Venezuela Plays Heavy-Oil Card: Firms Pay Hefty Fees for a Place at the Table
By Gary Marx, Chicago Tribune
Jun. 25–SAN DIEGO DE CABRUTICA, Venezuela — A decade ago, this vast region of eastern Venezuela called the Orinoco Belt was a backwater known for its expansive plains, ocher-colored soil and punishing heat.
Today, the region is a hotbed of development for many of the world’s largest energy companies and a source of conflict between those powerful firms and Venezuelan President Hugo Chavez.
The conflict centers on the sticky, extra-heavy oil that sits in sandy reservoirs several thousand feet below the surface. The tarlike substance was long believed to be of no commercial value.
But with lofty oil prices and advances in technology, the Orinoco’s extra-heavy oil is now coveted by energy firms desperate for new oil fields as global reserves of traditional, light crude taper off.
“When the light oil runs out you will have to go to the extra-heavy oil. We’ve got a lot of it,” said Dario Norma, an engineer at the oil installation here run by Sincor, a joint venture of two European companies and Petroleos de Venezuela, the state-owned petroleum entity.
Since 2001, three European multinational companies along with Exxon Mobil, Chevron and ConocoPhillips have invested about $14.5 billion to extract and upgrade the Orinoco’s oil.
Yet the daily production of 600,000 barrels is a fraction of the potential of the Orinoco Belt, which Venezuela claims contains 235 billion barrels of recoverable oil.
Aware of the Orinoco’s potential and hungry for cash to bankroll his social programs, Chavez raised royalty payments in May on foreign firms in the Orinoco from 16.6 percent to 33.3 percent, which Venezuelan officials say will bring in an additional $1 billion next year.
Venezuela also plans to increase taxes on the same multinationals from 34 percent to 50 percent, while forcing them to cede a majority stake of their Orinoco operations to Petroleos de Venezuela, perhaps by year’s end.
‘A juicy opportunity’
A charismatic populist and fierce critic of the U.S., Chavez has accused foreign energy firms of looting Venezuela’s wealth. But he is betting the new measures will not dampen interest in the Orinoco reserves.
“It’s clear this business has become a juicy opportunity, a juicy opportunity that is too beneficial for them,” said Mario Isea, a Venezuelan lawmaker who heads the National Assembly’s Energy and Mines Commission.
“The real impact of the increased taxes is simply that they are sharing their excess profits with Venezuela,” he said. “This is all. They are not losing.”
But an April report by Deutsche Bank said American and European companies could lose several billion dollars if Venezuela assumes a majority stake in Orinoco operations.
Some experts say the measures are likely to dampen investment in a region with so much oil that, if fully exploited, could shift the balance of power from the Middle East to this South American nation. Venezuela is already a top supplier of oil to the United States.
“If you want [the Orinoco Belt] producing in 10 years, the investment has to be now,” said Roger Tissot of PFC Energy, a consulting firm in Washington. “It’s not happening because of the level of uncertainty around the regulations.”
Chevron and Exxon Mobil officials declined to discuss the new measures or their Orinoco operations.
ConocoPhillips said in a statement that Venezuela is “an important part” of the company’s business and “we continue to work with the government and co-venture partners to responsibly and expeditiously develop our investments there.”
Alberto Quiros, the former head of Shell in Venezuela and an industry consultant, said energy firms are used to operating in hostile environments and are likely to ride out the storm in Venezuela.
“These companies all bet on the long term,” Quiros said. “They feel this is a good oil country and if they stick it out when the going gets rough they’ll benefit in the long term. Things change. Governments come and go.”
Tussling with Big Oil
The tussle between Chavez and the multinationals is only one of many battles pitting oil-producing nations against Big Oil as energy prices soar, global production stagnates and governments seek a bigger share of the riches.
Experts say much of the world’s traditional energy reserves are off limits to oil companies while countries ranging from Russia to Ecuador to Bolivia have become increasingly hostile to their presence.
With their options limited, international oil companies are increasingly looking to extract unconventional reserves.
But extracting heavy oil, which in the Orinoco has the consistency of chewing gum, is a difficult proposition requiring cutting-edge technology and massive investment.
In the late 1990s, when oil prices were low and countries were desperate to increase production, Venezuela lured energy firms to the Orinoco by offering them huge tax breaks.
One of four joint ventures with Petroleos de Venezuela in the Orinoco, Sincor has invested $4.2 billion in its operations, including sinking about 320 wells and building a towering plant at San Diego de Cabrutica that heats the heavy oil to help separate out impurities.
The thick crude is diluted with a solvent so it can be piped 120 miles north to Venezuela’s Caribbean coast. The oil is then upgraded into lighter crude and shipped primarily to the U.S.
Sincor, whose majority shareholders are France’s Total and Statoil of Norway, produces 180,000 barrels of oil a day.
Venezuela’s Isea argued the new taxes and ownership measures are fair because of soaring oil prices.
Energy firms can turn a profit in the Orinoco even if oil prices fall to $27 a barrel, far below the current $70 level, he asserted.
gmarx@tribune.com
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Copyright (c) 2006, Chicago Tribune
Distributed by Knight Ridder/Tribune Business News.
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