Hydrocarbons law tightens grip on Venezuela's oil industry

Nov 28, 2001 01:00 AM

A new law that will regulate the oil industry next year could undermine a seven-year effort to open Venezuela's oil industry to foreign firms, critics contend. But President Hugo Chavez argues that liberalizing the oil industry hasn't generated the money needed to spread the petroleum industry's riches across the company's economy and its residents. Under the new Hydrocarbons Law, state-owned oil company PdVSA, must hold a minimum 51 % stake in all future joint-venture projects involving exploration, exploitation, transportation and delivery.
Former PdVSA President Luis Giusti said the law clashes with the spirit of mid-1990s reforms that opened Venezuela's petroleum industry to joint-ventures with foreign oil companies. The move generated $ 20 bn in foreign investment and Venezuela's production rose to a record 4 mm bpd, making the state-owned company among the 10 biggest oil companies in the world. Giusti has argued that Venezuela should further liberalize its oil industry, a trend he said istaking place in other countries, including fellow members of OPEC.

Chavez, who will inaugurate the Hydrocarbons Law in oil-rich western Falcon State, promotes an oil policy that favours extracting the highest earnings possible per barrel over maximizing production. Despite record oil production in the mid-1990s, corporate tax breaks and plunging oil prices left government coffers scraping bottom, Chavez said.
Since taking office in 1999, Chavez said Venezuela has promoted healthy world oil prices through strict compliance with production quotas set by OPEC. Now, the government wants to create a steadier revenue flow by imposing the world's highest royalty rates on companies exploring and exploiting Venezuela's state-owned oil fields.

The Hydrocarbons Law raises royalty rates from 16.7 % to 30 %. Giusti warned the new rates will drive investors to other oil producing countries, where rates do not exceed 20 % and the average rate is 7.1 %. Among Venezuela's fellow OPEC members, the average is 14.7 %. Critics were unappeased by a compromise allowing payments as low as 20 % for the most high-risk projects, such as heavy crude oil fields in the environmentally fragile Orinoco River Delta.
Allowing for rates of 20 % "can only be considered a gesture. This doesn't change the law's central objective, which is to impose absolute state control over the oil industry," said economist Orlando Ochoa.
The Hydrocarbons Law is among the most contentious of 49 laws that Chavez passed last month under special powers that allowed him to bypass Congress. Several business leaders and opposition legislators have threatened to ask the Supreme Court to strike down all 49 laws, arguing that Chavez passed them without consulting the private sector. Business leader have also called a Dec. 10 strike to protest the laws.
Chavez, who insists all 49 laws were widely consulted, argues that the state must maintain control over its petroleum reserves because they are of "strategic importance." Venezuela, which has the largestoil reserves in the Western Hemisphere, depends on oil for more than 40 % of government income and 80 % of export revenue.

Oil Minister Alvaro Silva denied that the Hydrocarbons Law imposes excessive state control over the industry. He argues that the steeper royalty payments will be offset by lower income tax rates, which the new legislation slashes from 67.7 % to 50 %. Silva added that the law allows private companies to operate refineries alone, a moved aimed at encouraging the development of gas and other refined products and easing Venezuela's dependence on crude oil production.

Source: AP Online
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