A case study of the petroleum industry in Venezuela provides additional insights into overseas investment in the upstream oil and gas industry. In 1989, the Venezuelan government began to develop a policy known as "Apertura Petroera" (or Petroleum Opening) that has encouraged foreign investment in its oil industry. The central goal of the policy change was to increase Venezuela's productive capacity through the rejuvenation of its existing fields, the development of its huge resources of extra-heavy crude oil, and the discovery of new fields of medium and light crude outside of the traditional producing regions.
The first phase of the policy change opened up the operation of inactive or abandoned fields to the private sector. Between 1992 and 1993, a total of 14 contracts were awarded. Under these contracts, the operator received a 20-year contract that mandated certain minimum investment levels. In return, the operator received a fee for each barrel of oil produced.
The potential for these projects was originally estimated to be 125,000 barrels per day (b/d); as of 1997, however, they were already producing 260,000 b/d, more than twice the original estimate. (Note 1) According to one source, these fields can now be expected to produce 500,000 b/d within a few years. (Note 2) These increases can be attributed to the state-owned oil company's relative inexperience in managing smaller mature fields and its isolation from the recent technological advances in the industry that have made it possible to sustain (and some cases even increase) production from seemingly mature producing properties.
In 1996, the Venezuelan Congress authorized profit sharing agreements (PSAs) under which private firms have the right to explore and develop new areas. Under the PSAs, the foreign companies bear all exploration costs, with a maximum nine-year exploration period (during which the company is obligated to spend a minimum of $40 to $60 million per block). If a commercial deposit is discovered, a joint venture with PDVSA is formed (with PDVSA having up to 35 percent of the equity) to exploit the discovery. A foreign company's total tax burden under a PSA can range between 85 and 94 percent. Despite these seemingly prohibitive terms, over 75 companies participated in the auction. Five international joint ventures and three solo firms won the right to develop eight blocks, located throughout Venezuela. Exploration and development of these areas could increase productive capacity by 500,000 b/d.
The future trend in Venezuelan production is largely dependent on the success of a number of recently authorized joint ventures to upgrade the extra-heavy crude resources in the 270-mile long by 40-mile wide Orinoco Belt in eastern Venezuela. This region is believed by some to have reserves that rival those of any other country. Petroleos de Venezuela, S.A. (PDVSA) has estimated that there are 270 billion barrels of recoverable reserves in the area. (Note 3)
There are currently four heavy crude oil projects in the Orinoco Belt, at various stages of development. However, startup dates for three of the ventures have been pushed back by up to eight months due to the impact of the 1998 plunge in oil prices on PDVSA's ability to provide its share of the funding. In addition, three other projects have been planned but have not yet received government approval. Upon completion, these projects are expected to add 500,000 to 700,000 b/d to Venezuela's productive capacity.
In 1997, Venezuela completed its 3rd Reactivation Round by auctioning off 20 additional marginal oil fields. In contrast to the earlier auction rounds, the operators are now entitled to receive the full market value of additional output (net of a one-sixth royalty and administrative costs) until their investment is recovered. Subsequent to the recovery of initial costs, operators are then entitled to a percentage of net incremental value above costs, with the percentage rising as the field matures.
However, at the end of 1998, the election of a new government, which campaigned on cutting oil production, has created uncertainty about the future direction of oil policy in Venezuela. In early 1999, many observers are still contending that the government's decisions have not as yet set a discernable course for the country's oil policy.
Larry Spancake, Energy Information Administration, (202) 586-8597, March 1999.
This material was prepared by the Energy Information Administration (EIA), the independent statistical and analytical agency of the Department of Energy. The information herein should not be construed as advocating or reflecting any policy position of the Department of Energy or any other organization.
File last modified: April 16, 2001
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National Energy Information CenterURL: http://www.eia.doe.gov/emeu/finance/usi&to/venezuela.html
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