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Venezuela's Chavez Squeezes Oil Companies With Taxes, Raids
Aug. 24 (Bloomberg) -- On July 14 in the western city of Maracaibo, Venezuelan government tax auditors and a prosecutor went to the offices of Chevron Corp., the second-largest U.S. oil company.
They seized boxes of records to build a case that San Ramon, California-based Chevron and 21 other energy companies owe Venezuela $3 billion in back taxes. The raid is part of President Hugo Chavez's push to squeeze more money out of foreign companies that want to pump oil from the world's fifth-largest petroleum exporter.
Since October 2004, he has raised heavy-oil royalty fees to as high as 30 percent from 1 percent, begun paying for some services in nonconvertible bolivares instead of U.S. dollars, and ordered oil well contracts converted into government-controlled joint ventures.
Chavez, 51, wants to use the revenue to pay for homes, clinics and schools for the 58 percent of Venezuelan families who live on less than $200 a month.
Since taking office in February 1999, Chavez has embarked on a socialist revolution: seizing ranches to hand over to the poor and starting a TV news network with promotional ads featuring a swastika painted on a U.S. flag.
Chavez says he's using oil money to bankroll a quest to become Latin America's leader against U.S.-style capitalism, and in a May 4 speech, he said ``Being rich is bad'' and ``Jesus Christ was a socialist.''
Friend of Castro
Chavez, a close friend of Fidel Castro, sends crude to Cuba in exchange for doctors to staff 3,000 neighborhood clinics. In June, he pledged subsidized oil for poor Caribbean nations such as Grenada.
Chevron and its competitors haven't been scared off by the new rules or Chavez's fiery rhetoric because the country has the largest reserves in the Western Hemisphere.
The oil companies want to invest $30 billion in Venezuela, which is the fourth-largest supplier of crude to the U.S., according to the Venezuelan Hydrocarbons Association.
Venezuela is also attractive because Chavez is more open to foreign investment than other countries with untapped oil supplies such as Mexico and Saudi Arabia.
In an interview, Chavez said all companies are welcome in his country. ``Foreign companies have been here for the last century exploiting oil and gas, and they'll have all the space they've been able to have so far,'' he says. ``It's just that they will have to pay the royalties, they will have to pay the income tax. If they don't, we will go after them.''
The Prize
True to Chavez's word, Venezuela's tax agency stated on Aug. 11 that it's seeking to attach more than 280 billion bolivares ($131 million) in assets from The Hague-based Royal Dutch Shell Plc in a dispute over what the country says is unpaid back taxes. Shell Spokeswoman Bettina Steinhold declined to comment.
The prize in Venezuela is the tropical flatlands north of the Orinoco River, beneath which, according to Chavez, lie 230 billion barrels of heavy crude, one of the largest oil deposits in the world.
Chevron and Repsol YPF SA, Spain's biggest oil company, plan to seek approval for a $6 billion expansion in the Orinoco Belt, as the area is known. Shell, Europe's second-biggest oil company, proposes a $5 billion expansion there.
``The oil industry is a long-term industry, and you can't have an attitude of `in and out,''' says Ali Moshiri, 52, Chevron's Latin America exploration and development chief. ``We have to go where the oil is.''
Boosting Production
Chavez, who has used his clout as leader of the third- largest member of the Organization of Petroleum Exporting Countries to curb Venezuela's output by 20 percent since taking office, now says he wants to boost production.
Most of the decline came from the state-owned producer, Petroleos de Venezuela SA, where Chavez fired half the workforce to break a 2002-2003 strike aimed at his ouster. Daily output at PDVSA has tumbled to about 2 million barrels from 2.92 million barrels in 1998.
Chevron's oil production is part of a joint venture with PDVSA.
Foreign oil companies took up the slack, doubling their production to about 1.12 million barrels a day as of last year. Now, Chavez says he wants to attract $10 billion more from foreign oil companies to help boost Venezuela's total oil production to 5 million barrels a day by 2009.
``This government is your ally,'' Chavez told foreign oil executives in March. ``We are not chasing anyone away from Venezuela.''
`Mr. Danger'
At the same time, Chavez claimed that the Bush administration was trying to force him to commit suicide and threatened to cut off exports to the U.S. if he were to meet an untimely death.
Chavez, who refers to President George W. Bush as ``Mr. Danger,'' said in a June 5 speech that the U.S. is trying to install a global dictatorship. Secretary of State Condoleezza Rice, in January, described Chavez as a ``negative force'' in the region.
