This week, worldwide offshore rig utilization rose by 0.5%, as three previously idle rigs started new contracts, bringing the utilization rate up to nearly 84%. That rate would be notably higher if not for the political problems that have wracked the Venezuelan oil and gas industry over the last 7 years. Of the five major types of rigs included in the worldwide utilization counts, Venezuelan drill barges have by far the lowest utilization rate at just over 60%.
Recent headlines have clearly illustrated that the Venezuelan political climate is not improving, either, as shown by the recent efforts of Venezuelan President Hugo Chavez to wrest greater control of the Venezuelan oil and gas industry from foreign oil companies.
In the past week, three major European oil majors have pulled out of projects with PDVSA because of the less favorabe contracts being imposed by the Venezuelan government. Under the new contracts, a total of 22 multinational oil companies were being required to transition their 32 working agreements with PDVSA toward a "mixed company" mode in which the state-owned firm holds at least 60% of the shares. In addition to ownership changes, the Venezuelan government decided to redraw the concessions and take back about 60% of the land that was initially part of these agreements. Of the 22 companies involved in these agreements, 16 have apparently signed onto new deals with PDVSA, including majors Chevron, Shell, and Repsol YPF.
Eni and Total had initally signed preliminary agreements with the Venezuelan government back in December, but on Friday, both Eni and Total chose to allow the Venezuelan government to seize control of their operated fields rather than take part in the new JVs. Total gave up its more than 10 years worth of interest in the Jusepin field, which is the largest standard crude operation in Latin America with almost 400,000 barrels a day (b/d) output. And Eni is transferring control of its Daicon field over to PDVSA, while also looking into legal measures to assert its original contract rights.
In order to avoid being forced into a similar contract, Statoil sold its stake in the LL 652 field in Lake Maracaibo. Similarly, ExxonMobil also sold its 25% stake in the Quaimare-La Ceiba oil field to Repsol YPF.
The Venezuelan government and PDVSA have been pushing against ExxonMobil in an apparent effort to penalize the world's largest oil company for resisting royalty changes on heavy oil projects in the Orinico belt. In 2004, ExxonMobil was the only major company to protest the increase in royalties on heavy oil projects from 1% to 16.7%. Since then, the company has experienced a series of setbacks in Venezuela including the loss of involvement in the US$3 billion Jose petrochemicals plant in February. As such, the company seems to be reducing its presence in Venezuela, opting out of the Mariscal Sucre natural gas project in eastern Venezuela, and now only holding an interest in the Cerro Negro heavy oil project.
The level of tension between ExxonMobil and the Venezuelan government seems to have grown in recent days, with Venezuelan Oil Minister Rafael Ramirez having stated this week: "We said we don't want them to be here then, [If] we need them, we'll call them."
ExxonMobil is not the only international player affected by Chavez's plans to increase government revenue from oil and gas projects. ConocoPhillips, Chevron, BP, Total, and Statoil all have stakes in the four Orinoco heavy oil projects, which have seen royalties jump from 1% to 16.7% just over a year ago, and are now faced with the possibility of those royalties rising to 30%, while Seniat, the Venezuelan tax authority, contemplates a further rise in tax rates up to 50% on heavy oil profits. Over the course of 2005, the increased royalty rate generated more than US$1.6 billion in extra revenue for the Venezuelan goverment, so an increase to 30% royalties could drive a further US$1.3 billion per year into government coffers.
The 1% royalty was designed by the previous administration of Rafael Caldera in the mid-1990s in order to attract foreign investments in riskier extra-heavy crude ventures at a time when oil was trading at around US$15 a barrel. Now that oil prices have risen well above the US$60 level and look to stay there for some time, the Venezuelan government has been demanding a larger share of the revenues.
It is very easy to see why the Chavez administration is putting so much pressure on foreign oil companies to increase government revenues. The oil and gas industry is an essential part of the Venezuelan economy, accounting for about 30% of GDP, 80% of the country's US$52 billion in export earnings, and more than 50% of government revenues. These revenues are used to support the nation's impoverished majority, who have helped to keep Chavez in power because of his popular socialist programs and policies.
Add to that the virtual gutting of PDVSA after the 2002-03 strike, when 18,000 employees were let go, and the company is significantly hampered in its ability to find and exploit new fields, requiring it to increase revenues not by increasing production but by increasing its demands on other companies producing oil in the country. Much of this is tied directly to the advent of the Chavez government in 1998. Prior to the Chavez administration, Venezuela had been actively involved in attracting foreign capital into the country, and PDVSA was pursuing an expansion plan that was intended to have Venezuela producing 5.5 million barrels per day by 2004 and close to 8 million barrels per day by 2010. Instead, the country's overall production has fallen by an estimated 25% over the last 5 years.
The one bright spot in terms of PDVSA future is the recent announcement by Eudomar Tovar, Venezuela's vice finance minister, that the company plans to invest between $80 and $100 billion in the next 6 years.
In terms of exploration activity, the political ups and down of the Venezuelan government can be seen quite clearly in the level of rig utilization over the last 15 years or so. During the Caldera administration, offshore rig utilization rose to near, and even above, 90% for nearly 5 full years from 1994 to 1998. As soon as Hugo Chavez was elected in December of 1998, utilization dropped below 70% for the first time in more than 8 years. Although utilization recovered somewhat through 1999 and 2000, it fell steadily though 2001 and 2002, reaching a low of 40% in Q1 2002. And utilization still has not recovered to its previous levels, only reaching above 60% just this year, for the first time in nearly 5 years.
Although, Venezuelan rig utilization has finally begun to climb out of the pit, the many politically-motivated changes in the government management of the oil and gas industry may yet drive that recovery back down. And although Venezuela has the largest conventional oil reserves in the Western hemisphere, the country's production levels continue to decline as the Chavez administration seems intent on driving foreign companies out of the country. He may yet succeed in "re-nationalizing" the Venezuelan oil and gas industry, but the cost in production and revenues may be very high.
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