The new rules, which are more or less the same today, require foreign investors to form partnerships with PDVSA in which the state-owned oil company would have a 60% ownership. The foreign company, which would have 40% ownership, would still have to fund 100% of the investment. Furthermore, whatever the foreign company made would be subject to a 50% tax rate and a 33% royalty (tax). Oh, and investors must agree that any dispute that may arise in the future concerning their ownership with the government will be heard by Venezuelan courts, not those pesky impartial international arbitration courts.
But while the risk/reward ratio is clearly off, Venezuela says that it has auctioned off 36 lease blocks in the Orinoco to 27 companies hailing from 21 nations. Most are bizarre state-owned or controlled oil companies from places like Iran, Belorussia, and Cuba. But some of the big publicly traded oil companies like Spain's Repsol, Brazil's Petrobras, Italy's Eni and France's Total have stakes as well. Even Chevron was allocated a block -- albeit a small one.
While it makes sense to have a few foreign partners to help to spread out the risk, one can go too far, especially when those partners have pretty much zero experience working with oil sands. Indeed, this split looks more like a bizarre public relations stunt than a real division of labor. It should therefore come as no surprise to learn that there isn't too much drilling going on in the Orinoco right now. While PDVSA says that it has started to drill wells with its Russian and Vietnamese partners, the initial production numbers reported are trivial. Meanwhile, India's ONGC and several other companies are reportedly holding back from investing any more cash until there is some clarity as to the political situation in the country. You can bet even Venezuela's staunchest allies, like China, which has loaned the Chavez regime some $46 billion in the last few years, will be among those taking a breather.
It is difficult to see what, if anything, could change in Venezuela's oil industry in the next few months. The political apparatus Chavez has set up seems fully entrenched. It would probably take a full-fledged revolution for it to be wiped out at this point. Nevertheless, Venezuela is nearing a breaking point when it comes to oil production. The government cannot continue to rely on PDVSA to pay its bills. It needs real foreign partners with real experience to come in and help it boost production.
That means bringing back companies like ConocoPhilips, which before getting the boot in 2007, was the largest foreign operator in the country. They have the engineers and know-how to help Venezuela quickly get off the ground. Venezuela would be wise to also consult with oil companies like Husky, Suncor (SU), Syncrude and Nexen, all of which have extensive experience working in Canada's vast Athabasca oil sands.
To lure the right talent, Venezuela needs to make some serious changes to its ownership and tax laws. Companies must feel safe to make their investments so security and legal protections will need to be ironclad. But even if Venezuela's new leaders give in to all of the oil companies' demands, it will probably be a while before you see any real drilling. Chavez obliterated the nation's credibility, and it will take some time for Venezuela to earn back that trust. So when Venezuelans go to the polls in a month to choose their new leader, they would be wise to choose someone who knows how to eat a big helping of humble pie.