Fitch Affirms Petrozuata, Cerro Negro, Sincor & Hamaca Despite Royalty Hike.

CHICAGO -- Fitch Ratings has affirmed the 'BB' ratings for the respective senior secured debt obligations of the four Venezuelan heavy oil strategic associations -- Petrozuata, Cerro Negro, Sincor and Hamaca.

The rating action applies to the following debt securities:

Petrozuata Finance Inc. (Petrozuata)

--US$300 million 7.63% series A bonds due 2009;

--US$625 million 8.22% series B bonds due 2017;

--US$75 million 8.37% series C bonds due 2022.

Cerro Negro Finance, Ltd. (Cerro Negro)

--US$200 million 7.33% bonds due 2009;

--US$350 million 7.90% bonds due 2020;

--US$50 million 8.03% bonds due 2028.

Sincrudos de Oriente Sincor, C.A. (Sincor)

--US$1.2 billion senior bank loans borrowed by sponsors of Sincor Finance Inc.

Petrolera Hamaca, S.A. (Hamaca)

Total senior project loans of US$1.1 billion consist of:

--US$627.8 million senior agency loan due 2018;

--US$470 million senior bank loan due 2015, borrowed on a several (not joint) basis 30% by Corpoguanipa, S.A., a subsidiary of PDVSA, and 70% by Hamaca Holdings L.L.C.

The Venezuelan government announced on Oct. 10, 2004, an increase in the oil royalty rate to 16.67% for the four Venezuelan heavy oil strategic associations. The local tax authority (SENIAT) recently instructed the projects to begin paying the higher royalty rate on production attributed to the month of October. Fitch anticipates that the increased royalty tax combined with the increased social burden imposed on PDVSA by the current administration will reduce the attractiveness of private investments in Venezuela's hydrocarbons sector.

The higher oil royalty rate of 16.67% from the agreed 1% rate adopted in the late 1990s to incentivize private development of the Orinoco basin reserves is consistent with the 1943 hydrocarbons law that was in effect when the association agreements were formed. With the exception of Hamaca, all of the ventures have benefited from a reduced 1% royalty rate since their initial production of commercial syncrude beginning as early as 2001.

A higher royalty rate erodes the debt service capacity of the projects, because it increases operating expenses. For the Orinoco ventures, the oil royalties paid by each of the projects as a privilege levy on the extraction of a natural resource are derived from a PDVSA defined oil price benchmark. At an assumed oil price of US$35 per barrel for WTI (West Texas Intermediate) in 2005 and a sustained long-term price of US$22 per barrel from 2006 onward, each of the four project's cash flow capacity during the initial applicable years is estimated to decline in the range of 9% to 23%.

Notwithstanding the deterioration in the economic profile of the projects attributed to the higher royalty burden, and irrespective of any ratings constraints that might be associated with PDVSA or Venezuela's sovereign environment, their credit quality remains consistent with Fitch's current 'BB' ratings. Finally, a sustained low-cycle oil price could further weaken the projects' debt service capacity prompting future rating downgrades.

Petrozuata, Cerro Negro, Sincor and Hamaca are all domiciled in Venezuela and are key to the development of the Orinoco Basin's extra heavy crude oil reserves. Debt holders rely solely on the ability of each project to generate sufficient cash flow from operations to meet scheduled debt service. Revenues are largely derived from the sale of syncrude exports.

Petrozuata is owned 50.1% by a ConocoPhillips subsidiary and 49.9% by a PDVSA subsidiary. Cerro Negro is owned 41.67% by an ExxonMobil subsidiary, 41.67% by a PDVSA subsidiary and 16.67% by a Veba Oel subsidiary. Sincor is owned 47% by a TOTAL subsidiary, 38% by a PDVSA subsidiary and 15% by a Statoil subsidiary. Hamaca is owned 40% by a ConocoPhillips subsidiary, 30% by a ChevronTexaco subsidiary, and 30% by a PDVSA subsidiary.