VENEZUELA'S EXTRA-HEAVY OIL RESOURCES: IMPLICATIONS OF INCREASED GOVERNMENT CONTROL

On May 1, 2007, Venezuela implemented the long-awaited nationalization of Orinoco Oil Belt resources as state-owned oil company Petróleos de Venezuela, SA (PDVSA) assumed direct control of operations in addition to a majority equity stake in the four existing extra-heavy oil (EHO) strategic associations. The move completes the implementation of the 2001 Liquid Hydrocarbon Law, which has steadily increased government take and gives PDVSA direct control of all upstream oil operations in the country.

*Despite being announced as a nationalization of EHO resources, the new regulatory framework opens the door to a new wave of strategic partners selected at the government's discretion. The new EHO partners are almost entirely foreign national oil companies whose governments have signed broad cooperation agreements with Venezuela, bringing a geopolitical link to heavy oil development.

*Selection criteria for newcomers to the Orinoco Oil Belt is based not on EHO knowledge, expertise, or the ability to exploit market synergies but rather on the exchange of EHO reserves for enhanced relations with other countries that will directly or indirectly contribute to consolidating President Hugo Chávez's political agenda regionally and globally.

*This strategy may have negative consequences in the middle and long term if the focus on extracting the largest amount of value possible out of existing EHO associations comes at the expense of future growth. Existing EHO businesses are less likely to invest under the proposed terms, putting greater pressure on PDVSA and its new partnerships to fill the investment gap.

*An incomplete or too rapid transition to PDVSA's taking direct control over the assets might negatively impact synthetic oil production levels, resulting in reduced reliability of upgrading facilities and irregular production rates. Additionally, OPEC quotas might continue to be enforced based on official production figures or continue to affect production in the event that OPEC production restrictions increase.

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