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Elio Ohep : Exxon-Conoco: Emotional or rational ?

On retrospective about the development of Venezuela's Orinoco Faja or heavy oil belt field ( 13.600 square kilometers) project*, you can said that Venezuela is actively pursuing the development of the Faja with anyone that is willing to engage in a partnership with the venezuelan oil company PDVSA on a minority joint venture basis, has the ability to finds funds from the financial world to develop the project, and brings the technology to operate it.

In the coming months we will see the awards of the 3 joint ventures to develop various blocks in the Carabobo 1 area** ( originally part of Cerro Negro area, 725,33 square kilometers) with at least two upgraders to process the extra heavy orinoco crude.

The point I want to bring is, if the decision of ExxonMobil and ConocoPhillips of not participating in the Faja development has a solid economic basis or is just a emotional decision of top management, specially in the light of companies like Chevron, Total, BP and Statoil, with areas in the original project that chose to pursue the new opportunities offered under new conditions.

We all know that in the oil business projects are long term ones, companies want to pursue the future reserves and that for any oil development project two conditions must be there, the reserves have to be proven, and the production have to be realistic in economic and technical terms. In the Orinoco Faja project the two conditions are present.

So here is the big question. How can the company top management justified to the company board the decision of engaging in arbitration with the government of Venezuela for an disagreement in assets compensation when an opportunity of such magnitude is at stake ?

Below is an article by Luis Pacheco, former PDVSA's planning director, publish last year on the subject that gives you some prospective on the issue.

The original Orinoco Faja areas

The new Orinoco Faja project areas

The companies in the top are the present Faja joint ventures companies after the nationalization.
BP acquired a small stake in Cerro Negro, now Petromonagas. PDVSA has 60% or more of all the joint ventures

The rest of the companies in the map are doing reserves certification work for PDVSA.

High Noon at the Orinoco River: Venezuela and Exxon-Mobil

By Luis A. Pacheco

Push finally came to shove in the conflict between the Venezuelan national oil company, PDVSA, and the giant multinational Exxon-Mobil, when the latter appealed to courts in New York and London to freeze PDVSA's assets in February. This is just the latest chapter of a saga that started as a love affair and now appears to be heading for an acrimonious divorce.

During the 1990s, Venezuela faced a strategic conundrum: how to economically activate the enormous quantity of heavy hydrocarbon resources that were known to exist in the Orinoco Belt since the 1960s and that were fully charted by the newly formed PDVSA during the 1980s.

These resources were known to be enormous: close to 1,200 billion barrels of oil originally in situ (between 80 and 210 billion barrels of recoverable resources, depending on the recovery factor one chooses to believe). However, they were of very poor quality, at less than 10o API (indicating low gravity/high viscosity) and a high content of sulfur and heavy metals. For all intents and purposes, these reserves were commercially worthless, at least with the technology that was available to PDVSA at the time, the oil price forecast, and the fiscal regime then in existence in Venezuela.

However, given the very mature nature of the Venezuelan basins on the one hand, and the need for Venezuela to use its resources to foster economic growth on the other, the Orinoco Belt presented itself as a clear strategic opportunity for the future.

So PDVSA, with the full support of the government and parliament, set out to design an industrial and fiscal strategy that would attract the best actors within the international oil industry – actors who were capable of contributing not only the large amounts of capital and innovative strategy required, but also the access to markets that the venture called for. This strategy was familiarly known as “Apertura Petrolera.”

The chosen strategy was the production of the oil, its transportation to port and its upgrade (using different degrees of decabornization) in order to produce oil streams of commercial grade. This required the modification of the then very stringent Venezuelan fiscal regime, resulting in the reduction of royalties and tax rates. This facilitated the more than $20 billion that were eventually invested, between PDVSA and its chosen partners, for the development of a capacity of 600,000 barrels per day of synthetic crude in four different projects. These projects became unqualified successes, technologically and commercially.

Although the strategy was agreed upon and implemented in less than five years, it would take more than a decade to see the projects built and in operation. It is important to remember that prior to this effort, the Orinoco Belt was no more than an unfulfilled promise: 400 km from the nearest export port and with no real future with the policies as they then stood — it was the proverbial “middle of nowhere,” both geographically and economically.

Of course, such initiatives were not without detractors, particularly from the political opposition of the time, who could never put forward legal arguments or assemble enough political support to derail what they regarded as the denationalization of the Venezuelan oil industry.

But destiny plays tricks on even the best of intentions. With the new decade came a number of unexpected events. Hugo Chávez became president of Venezuela, and with him came political groups that had stubbornly opposed the “Apertura Petrolera.” With them came the political intention to rewind all the projects that had been previously implemented.