Yesterday, television evangelist Pat Robertson told viewers of ``The 700 Club'' program that the U.S. should assassinate Chavez to stop him from becoming a ``launching pad for communists.''
Venezuelan Vice President Jose Vicente Rangel responded by saying Robertson's remarks were ``criminal.'' U.S. State Department spokesman Sean McCormack said at a press briefing that Robertson's views ``do not represent the policy of the United States.''
`Unilateral Changes'
Chavez, a former army lieutenant colonel who was jailed for trying to overthrow the government in 1992, risks pushing too hard on the foreign oil companies, says Jason Todd, a Chicago- based analyst at credit ratings company Fitch Ratings.
``We have seen a lot of unilateral changes made by the government, and those things raise concerns,'' Todd says of Chavez's oil policy. ``That can lead to lack of investment.''
All Chavez has to do is look to Russia, the world's second- largest oil exporter, to see the risks of demanding too much from foreign investors, Todd says.
Production in Russia in 2005 is expected to rise at the slowest pace in six years, after President Vladimir Putin raised taxes on oil sales as high as 90 percent.
Though Chavez says he wants more foreign oil money, his policies have harmed some of the companies that could supply it. In October 2004, the government raised royalties on four heavy- oil production projects along the Orinoco Belt to 16.67 percent from 1 percent and slapped a 30 percent royalty on excess output.
`Sanctity of Contracts'
Six months later, the government raised taxes on companies that run 32 oil fields for PDVSA to 50 percent from 34 percent. Minister of Energy and Oil Rafael Ramirez, 42, gave those 22 companies until year-end to convert the oilfield contracts into joint ventures that are 51 percent owned by PDVSA.
Exxon Mobil Corp., the world's largest publicly traded oil company, faces higher royalties on its Cerro Negro heavy-oil field in the Orinoco Belt, which produces 120,000 barrels of crude per day.
Henry Hubble, vice president of investor relations at Irving, Texas-based Exxon Mobil, said on a July 28 investor conference call that the company is negotiating with Venezuelan officials to keep the royalty terms of its written agreements. ``We insist on the sanctity of contracts,'' he says.
Chavez's government hasn't approved any major expansion by foreign oil companies: Some 80 percent of the $26 billion of private oil investment in Venezuela was made before Chavez took office.
Dwindling Reserves
Houston-based ConocoPhillips, the largest U.S. oil refiner, needs to replace dwindling reserves, lock in future profit and assure supplies.
Unless new reserves are tapped in countries like Venezuela in the next 15 years, global oil output won't keep pace with demand, according to a report by New York-based securities firm Sanford C. Bernstein & Co.
The report forecasts that demand for oil will grow 1.8 percent a year through 2020 to 102.7 million barrels a day. Global oil production capacity will be 102.1 million barrels a day, the July 15 report says.
Concern about future supply has helped push crude oil prices up more than fivefold to a record $67.10 a barrel on Aug. 12 from $12.28 on Feb. 2, 1999, when Chavez was sworn in as president.
Chavez's Venezuela is one of the few major oil producers that allow foreign investment; Saudi Arabia allows only its state oil company to pump crude.
Murky Waters
And Venezuela has been more open than other countries in Latin America such as Mexico, which bars foreign companies from exploiting the second-biggest oil reserves in Latin America.
Chavez says he wants to expand even further by converting 32 agreements to run wells into ventures, which would be 49 percent owned by private oil companies. ``That's the uniqueness of Venezuela,'' Chevron's Moshiri says. ``It opened up, and we hope it will continue to do that.''
Oil companies such as Shell have acquiesced to Chavez's demands. In December, Shell started renegotiating its oilfield agreement near the murky waters of Lake Maracaibo, where 10,000 wells tap into 40 percent of Venezuela's proven crude oil reserves.
On July 14, the government ordered Shell, whose 90 years of working in Venezuela includes having its wells nationalized in 1975, to pay $131 million of back taxes. Shell says it has paid all of its taxes.
`I Can't Imagine'
Sean Rooney, Shell's president in Venezuela, says the country is still a good place for the company. ``I can't imagine a scenario where we would ever leave, where it would ever be so discouraging,'' says Rooney, 45.
``The resource is too significant, and the potential is too great,'' he says.
Norway's state-run Statoil ASA, Paris-based Total SA and Chevron have been the hardest hit by Chavez's new rules because they manage wells for PDVSA and are shareholders in the four heavy-crude production ventures in the Orinoco belt.
