Squeezing the Oil Concessions

A combination of rich oil deposits and relative political stability has long lured investment money and technology to Venezuela. Largely on the strength of this inflow of cash and know-how from the U.S. and elsewhere, the country's living standard has risen to the highest level in South America. Lately, however, a tide of economic nationalism aimed at minimizing outside control of domestic resources has been on the flow in Latin America. Oil investment has been a frequent casualty. Argentina, Brazil, Chile, Mexico and Bolivia have put their oil-producing industries under state ownership. In Peru, the largest oil company has been expropriated. Last week a Colombian congressional committee recommended that the government nationalize foreign oil operations.

Until recently, Venezuela, the world's largest oil exporter, remained immune to this nationalistic fever. Now it, too, is succumbing. Last week President Rafael Caldera signed into law a bill nationalizing natural gas. Foreign participation in ownership of banks in Venezuela has been restricted, and a new law setting more stringent standards for investments from abroad is in the offing. But for U.S. investors the most worrisome measures are those that the government has directed toward its foreign-supervised oil concessions.

American firms, including Gulf, Mobil, Texaco and Atlantic Richfield, have an enormous stake in Venezuelan oil. Creole Petroleum Corp., a subsidiary of Standard Oil of New Jersey, lifts almost half of the 3.7 million bbl. of oil pumped daily. The U.S. companies have nearly $2 billion tied up in wells, pipelines and refineries; it is the largest single American investment in South America.

Rusting Rigs. Thus the consternation of foreign oilmen at the government's enactment of the Hydrocarbons Reversion Act just over a month ago is hardly surprising. The measure requires that when the present concessions expire, beginning in 1983, improvements will revert to the state without compensation to the companies. Such a provision was written into the 40-year leases signed by the oil companies in the early 1940s, but the new law may force them to give up more than they expected to. By its terms, the companies could be required to give up not only concession land and all the equipment on it but also other facilities located outside the concession areas, including refineries, chemical plants, offices, bowling alleys and even the company president's car. The companies contend that this is illegal and are taking their case to the Venezuelan courts. Says one Shell executive: "If we had been forewarned when the concessions were signed that this would happen, we would have invested accordingly."

To ensure that the government will not be left with rusting rigs and dry holes when the concessions end, the new law contains another stipulation: over the next twelve years, the oil companies must put as much as $1 billion into a special government fund. If the equipment left behind is in satisfactory condition, the money will be returned to the firms; if not, it will be used to replace and repair rundown facilities. The new legislation also gives the government greatly expanded supervision over day-to-day operations.

Battering Ram. In addition to tightening the restrictions on existing concessions, the government is negotiating tough new "service contracts" for new oil exploration ventures. In effect, foreign oilmen will be operating on government property instead of leasing land to work as they see fit. Under these contracts, the companies' exploitation rights will be limited to 20 years, v. 40 years for concessions, and the government will collect up to 85% of the profits, compared with 75% under the old system. Even under these conditions, the oil companies obviously believe that they can make money. Occidental Petroleum and a subsidiary of Royal Dutch/Shell have already signed the new contracts, and Mobil is expected to join them.

Many of the new measures were initiated by minority leftist blocs in the Venezuelan Congress, but they have the full support of the majority Accion Democratica party. The government reasons that the concessions have given away too much of the country's resources for too long. Venezuelan officials contend that the oil companies' fears are exaggerated, and President Caldera has publicly promised that he will be flexible in interpreting the new legislation. Notes the Minister of Mines, Dr. Hugo Perez La Salvia: "Our goal is continued smooth operations with no sharp break-offs. If we can achieve our goals, there is no reason to pose obstacles for the oil companies." Most oilmen in Venezuela do not question the motives of the Caldera government, but they argue that the new legislation could turn into a battering ram in the hands of a less reasonable regime.

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