At the same time, oil prices started moving upward to unexpected levels, making the concessions of the previous decade appear unsustainable at best and politically dangerous at worst. The Venezuelan government then started a focused effort to modify the legal and fiscal concessions that had been necessary to realize the “Apertura Petrolera.”

The four projects in the Orinoco Belt were the last to be tackled by the government. Between 2005-2007 royalties were first increased, then the tax structure was modified, and finally, the new legislation put in place by the government called for a reduction on the share that private companies could hold in the projects. The government's negotiating stance was simple: take it or leave it.

Most of the foreign companies reluctantly agreed to these changes, even though in the process they were the object of political abuse and public invective. One has to remember that although the vindication of the rights of the resource owner (in this case, the nation) appear logical under the light of market conditions, the government needed to appear to be getting a rematch, this time on the winning side, of a political argument they had lost in the 1990s.

Exxon, which incidentally was never a part of the “Apertura Petrolera” but inherited its presence from its takeover of MOBIL, took exception to what they saw as inadequate compensation and resorted to arbitration in accordance with the original contract. For the Venezuelan government this was like adding insult to injury, since international arbitration was one of the conditions to which they most objected in the original contracts.

EXXON and PDVSA are both engaged in an unnecessary farce that will benefit no one. In the end, Exxon's stance will only lead to fair economic compensation, but the affair will hurt the long-term credibility of Venezuela. It will also lend support to those in Venezuela who preach that foreign companies are unrepentant vultures and that political dogmatism takes precedence over the nation's welfare — even if takes a rewriting of history to make that political point.

*Orinoco Project: In charge of developing the Orinoco Belt. Twenty-seven blocks have been selected for development under this project with the cooperation of selected companies. Because of the strategic location of this hydrocarbon reservoir, it is considered of vital importance in reducing levels of overcrowding in some parts of the country and providing local employment. Services and housing will be developed to guarantee adequate oil exploitation.

** Venezuela invites tender for Block Carabobo 1

The Bolivarian Republic of Venezuela is getting ready to put out to tender the areas of Block Carabobo 1, reported People's Minister of Energy and Petroleum and PDVSA Executive Director Rafael Ramírez.

The ministry has everything available to announce the schedule, conditions and business plan for the bidding, under the Organic Hydrocarbons Law and in the interest of the Venezuelan people.

A high turnout is expected, following talks with multiple companies. "The process follows also the judgment of diversifying the participating companies and our market,” he said.

This block, with reserves amounting to 10 billion barrels of heavy crude oil, forms part of an area certified by Petróleos de Venezuela, S.A. and Petrobras. “A comprehensive scheme with the improvers have been outlined to produce 32° API crude oil, as the oil currently drilled in Petrocedeño, seeking the top recovery factor, because natural resources should be managed properly,” said the PDVSA CEO.

Legal assurances

Upon completion of the migration of former oil businesses to the legal framework set forth thanks to the nationalization of the Orinoco Oil Belt, Venezuela is ready to welcome the participation of private companies, under the current regulations and based on new agreements endorsed by the National Assembly.

“We maintained that we would not expand our production if our tax and production related laws were not observed. Now, as this process has ended, we are prepared to attract the participation of the private capital. This is the way to do it, with legal transparency," said the minister.

The bidding in fully favorable conditions for the Bolivarian Republic of Venezuela, is the result of the policy on Full Oil Sovereignty sponsored by President Hugo Chávez. This policy helped retake the control over energy resources and restored the tax system.

“During migration, private companies have gotten to know our law, the current legal framework and royalties,” said Minister Ramírez.

Certification of reserves

An agreement on quantification and certification or reserves at Block Junín, Orinoco Oil Belt, was entered into by People's Minister of Energy and Oil and PDVSA CEO Rafael Ramírez and Total Executive Director Cristophe de Margerie.

Total is the first out of the migrating big companies that has reached a new agreement to carry out operations at the Orinoco Oil Belt under the Venezuelan current regulations in the energy field.

Ramírez praised the transparency and legal security offered now by the Hydrocarbons Organic Law. “If they are participating here is because they are accepting all the conditions. Venezuela is one of the countries which have lately set a strategy to retake control over their resources," he said.

For his part, Cristophe de Margerie expressed satisfaction for the agreement, which he viewed as the result of migration. "Noteworthy, we can work together on a project and under the Ministry's supervision. The new legal framework allows us to continue with our activities in the businesses we have in Venezuela and make plans for our investments," he said.

This article was originnaly posted, on march 3rd, 2008 at Focal Point.

Elio Ohep is the editor of Petroleumworld not necessarily share these views.

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Petroleumworld News 04/08/09

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