Venezuela's Chavez May Escalate Fight With Exxon, Oil Producers

April 24 (Bloomberg) -- Venezuelan President Hugo Chavez may rewrite the rules for ventures run by oil companies including Total SA and ConocoPhillips in the Faja, a region that rivals Canada's oil sands as the Western Hemisphere's biggest deposit.

"We are adjusting our relationship with the private companies," Venezuelan Energy Minister Rafael Ramirez said today in an interview in Doha, Qatar. Eulogio del Pino, a vice president at the state oil company, Petroleos de Venezuela SA, said the government may consider taking a controlling 51 percent stake in the ventures that tap heavy oil deposits, according to an April 22 report in the newspaper El Universal.

Restructuring the ventures would escalate the battle between Chavez and the world's biggest oil companies. Chavez has already raised royalties and taxes on producers including Chevron Corp. and Exxon Mobil Corp. and forced them to cede control of fields elsewhere in the country. France's Total and Italy's Eni SpA had some operations seized after failing to sign off on changes the government had required.

"There is no reason to believe that Venezuela won't play the same sort of hardball with the heavy oil producers that they played with the holders of the conventional oil contracts," said Pavel Molchanov, an energy analyst with Raymond James & Associates in Houston.

The changes are a threat to companies such as Chevron and ConocoPhillips, the second- and third-largest U.S. oil companies. ConocoPhillips gets about 8 percent of its total output from Venezuela. Venezuela is the largest producer in South America and was the fourth-biggest supplier to the U.S. last year.

Chavez, 51, risks alienating companies he may need to meet his goal of attracting $15 billion in new investment to help double the country's output by 2012.

Before Chavez
The Faja in eastern Venezuela, near the Orinoco River, has attracted $17 billion in investment by foreign oil companies, more than any other part of the country. About 600,000 barrels a day is produced from its tar-like deposits, which are easy to find and expensive to extract. That's almost a quarter of the 2.6 million barrels the country pumped last month.

The terms of the four joint ventures were set and approved by the Venezuelan Congress before Chavez came to power in 1999. The government's take was small to encourage oil companies to develop the resource amid low energy prices and questions about how efficiently the heavy oil could be extracted.

Heavy oil deposits such as the Faja and the tar-sands in Alberta, Canada, have grown more desirable as conventional oil fields have become harder to find and prices surged to all-time highs.

Benchmark crude oil futures in New York touched a record $75.35 a barrel last week in New York. Prices averaged less than $20 in the 1990s and were near $10 a barrel in 1998.

Legal Framework
Ramirez said today that the legal framework from the 1990s would be respected. At the same time, he said that agreements with oil companies need to conform to Chavez's 2001 law governing exploitation of oil and gas.

The companies that have investments in the Faja include four of the world's five biggest publicly traded energy companies: Irving, Texas-based Exxon Mobil; London-based BP Plc; Chevron of San Ramon, California; and Paris-based Total. ConocoPhillips, based in Houston, has invested the most in the region. Norway's Statoil ASA also has a stake.

"We expect to see a proposal within two to three months that would raise the income tax rate on the ventures to 50 percent from their current 34 percent," said Patrick Esteruelas, an analyst with New York based Eurasia Group. "We think the government will also try to raise royalties to 30 percent from 16.67 percent, and we see Petroleos de Venezuela taking a majority stake in all four."

The state oil company has a minority interest in the ventures today.

Total spokeswoman Patricia Marie declined comment as did ConocoPhillips spokesman Sam Falcona. Spokespeople for Exxon Mobil and Chevron Corp. in Caracas didn't return calls seeking comment.

'To the Faja'
The Chavez government has made clear that it intends to turn its attention to the heavy oil ventures, and plans for future development in the Faja, since finishing earlier this year with revisions of contracts governing oil resources in western Venezuela, including Lake Maracaibo, where the country's oil industry got its start early in the 20th Century.

"Now we are going to the Faja," Ramirez said at an April 3 press conference after Petroleos de Venezuela took majority control of operations that tap 32 oil fields in the west.

While no major oil company has left Venezuela since Chavez started tightening control, the effort to change the terms of the heavy oil ventures may deepen the rift between the government and the industry.

"I would be very surprised if some of these companies that have stakes in these projects don't already have their lawyers working on lawsuits," said James Williams, an analyst with WTRG Energy Economics.

U.S. lawmakers have warned that Chavez's actions to raise taxes and royalties and change ownership structures in the country's oil industry show that energy supplies from Venezuela are in jeopardy.

U.S. Senator John McCain said that Americans should be wary of the "vulnerabilities that our economy and our very lives have when we're dependent on Iranian Mullahs and wackos in Venezuela."

The average level of Venezuelan production has been lower the past six months compared with the 12 months prior, according to Bloomberg data. Output remains lower than before Chavez broke a strike in early 2003 aimed at his ouster.

Russia, Libya and the U.K. have, like Venezuela, have made changes aimed at getting a bigger take from their oil and gas resources as prices have soared to records.