Oct. 2001 Vol. 222 No. 10  International Politics

Stuart Wilkinson,  Contributing Editor

New Venezuelan hydrocarbons law struggles forward

CARACAS – A polemic is being whipped up in Venezuela about the proposed new hydrocarbons law. It has been called names like "a straitjacket for PDVSA" that would drive away foreign investors, and a way of "state-izing" the industry. Its aim, however, is to tidy up previous legislation and bring these good-but-old laws into a single, coherent framework. This would eliminate making frequent, complicated interpretations of contradictory legal norms.

The debate, which has re-opened arguments for and against the "Apertura" policy undertaken during the last decade, has been termed "a storm in a teacup" by one of the members of the Presidential Commission. This individual stated that the new law will have more positive results for the country than the laws currently in existence.

Energy Minister Alvaro Silva Calderón was very clear in this respect, when he said at the beginning of September, "They are merely judging one side of the law. . . . why don’t they speak of the change in model (of development) that is proposed; why don’t they say that at last, there are clear rules of the game." He also added, "With regard to majority participation (for PDVSA), what was done in the Apertura was an error of interpretation." Later, at the inauguration of the Cerro Negro project, an association with ExxonMobil and Veba in the Orinoco Oil Belt (the Faja), Silva Calderón reiterated, "(By) using a simple, quick mode, we want public and private management to know how to act."

The most polemic areas of the proposed law, so far, fall into two categories – royalties and the interpretation of majority shareholding. It is planned to raise royalties to 30% from 16-2/3%. Former Venezuelan Energy Minister and present OPEC Secretary General Alí Rodríguez Araque said on this point, "Tax contributions are not being increased. What is being looked for is a more transparent and effective way of collecting the taxes. The prime objective is stop the decline in fiscal contributions, and a royalty is a very simple mechanism."

Majority shareholding is defined in the proposed law as PDVSA having a minimum 50% share in any joint projects. On this question, Rodríguez Araque stated that as regards the Apertura, one sees the effects of a process that has only worked in the strategic associations for heavy and extra-heavy crudes. Here, one should bear in mind that in the Cerro Negro project, which was structured under a flexible tax structure, the direct taxation rate is 34% rather than the normal 67.7% that hydrocarbons pay. Royalties start at 1% for the first eight years, eventually rising to 16-2/3%.

Adding to the debate, former Venezuelan Petroleum Chamber President Alan Viergutz believes that a 30% royalty would make the development of certain projects impossible. However, he mounts another horse, when he comments that "Ricardo’s model of marginal profit, which was the fundamental base of the Apertura, collapses when the oil market is in recession." It obliges low-cost production to be shut-in when there is a production cut to honor the agreements undertaken in the Apertura. He adds that a larger royalty would prevent such distortions, and he expects that the law will end up with a royalty of between 20% and 25%.

On majority shareholding, Viergutz believes that a window of opportunity should be left open within the norm of state participation and control, so that more liberal associations and special conditions can be considered. Former PDVSA president and oil adviser to U.S. President George W. Bush, Luis Giusti, feels that what is in the proposed law would limit PDVSA’s flexibility. However, he says that there are good points. One is a special fund that would be set up by contributing 3% of PDVSA’s export revenues, to give economic support to the Ministry of Energy and Mines in its activities. Another good item is the explicit confirmation of the possibility of private participation in refining activities. Finally, there is the possibility of choosing private companies as partners in projects without the need for bidding "for reasons of public interest or particular circumstances."

The Presidential Commission members are as follows: Minister of Energy and Mines Alvaro Silva Calderón; Finance Minister Nelson Merentes; Planning Minister Jorge Giordani; PDVSA President Guaicaipuro Lameda; Petroleum Chamber President Hugo Hernández Rafalli; Central Bank Director Domingo Maza Zavala; Gastón Parra Luzardo of the Ministry of Energy and Mines; and oil area specialists Mazhar Al-Shereidah, Aníbal Martínez and José Giacopini. The experience level of this team is clearly extensive. The members have accepted, and brought into their discussions on the law, considerations and recommendations from a wide range of interested parties. So, one would expect that what they finally come up with should be a coherent, effective body of legislation for the Venezuela oil industry.

The commission should have the final modifications to the proposed new hydrocarbons law ready by mid-October for presentation to the Council of Ministers. The law is one part of the presidential Enabling Law, for which the period terminates on November 13, 2001. Presidential approval would then be requested. Nevertheless, formal requests have been made by the Confederation of Chambers of Commerce (Fedecámaras) and the Venezuelan- American Chamber of Commerce (Venamcham), to put off the November deadline to a later date that would not be constrained by the Enabling Law’s duration.

Within this context of improving the country’s oil legislation, one should take a close look at the efforts that Venezuela is making to further solidify its oil relationship with the U.S. In late September, Venezuela’s ambassador to the U.S., Ignacio Arcaya, presented "The Four Pillar Strategy for Energy Security" in Houston. Here, he made it crystal clear that "Venezuela wishes to work with the United States to avoid a serious energy crisis. . . . it is our desire that this cooperation becomes (stronger) in the coming years." The new hydrocarbons law should contribute to this sincere desire.

Stuart Wilkinson is a Caracas-based journalist with extensive experience covering Venezuela’s petroleum industry. He currently is editor of the English section of the magazine, Enfoque Petrolero. He is a regular contributor to this column.