies won't find the terms attractive, and some will," remarked a U.S. Embassy official who asked not to be named. "The geology is excellent; the terms are tough. Taxes are quite high, but PDVSA knows what it's doing."
Meanwhile, U.S. oil conglomerates continue to invest wherever they can in Venezuela's oil and petrochemicals sector. Houston-based Conoco, a subsidiary of DuPont, is currently forming two joint-venture companies to commercialize large heavy oil reserves in the Orinoco tar belt. The $1.7 billion Venezuela Heavy Oil Project will produce a medium-gravity synthetic crude oil for conventional refinery feedstock, while the $320 million Bitor Project will create Orimulsion, a fuel for power generation that has already been approved for use in Turkey and Lithuania.
Separately, Foster Wheeler Power Systems Inc. and BOC Gases have announced a $50 million project to supply hydrogen to Lagoven, a PDVSA subsidiary. The joint-venture partners -- both based in New Jersey -- will build, own and operate a plant capable of producing 50 million cubic feet of hydrogen a day. The facility, set for completion in mid-1997, will be adjacent to Lagoven's 630,000-barrel-a-day refinery in Amuay, on northwestern Venezuela's Paraguana peninsula.
While foreign participation in the Venezuelan oil sector will no doubt help bring the country out of its current crisis, PDVSA says it has a longer-term goal: that of snaring a larger percentage of the world's oil exports. But in order to do that, Carnevali says Venezuela needs foreign capital.
"We would like to increase our daily production from the current 2.3 million barrels to between 4.0 and 4.5 million barrels. With this program, by 2005, we'll have a niche where we'll be able to place 4.0 to 4.5 million barrels a day on the world market," he said. "It would take us 20 years to increase production this much if we were to do it alone."