- The Washington Times - Tuesday, January 12, 2010

Venezuelan President Hugo Chavez has been making overtures to foreign oil companies to try to rescue his country’s nationalized energy industry before legislative elections scheduled a year from now.

Venezuela’s national oil company, PDVSA, recently offered to reduce taxes levied on foreign firms from 50 percent to 34 percent in a bid to entice them to develop drilling projects and build new refineries on the Orinoco River basin. The basin is thought to contain one of the world’s largest oil reserves, estimated at 316 billion barrels.

Among the companies offered lower taxes are a Russian consortium composed of Gazprom, Lukoil and TNK-BP plus Italy’s ENI, Norway’s Statoil and France’s Total.

Many foreign oil companies have been reluctant to supply the high degree of investment and technology required to extract the Orinoco’s heavy crude oil because of Mr. Chavez’s nationalization policies, which have given his government increasing control over the energy sector.

Oil giants including Exxon Mobil, ConocoPhillips and British Petroleum PLC pulled out of Venezuela after PDVSA assumed 60 percent ownership of their operations in 2007, when the international price of oil stood at $137 per barrel.

Drastic drops in the price of crude because of last year’s global recession, combined with PDVSA’s chronic underperformance, have forced Mr. Chavez to try to lure back foreign companies.

Mr. Chavez has frequently brandished his oil weapon against the United States, threatening to cut off oil deliveries. A bigger threat is that PDVSA could simply cease to produce.

PDVSA’s revenues declined by 67 percent this year, according to the company’s most recent financial report, released in November. It attributed the fall “principally to the decline in export prices and a reduction, as of 1 January 2009, of production as a result of decisions derived from within the Organization of the [Petroleum Exporting] Countries,” or OPEC.

International oil experts and former PDVSA executives say mismanagement and corruption are also major factors in the decline.

“By overplaying his hands in the bonanza, Chavez is now having to bow and beg for investment,” said Pedro M. Burelli, a former member of PDVSA’s executive board.

“By having raised the country’s and PDVSA’s risk profile through demagoguery, technical and managerial incompetence, many oil companies today consider Venezuela the world’s worst risk return opportunity,” Mr. Burelli added.

On Friday, Mr. Chavez announced a currency devaluation for the first time since 2005, setting a two-tiered exchange rate designed to help Venezuela’s oil earnings go further domestically while holding down prices of priority imports such as food to counter soaring inflation.

Mr. Chavez said the bolivar will now have two government-set rates: 2.60 to the dollar for transactions deemed priorities by the government, and 4.30 to the dollar for other transactions. The devaluation dropped the currency’s value by 17 percent or 50 percent, depending on the tier.

The higher rate, which he called the “oil dollar,” will double the paper value of Venezuela’s petroleum earnings when converted to local currency.

Mr. Chavez said the priority exchange rate will be allotted for food, health care products, school supplies, machinery and equipment for economic development, among other things. Imports that will fall under the less favorable rate include automobiles, telecommunications goods, computers, appliances, alcohol and tobacco.

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