Venezuela To Rewrite Oil Contracts As Joint Ventures

Something we can expect to see a lot more of: despite an earlier decision to raise tarriffs on oil, the Venezuelan government has decided that isn't enough, and seeks to rewrite contracts on 32 fields to turn them into joint ventures.

"With oil prices so high, they think they can change the contracts without any problems," Jose Toro Hardy, an independent oil analyst and former Petroleos de Venezuela board director who oversaw the contracts, said in an interview today. "The basis of these contracts were approved by the National Assembly."

It goes almost without saying that the point of these moves is to secure even more money for Venezuelan state coffers. Hugo Chavez is a populist, which is to say, he needs cash to keep him in operation.

"No contract is above the law," Ramirez said. Current contracts are detrimental to the government and Petroleos de Venezuela, he said. "We are the owners of the resources in our house."

Petroleos de Venezuela lost $260 million last year on 16 of the 32 operating agreements with private oil companies, Ramirez said. Most of the oil companies also evaded paying taxes on their operations, he said.

Such claims should be taken with a grain of salt; one wonders how, as a state agency, Petroleos de Venezuela calculates expenses. The real issues, longer-term, is how this will affect exploration and production down the road:

Venezuela's decision to pressure companies to convert their operations comes as the country is seeking up to $10 billion in investment from foreign companies through 2009 to about double production capacity to 5 million barrels a day.

The decision also comes four months before a planned auction of six offshore blocks in August. Venezuela is relying on international companies to explore and develop the fields, partially to alleviate a shortage of natural gas in the western part of the country.

"I am surprised that they are making this kind of announcement just prior to a bidding round," said David Voght, managing director of energy consultant IPD Latin America, which has offices in Caracas and Mexico City. "It's better for the government to be clear in its energy policy."

... unless they think they're going to have the upper hand for a long, long time.

The decision to change the contracts must be seen in the perspective of the government's other economic policies, which are aimed at short-term gains of revenue to finance burgeoning government expenditures, said Toro Hardy.

``This is a very short-sighted policy,'' he said. ``They are just trying to get revenue at any cost to cover spending.''

Which, again, is almost certainly the point. Chavez wants to stick it to the US as much as possible, and knows a good thing when he sees it. Whether this backfires or not is up to us.