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Venezuela Seeks Control Over Oil Projects

Posted on: Monday, 24 April 2006, 21:00 CDT

By NATALIE OBIKO PEARSON

CARACAS, Venezuela - Venezuelan President Hugo Chavez wants to further increase state control over some of the country's most promising oil projects in a move industry analysts warn could squeeze corporate profits and spook foreign investment.

A proposal raised by state oil company Petroleos de Venezuela SA, or PDVSA, to take a larger stake in heavy crude projects operating in the oil-rich Orinoco River basin has yet to be spelled out. But analysts warn it is threatening to hurt long-term oil production in an area that potentially outstrips Saudi Arabia's proven reserves at a time when oil prices are rising on fears of depleting deposits and surging demand.

In comments published over the weekend, Eulogio Del Pino, a PDVSA director who oversees contracts with foreign oil companies, told the El Universal newspaper that Venezuela would like oil majors BP PLC, Exxon Mobil Corp., Chevron Corp., ConocoPhillips, France's Total SA and Norway's Statoil ASA to change four heavy oil upgrading projects into state-controlled joint ventures, known as "mixed companies."

While the terms have yet to be presented and any changes would need to be approved by congress, Del Pino said the government should "do the job completely and the participation of the state should be 51 percent."

Venezuela has already set a precedent for what it has in mind: earlier this month, it voided oil-pumping contracts with private companies at 32 fields and replaced them with the new mixed-company model that gives PDVSA a minimum 60-percent stake, sharply raised royalties and taxes and reduced potential drilling acreage by almost two-thirds.

"It's a matter of time," before Venezuela moves to impose similar terms on the Orinoco projects, which together produce about 600,000 barrels a day, said Juan Carlos Sosa Azpurua, president of Grupo Petroleo YV, a Caracas-based energy consultant.

The results of that could be grave in a sector that needs as much as $5 billion a year just to maintain current production and will probably suffer if operations were to be handed over to other players with less expertise in extracting heavy crude, he said.

"It's very possible that production will go down," Sosa said.

He said the synthetic crude produced by the projects comprises only a fraction of total world oil supplies - currently at about 84 million barrels a day - and is unlikely to have a tangible effect on the market.

Venezuela has so far left little negotiating room from the oil majors in announcing such contractual changes.

PDVSA seized two oil fields from Total and Italy's Eni SpA after they refused to migrate their oil-pumping contracts to the joint ventures earlier this month. Oil Minister Rafael Ramirez has said Venezuela does not need companies that refuse to adjust to the new terms.

Ramirez said on the sidelines of an oil conference in Qatar on Sunday that Total and Eni would not be compensated for the fields they lost.

Much more is at stake in the Orinoco projects, where the companies have invested a combined $16 billion in developing the technology and infrastructure to extract tar-like bitumen and convert it into lighter, more marketable crudes at the giant Jose refinery.

The Orinoco projects in eastern Venezuela differ markedly from the 32 oil fields where the state has already taken a majority share, because companies operating in the Orinoco own the bulk of the oil infrastructure in the area, Sosa said. In the other oil fields, the companies did not own such assets.

"It's going to be much more difficult," to calculate and compensate the companies for investments in the Orinoco if the government decides to seize them, he said.

Jose Toro Hardy, an oil analyst and former PDVSA director, said the private companies are also clearly the best at exploiting the reserves and it's in Venezuela's interest to keep them there. "The companies that made these investments have been extremely successful," he said.

Most of the companies involved have not responded directly to Del Pino's comments, though most indicated discussion were ongoing with the government.

"It is difficult to have any reaction when we don't know what the plan might be," said Kai Nielsen, a spokesman for Statoil, which holds a 15 percent stake in the 180,000-barrel-a-day Sincor project. PDVSA and Total hold the remaining 38 percent and 47 percent respectively.

BP spokesman Robert Wine said the company is aware of Venezuela's desire to boost joint ventures, while Exxon Mobil spokesman Mark Boudreaux said the Texas company takes a "long-term view of oil and gas production in Venezuela." ConocoPhillips and Total spokespeople said they continued to work with Venezuelan officials.

An uneasy compromise between the companies and Venezuela likely hinges on the enormous potential of the Orinoco tar belt, which holds as much as 270 billion barrels of extra-heavy oil and tar-like bitumen - enough to make Venezuela home to the world's largest crude oil reserves if it's certified and proved commercially viable.

Any exodus of foreign oil companies is highly unlikely as both sides need each another. The companies would sustain huge losses, while Venezuela would be hard pressed to find partners with similar expertise and deep pockets.

"Most companies will continue to play. The game has changed, but Venezuela is still where the oil is," said Andrew Derman, head of the international energy practice for the law firm Thompson & Knight in Dallas.

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Associated Press writers Steve Quinn in Dallas, Brad Foss in Washington, Jane Wardell in London and Doug Mellgren in Oslo contributed to this report.

Source: Associated Press/AP Online

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