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In Venezuela, a face-off over the prospect of oil riches
By Juan Forero
The New York Times
PUERTO LA CRUZ, Venezuela
Petroleumworld.com 06 08 06
The sludge in the glass jar on David Nelson's bookshelf here is thicker than molasses and was once thought worthless.
But Chevron, whose operations Nelson runs in eastern Venezuela, has spent about $1 billion turning what was once called "liquid coal" into oil, helping transform a swath of scrub grass into one of the last great frontiers for oil production. The region is so promising that President Hugo Chávez claims that it contains up to 235 billion barrels of recoverable oil, which if true would rival Saudi Arabia's reserves.
"We do know that the Orinoco is underdeveloped," said Nelson, a geologist from California with 27 years of experience developing heavy oil. "And the resources in the Middle East are at their midpoint."
The stakes are pitting a leftist administration, aiming to use oil revenue for social programs, directly against multinationals like Chevron, who were invited to Venezuela a decade ago to develop the Orinoco Belt, a 140-square- kilometer, or 54-square-mile, area about 190 kilometers, or 120 miles, south of here.
With oil demand rising, supply dwindling and prices hitting new highs, the conflict here underscores the growing debate between governments and oil companies worldwide over profits in technologically challenging but potentially lucrative oil fields, from the Caspian Sea to the Arctic tundra.
Venezuela, the Western Hemisphere's largest oil-exporting country, has much to gain from the Orinoco, especially as its daily oil production has slid to 2.2 million to 2.5 million barrels from a peak of about 3.5 million barrels in 1997.
To bolster the Orinoco's profile, Chávez has contracted companies from as far away as China and Russia to certify the size of the reserves. Saudi Arabia scoffs at the boasts.
In any case, what is underground has become so valuable that oil companies worldwide want to explore for more, and the country's self-styled revolutionary government wants a larger slice of the earnings.
In Venezuela, companies like Exxon Mobil, Chevron and ConocoPhillips, as well as BP and Total, could lose once-favorable terms and in essence be forced to transfer up to $8 billion in value to the state - just as opportunities elsewhere are drying up.
Big Oil is right to be rattled.
In April, Chávez's populist government took majority control of 32 mostly marginal fields across Venezuela that had been managed by foreign companies. Then on May 16, the National Assembly raised royalties on the four heavy crude projects of the Orinoco to 33.3 percent from 16.6 percent and said that it planned to increase taxes to 50 percent from 34 percent.
Now, the government says it is preparing to capture a bigger stake in the Orinoco - handing control of projects that produce 600,000 barrels a day to Venezuela's state oil firm, Petróleos de Venezuela, better known as Pdvsa.
Energy officials say the state could take up to 60 percent control of the so- called strategic associations, as the projects are called. No timetable has been given, but leaders in the National Assembly say it is only a matter of time.
"With the high price of petroleum on the market, we are going to share in the excess earnings of the strategic associations," Mario Isea, president of the legislature's hydrocarbons commission, said during an interview. "They have gone years without paying royalties and effectively paying commercial taxes instead of petroleum taxes."
Michelle Billig, director of political risk at PIRA Energy Group, a New York consulting firm, said, "Companies thought that technological impediments would provide a safeguard" from government interference.
Billig added, "Governments needed them and provided them with that bargaining power, and that has slipped for several reasons - oil prices embolden the governments, and two, a lot of these projects have proven themselves to be viable."
But because the Orinoco may give Venezuela influence in the energy world that could rival other top producers, like Saudi Arabia or Russia, the stakes are extremely high - and the developments are closely watched.
In the mid-1990s, President Rafael Caldera's government, eager to develop oil that had first been discovered here in the 1930s, opened the region to foreign investment because Pdvsa had neither the capital nor the technology to develop the Orinoco's sludge.
Oil prices were low, world supplies easily met demands and Pdvsa had a crude so heavy, so filled with impurities that it was not even known as oil, but rather as bitumen.
Given a virtual tax holiday to spur investment - the royalty rate was 1 percent - the multinationals began drilling and, more recently, building upgraders that permit Orinoco's crude to be refined into a lighter, marketable oil.
All told, $17 billion has been invested, according to a recent Deutsche Bank report. Oil multinationals would like nothing more than a free rein to invest and produce, increasing production as fast as possible.
Others, like Petrobras in Brazil, China National Petroleum and companies from Russia and India, also hope to get into the Orinoco.
Ali Moshiri, managing director for Chevron's Latin America exploration and production group, said in April that Venezuela needed $200 billion to develop the heavy oil reserves.
Venezuela's government talks of doubling production to the 5.8 million barrels it wants to produce daily by 2012.
But it wants to achieve this on its own terms, with Pdvsa controlling projects through contracts far more beneficial to the state than in the past.
Rafael Ramirez, the energy minister and president of Pdvsa, said in an interview that deals the multinationals signed with the state in the 1990s were "absurd," giving Venezuela little in return.
"They are beholden to their stockholders, and we are beholden to our country," Ramirez said.
Venezuelan officials contend that exploration and production in the Orinoco has become easy and risk-free, with a barrel costing less than $1 to produce, down from $2 in 1995. Energy officials here assert that the multinationals exaggerated the technical challenges and costs, swindling the state.
They also argue that the companies have made extraordinary profits - and that they will continue to do so even with higher taxes and royalties. Exxon Mobil, Chevron and ConocoPhillips had combined earnings of $191.5 billion in the first three months of the year.
Venezuelan officials say their measures are backed legally, citing a 2001 law that says Pdvsa must have a 51 percent stake in projects - sidestepping questions about previous contracts being grandfathered. Ramirez and lawmakers here also say that a 1945 hydrocarbons law permits the state to raise royalties when oil prices go up.
The companies here do not publicly challenge Venezuela's government. But Larry Goldstein, president of the Petroleum Industry Research Foundation, an industry-supported group in New York, said: "In Venezuela today, I don't believe contracts have meaning. And it affects the production, no matter what the Venezuelans say."
The game of oil brinkmanship continues, with Ramirez, the energy minister, saying that the companies have few options. "There are no new oil regions that compare to the Orinoco belt," he said.
The Deutsche Bank report agreed, noting that "few are likely to quickly turn their backs on reserves of the order seen in Venezuela."
It continued: "They may not like Chávez. They may not like his regime. But they also know that he has probably done as much to support high oil prices through his rhetoric and posturing as any individual. This president is no fool. And at the end of the day, you go where the oil is."
Jens Gould contributed reporting for this article from Caracas.
PUERTO LA CRUZ, Venezuela The sludge in the glass jar on David Nelson's bookshelf here is thicker than molasses and was once thought worthless.
But Chevron, whose operations Nelson runs in eastern Venezuela, has spent about $1 billion turning what was once called "liquid coal" into oil, helping transform a swath of scrub grass into one of the last great frontiers for oil production. The region is so promising that President Hugo Chávez claims that it contains up to 235 billion barrels of recoverable oil, which if true would rival Saudi Arabia's reserves.
"We do know that the Orinoco is underdeveloped," said Nelson, a geologist from California with 27 years of experience developing heavy oil. "And the resources in the Middle East are at their midpoint."
The stakes are pitting a leftist administration, aiming to use oil revenue for social programs, directly against multinationals like Chevron, who were invited to Venezuela a decade ago to develop the Orinoco Belt, a 140-square- kilometer, or 54-square-mile, area about 190 kilometers, or 120 miles, south of here.
With oil demand rising, supply dwindling and prices hitting new highs, the conflict here underscores the growing debate between governments and oil companies worldwide over profits in technologically challenging but potentially lucrative oil fields, from the Caspian Sea to the Arctic tundra.
Venezuela, the Western Hemisphere's largest oil-exporting country, has much to gain from the Orinoco, especially as its daily oil production has slid to 2.2 million to 2.5 million barrels from a peak of about 3.5 million barrels in 1997.
To bolster the Orinoco's profile, Chávez has contracted companies from as far away as China and Russia to certify the size of the reserves. Saudi Arabia scoffs at the boasts.
In any case, what is underground has become so valuable that oil companies worldwide want to explore for more, and the country's self-styled revolutionary government wants a larger slice of the earnings.
In Venezuela, companies like Exxon Mobil, Chevron and ConocoPhillips, as well as BP and Total, could lose once-favorable terms and in essence be forced to transfer up to $8 billion in value to the state - just as opportunities elsewhere are drying up.
Big Oil is right to be rattled.