Statoil, Total and ConocoPhillips may have to pay $320 million of back taxes for their heavy-oil ventures in the Orinoco belt, according to Oil Minister Ramirez.
Chavez is also considering a reduction in Venezuela's dependence on oil sales to the U.S., which accounts for about 60 percent of the nation's crude exports. Chavez signed agreements to boost oil sales to Argentina, Brazil, China, India, Paraguay and Uruguay.
Ease U.S. Sales
He also proposed building a pipeline to Pacific Ocean ports in Colombia to ship more crude to China. The U.S. imports 15 percent of its crude oil from Venezuela, which is just a four- to five-day tanker trip from Texas refineries.
Chavez has also said he'd like to ease sales to the U.S. market by selling some assets of Citgo Petroleum Corp., the Houston-based refinery and gas station chain that PDVSA owns. Citgo has four oil refineries, two asphalt plants and 13,500 gas stations in the U.S.
Chavez's tough stance is part of Venezuela's tradition of trying to ensure it receives a fair price for crude. When U.S. President Dwight Eisenhower created import quotas for crude oil in 1959, then Oil Minister Perez Alfonso flew to Washington to lobby against the quotas.
Eisenhower and other administration officials refused to see him. Alfonso then flew to Cairo for the Arab Oil Congress, where he met with officials from Iran, Iraq, Kuwait and Saudi Arabia. Those talks led to the founding of OPEC in 1960.
State Oil Monopoly
In 1975, Venezuelan President Carlos Andres Perez nationalized the oil industry, paying companies such as Shell for oil wells, refineries, terminals and gas stations. PDVSA, formed as the state oil monopoly after nationalization, began welcoming back private oil companies in 1992.
Now, PDVSA pays private companies that run 32 of its oil fields a fee for each barrel they pump above the levels of production from when the agreements began.
Chavez targeted PDVSA soon after taking office, accusing the company of recklessly boosting production so much it depressed oil prices. Chavez persuaded OPEC to adjust production to keep crude prices within a range of $22 to $28 a barrel at the time.
In January 1998, Venezuela was pumping about 3.4 million barrels a day, or 800,000 barrels more than its OPEC quota. By October 2000, seven months after OPEC adopted the price range, Venezuela was producing within its quota.
18 Cents a Gallon
In July, Venezuela pumped about 2.7 million barrels of crude a day, 523,000 barrels fewer than its OPEC quota, according to a Bloomberg survey of producers, oil companies and analysts.
Oil is a pervasive part of life in Venezuela, where gas stations don't even post the price because it is fixed at 18 cents per gallon. Revenue from crude exports funds half the government's budget, and oil prices have driven Venezuela's economy since the 1920s.
In the 1970s, as prices soared during the Arab oil embargo, the government overhauled Caracas with new elevated highways and public housing blocks. State airline Viasa chartered 747 jetliners to carry luggage back as Venezuelans increased their shopping trips to Miami.
Last year, as crude prices soared again, Venezuela's economy grew a record 17 percent, increasing consumer spending so that there were three-month waiting lists for new cars.
Chavez, born to schoolteacher parents in rural Berinas state, found his political calling after going to the country's Military Academy when he was 17 and seeking a career in baseball. Chavez rose through the ranks and in 1992 helped lead 15,000 soldiers in an attempted coup.
Two Years in Jail
Chavez was jailed for two years, and won a national following among Venezuelans fed up with government corruption with a televised speech justifying the coup attempt.
In 1998, Chavez won a landslide election victory by pledging a revolution that would use oil revenue to spread equality. Since taking office, Chavez has taken advantage of surging oil prices by boosting spending on programs for the poor to a projected $13 billion this year -- or almost half the national budget.
The programs have helped him survive an attempted coup and recall referendum.
PDVSA dispenses $4 billion a year for everything from cooperatives that make the red T-shirts Chavez supporters wear to monthly stipends for 700,000 people enrolled in adult education courses.
On some days, PDVSA's 13-floor concrete headquarters in Caracas draws scores of people seeking funds for social programs, known as missions.
that energy costs are like any other cost in manufacturing and transporting product to market.....it has to be low to make the product cost effective so that it can be sold at an affordable price......anytime a cost gets outtahand, say like labor,energy...etc, that cost has to be dealt with or else the manufacturer goes out of business..:^....in this case with energy being the higher cost factor, a recession will happen because of the delay in reducing the cost of energy.....and the manufacturer may still go out of business if something isn't done about the higher energy cost right away......:shock:
