Oliver L Campbell:
Delay in assigning Carabobo block to winners
The winners of the auction for licences to operate in the Carabobo blocks were to be announced on 14 August, but the Oil Ministry has just sent letters to bidders stating the decisions will be postponed sine die. No reason has been given, so what I write below can only be conjecture on my part. The possibilities can be looked at from both parties’ points of view:
- PDVSA’S dissatisfaction. The company was hoping for a large upfront bonus, which some say was as much as $1billion, for each licence awarded. In addition, it expected bidders to provide financing, in one way or another, for its own 60% share of the investment. While seeking a bonus is not exceptional, asking bidders to provide funds for a major shareholder’s investment is audacious to say the least. One can only surmise bidders did not come up with the minimum bonus and financing proposals that PDVSA was expecting.
- Bidders’ dissatisfaction. They found the overall financial conditions to be too stringent. Royalties at 33% and income tax at 50% are on the high side, and they cannot even take full advantage of future high oil prices since a windfall levy was introduced last year which kicks in when prices exceed $70 a barrel. In addition, they are only minority shareholders in a mixed company and not partners in a joint venture which would give them joint control.
Investment in the Orinoco Oil Belt seems an attractive proposition since the area is on land and easily accessible. No exploration is necessary--the area has been explored and substantial seismic data is available. The oil in place has also been quantified and, in some cases, certified by independent experts. The upshot is that the risk element inherent in oil exploration and production has been largely eliminated. However, there is the additional cost of upgrading the oil which requires substantial investment in a special upgrading plant.
So why are the oil companies not rushing to invest there? The answer is they have alternative areas in which to invest and Venezuela may not be the most financially attractive because of its high royalty and tax rates. This is an assumption, but something has to explain their reticence to accept PDVSA’S conditions. It now has to be seen what concessions PDVSA can offer to make the investment more attractive to foreign oil companies both private and state owned.
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. Petroleumworld does not necessarily share these views.
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Petroleumworld News 07/13/09
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