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Caracas: Opening up oil sector will offer message to the world
The Miami Herald / November 2, 1995

By Larry Luxner

CARACAS -- Three months from now, the Venezuelan government -- crippled by negative economic growth and a looming foreign-exchange crisis -- will open its once-sacred petroleum sector to large-scale foreign investment for the first time in 20 years.

State-owned Petroleos de Venezuela S.A. (known as PDVSA) has been authorized by the national legislature 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," said Juan Szabo, PDVSA's exploration and production coordinator, in a recent 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."

Carnevali says PDVSA needs foreign capital in order to snare a larger percentage of the world's oil exports and increase daily production from the current 2.3 million barrels to between 4.0 and 4.5 million barrels by 2005.

In mid-September, PDVSA approved 75 petroleum companies out of 88 applicants to prepare bids for the 10 oil basins. The firms -- representing 21 countries and a broad cross-section of the global petroleum industry -- are now eligible to buy data information packages on any or all of the 10 areas offered. Final comments are due Nov. 13 and the opening of bids, to take place in a nationally televised ceremony, is set for sometime in late January. The list of qualifiers includes Amoco, Chevron, Exxon, Mobil, Occidental, Phillips, Texaco and 18 other U.S. oil giants, as well as 10 Canadian companies and a number of European and Japanese firms (but only one Venezuelan company, much to the disappointment of the local petroleum industry).

"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."

PDVSA has designed the tender participation fee 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 question-mark for oil companies is the government's take on oil-industry profits. Royalties of 16.7% and income taxes of 67.7% will siphon off more than 83% of potential earnings. In addition, a PDVSA special-purpose affiliate may hold between 1% and 35% of any new venture. In the end, Caracas could end up with 90% or more of the profits.

"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."

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."

It's also difficult to find a country that has so badly mismanaged its oil wealth. Once among Latin America's wealthiest nations, Venezuela is now well below Argentina and Chile in terms of per-capita income. On the other hand, PDVSA itself has always been managed as a world apart. Last year, it reported sales of over $25 billion; revenues this year are expected to increase by 6.5% -- when the rest of the economy is clearly sinking.

"The petroleum sector has engineered a complete reversal of its 1970s oil policy," says Donald Williams, president of Caracas Wireless Vision, who believes the Venezuelan 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."

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