petroleumworld

Oliver Campbell: Selection of participants
for developing the Carabobo Area

Selection of Participants for Developing the Carabobo Area

Although 47 companies were invited to take part in the auction of the Carabobo Area, only 40 were actually named in the document giving detail of the “Carabobo Project.” The list is notable for including a hotchpotch of private and state companies, and of companies with and without experience of producing extra-heavy oil.

The criteria for accepting bids were stated to depend on:

• The amount of an upfront payment

• A proposal for minimizing, as far as possible, PDVSA'S financial burden in the various projects

• A proposal for selling the crude that is upgraded by the mixed company

It should be noted a “mixed company” is one where PDVSA must hold a majority of the shares, and it is not joint venture since joint control does not exist. Some observers have pointed out that several of the companies lack the technical ability to develop the extra-heavy crudes of the Orinoco Oil Belt which, though liquid while in the reservoir, become a thick tar on reaching the surface and cooling down.

Though this observation is true, I believe it is only of secondary importance for the following reasons:

• The production technology--wells drilled in a cluster, first vertically and then horizontally, in the form of an L--has already been developed, as has that of the very powerful pumps which send the crude to the surface.

• The new upgrading plants, which will upgrade the crude to 32º API, will most likely use the successful technology developed by TOTAL in the previous Sincor consortium. This has been inherited by the Petrocedeño mixed company in which PDVSA holds 60 percent of the shares.

• The two upgraders to be constructed will not belong to any particular mixed company but will be used by all. This means there is no need for the new companies to contribute technology, although any different proved technology will be considered.

Credit must be given to the four consortia in the Orinoco Oil Belt which were the pioneers in developing the technology for producing extra-heavy crudes and for upgrading them so as be commercially viable.

In my opinion, the dominating factor is financial strength. The large oil companies have the funds required, and so do others such as the large Japanese trading houses Marubeni, Mitsui and Mitsubishi. To give some order to the selected participants, I have taken gross income, as stated in the annual report, as a good indication of financial capacity. NA means “Not Available.”

I. Companies with Large Financial Resources

Company	Gross Income 2007	Origin
BP	MM US$ 284.365	British
Chevron	MM US$ 214.091	USA
CNPC	MM Yuan 1.000.677	Chinese
Gazprom	MM Roubles 2.522.428	Russian
ENI	MM Euros 88.083	Italian
Lukoil	MM US$ 82.238	Russian
ONGC	MM Rupees 648.459	Indian
Petrobras	MM US$ 87.735	Brazilian, mixed
Petronas	MM US$ 66.215	Malaysian, state
Repsol	MM Euros 55.923	Spanish
Shaanxi Yanchang	NA	Chinese, state
Sinochem	NA	Chinese, state trader
Sinopec	NA	Chinese, public
Shell	MM US$ 355.782	Dutch
StatoilHydro	MM NOK 522.797	Norwegian
Total	MM Euros 136.824	French
Zhenhua Oil	NA	Chinese, public

II. Conglomerates with Large Financial Resources

Itochu	MM US$ 28.558	Japanese
Marubeni	MM US$ 41.662	Japanese
Mitsubishi	MM US$ 52.802	Japanese
Mitsui	MM US$ 57.389	Japanese
Sumitomo	MM US$ 25.360	Japanese

III. Companies with Fewer Financial Resources

Ancap	NA	Uruguayan, state
Ecopetrol	MM US$ 11.084	Colombian, state
Enarsa	NA	Argentinean, state
Galp Energia	MM Euros 12.557	Portuguese
Harvest Vinccler	MM US$ 11	USA
Impex Oil	MM US $ NA	Russian, trader
JGC	MM US$ 5.500	Japonesa, constructor
Jogmec	MMM Yen 124	Japanese, purchaser
Kanok	NA	Thai?
Perenco	NA	French, incorporated in Bahamas, known before as Kelt Energy
Petropars	NA	Iranian, state
PetroSA	MM Rand 8.900	South African
Petrovietnam	NA	Vietnamese
Pluspetrol	NA	Argentinean
PTT	MM Baht 1.495.806	Thai, state
Suelopetrol	MM Bs. 142.563	Venezuelan
Tecpetrol	NA	Argentinean
Vinccler	NA	Venezuelan

The fact I have placed them in the category of fewer financial resources does not mean they are not suitable investors, and they can always form consortia with other companies and so provide a stronger bid.

However, there are two potential problems with the smaller state companies in group III.

1) They lack the ability to take quick decisions since everything of importance must be consulted with their political masters, and 2) there is competition for state funds which are also needed for many other things--schools, hospitals, housing, transport, etc. The sums required for investment in the Orinoco Oil Belt are substantial, and progress should not be hindered because a state partner has difficulty providing the mixed company with its share of the funds.

Under criterion b) above, the company should come up with a proposal on how to reduce PDVSA'S financial burden. This will be more difficult for companies with limited financial capacity and, if applied strictly, could eliminate several of them right from the start. One possibility would be to lend PDVSA the capital it should contribute to the mixed company and recover this loan with payment in kind i.e. with the crude oil which accrues to PDVSA. There is plenty of room for some original thinking. The inclusion of this criterion shows PDVSA has cash-flow problems and is looking for the companies to provide help.

A thing that surprises me is that the upgraded crude of some 32º API will be blended with formation crude of around 8.5º API to produce 400,000 b/d of medium crude. I believe in the first phase 100,000 b/d will be produced in each of the four blocks for a total of 400,000 b/d and, when the new upgrading plants are ready, production in each block will increase by another 100,000 b/d. However, there will then be insufficient light crude available to blend with the additional production of 400,000 b/d. PDVSA'S solution is blend those barrels with upgraded crude to produce a crude of some 16º API in the same way as is done at present with Mesa crude of 30º API.

It seems strange to upgrade a crude to 32º API and then degrade it to 16º API by blending it with formation crude, but the reason is it allows 400,000 b/d to be produced for which otherwise there would be no market. At present, approximately 0.4 barrels of Mesa light crude are blended with 0.6 barrels of formation crude to produce one of 16º API called Merey. If this same proportion is maintained, the blend will produce a new crude--let's call it Carabobo 16--of some 650,000 b/d.

It seems the option to construct upgrading plants which upgrade the crude to 16º API, as is done at present in the other three consortia, was rejected. These plants are less complex and their capital cost is considerably lower so that probably four could have been constructed for the cost of the two new ones proposed. However, doubtless PDVSA did its sums and found the profitability of the more complex plants to be superior.

As regards criterion c), I imagine PDVSA seeks not only a good price for the oil but also a security of supply such as it has with sales to CITGO. This gives an advantage to the large oil companies which have their own refineries and an established customer base. However, it is possible the smaller state companies could buy the oil for their own refineries and consumption in their home market.

With this auction leading to the selection of new partners, Venezuela is entering in a new phase of its oil production. Up to the present, only four consortia have operated in the Orinoco Oil Belt, but the field is now open to new companies both large and small. It is hoped the selection process will be transparent and that contracts will be awarded on the basis of the commercial benefits and advantages which will accrue to the country.

Oliver L Campbell , MBA, DipM, FCCA, ACMA, MCIM was born in El Callao in 1931 where his father worked in the gold mining industry. He spent the WWII years in England, returning to Venezuela in 1953 to work with Shell de Venezuela (CSV), later as Finance Coordinator at Petroleos de Venezuela (PDVSA). In 1982 he returned to the UK with his family and retired early in 2002. At present Mr. Campbell is Petroleumworld's London Correspondent and analyst. Petroleumworld does not necessarily share these views.

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Petroleumworld News 11/18/08

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