Multinationals poured around $9.5 billion into Venezuelan oil exploration and development projects between 1997 and 1999. The Hamaca extra-heavy oilfield project in southeastern Venezuela was the first oil and gas exploration and development project signed since Chavez came to power and a vote of confidence that Venezuela’s higher country risk was manageable.
The Hamaca project covers 657 square kilometers of the Orinoco belt and industry estimates put crude oil reserves at around 1.2 trillion barrels. The Venezuelan government awarded the sponsors a 35-year concession to develop the oil field. Debt financing comprised about 60% of the project cost and the sponsors put in the remaining 40% in equity. Moody’s assigned a Baa3 rating to the project, piercing Venezuela’s sovereign rating of B2. The $1.1 billion financing is split between $470 million 14-year term loan lead-arranged by BNP Paribas and Royal Bank of Scotland and syndicated to eight commercial banks. The $628 million 17-year guarantee facility was provided by the Export-Import Bank of the United States.
The Hamaca project is the fourth in a series of extra-heavy crude exploration and drilling projects in Venezuela. Hamaca had to endure dramatically different market conditions to get funding. “This was the first of the four that required help from an export credit agency,” says Jonathan Rod, partner at Freshfields Bruckhaus Deringer, who acted as US counsel to Exim Bank. “There are fewer players in project finance in Latin America,” agrees Sandy Reid, head of project finance at Export Development Corp, which was one of the lenders. “Hamaca took eight banks, not two as in the past, to raise the same amount of capital,” he says.
The sponsors secured the financing on 70% of the projects assets. PDVSA’s 30% share in the project was unsecured because it is a state-owned entity and bound by Venezuela’s negative pledge commitments to international lending organizations such as the World Bank. Nor could PDVSA secure the loan on future revenues from the Hamaca project. Instead, the loan was secured after PDVSA agreed to turn over future revenues from the project directly to the sponsors to be deposited into a secured account.
Yet regardless of Hamaca’s success, this could be the last extra-heavy crude oil project financed for a while. The proposed Hydrocarbons law increases royalty tax payments from 16.6% to 30% and requires PDVSA to take a minimum 51% stake in all shared investment projects. Under the current hydrocarbon law, adjustments to income tax rates are flexible on a project-by-project basis. But the new law will strip the ability for private investors to negotiate on tax rates.
The new Hydrocarbons law threatens to increase Hamaca’s financing costs as sponsors plan to raise more capital through commercial loans and floating bonds in the international capital markets. It will also affect the cost of financing other projects. There are three other oilfield exploration and development projects totaling $5.45 billionpresently in tender or awaiting governmental approval.
The new law could also stall development of Venezuela’s potentially more lucrative natural gas industry. Neighboring Trinidad & Tobago is home to the Atlantic Liquefied Natural Gas (LNG) project, the second largest production facility in the world and Trinidad cannot develop its LNG industry fast enough. It already provides 40% of US imports of LNG. The US Department of Energy predicts LNG imports will increase more than fivefold by 2020.