In April, Chávez's populist government took majority control of 32 mostly marginal fields across Venezuela that had been managed by foreign companies. Then on May 16, the National Assembly raised royalties on the four heavy crude projects of the Orinoco to 33.3 percent from 16.6 percent and said that it planned to increase taxes to 50 percent from 34 percent.
Now, the government says it is preparing to capture a bigger stake in the Orinoco - handing control of projects that produce 600,000 barrels a day to Venezuela's state oil firm, Petróleos de Venezuela, better known as Pdvsa.
Energy officials say the state could take up to 60 percent control of the so- called strategic associations, as the projects are called. No timetable has been given, but leaders in the National Assembly say it is only a matter of time.
"With the high price of petroleum on the market, we are going to share in the excess earnings of the strategic associations," Mario Isea, president of the legislature's hydrocarbons commission, said during an interview. "They have gone years without paying royalties and effectively paying commercial taxes instead of petroleum taxes."
Michelle Billig, director of political risk at PIRA Energy Group, a New York consulting firm, said, "Companies thought that technological impediments would provide a safeguard" from government interference.
Billig added, "Governments needed them and provided them with that bargaining power, and that has slipped for several reasons - oil prices embolden the governments, and two, a lot of these projects have proven themselves to be viable."
But because the Orinoco may give Venezuela influence in the energy world that could rival other top producers, like Saudi Arabia or Russia, the stakes are extremely high - and the developments are closely watched.
In the mid-1990s, President Rafael Caldera's government, eager to develop oil that had first been discovered here in the 1930s, opened the region to foreign investment because Pdvsa had neither the capital nor the technology to develop the Orinoco's sludge.
Oil prices were low, world supplies easily met demands and Pdvsa had a crude so heavy, so filled with impurities that it was not even known as oil, but rather as bitumen.
Given a virtual tax holiday to spur investment - the royalty rate was 1 percent - the multinationals began drilling and, more recently, building upgraders that permit Orinoco's crude to be refined into a lighter, marketable oil.
All told, $17 billion has been invested, according to a recent Deutsche Bank report. Oil multinationals would like nothing more than a free rein to invest and produce, increasing production as fast as possible.
Others, like Petrobras in Brazil, China National Petroleum and companies from Russia and India, also hope to get into the Orinoco.
Ali Moshiri, managing director for Chevron's Latin America exploration and production group, said in April that Venezuela needed $200 billion to develop the heavy oil reserves.
Venezuela's government talks of doubling production to the 5.8 million barrels it wants to produce daily by 2012.
But it wants to achieve this on its own terms, with Pdvsa controlling projects through contracts far more beneficial to the state than in the past.
Rafael Ramirez, the energy minister and president of Pdvsa, said in an interview that deals the multinationals signed with the state in the 1990s were "absurd," giving Venezuela little in return.
"They are beholden to their stockholders, and we are beholden to our country," Ramirez said.
Venezuelan officials contend that exploration and production in the Orinoco has become easy and risk-free, with a barrel costing less than $1 to produce, down from $2 in 1995. Energy officials here assert that the multinationals exaggerated the technical challenges and costs, swindling the state.
They also argue that the companies have made extraordinary profits - and that they will continue to do so even with higher taxes and royalties. Exxon Mobil, Chevron and ConocoPhillips had combined earnings of $191.5 billion in the first three months of the year.
Venezuelan officials say their measures are backed legally, citing a 2001 law that says Pdvsa must have a 51 percent stake in projects - sidestepping questions about previous contracts being grandfathered. Ramirez and lawmakers here also say that a 1945 hydrocarbons law permits the state to raise royalties when oil prices go up.
The companies here do not publicly challenge Venezuela's government. But Larry Goldstein, president of the Petroleum Industry Research Foundation, an industry-supported group in New York, said: "In Venezuela today, I don't believe contracts have meaning. And it affects the production, no matter what the Venezuelans say."
The game of oil brinkmanship continues, with Ramirez, the energy minister, saying that the companies have few options. "There are no new oil regions that compare to the Orinoco belt," he said.
The Deutsche Bank report agreed, noting that "few are likely to quickly turn their backs on reserves of the order seen in Venezuela."
It continued: "They may not like Chávez. They may not like his regime. But they also know that he has probably done as much to support high oil prices through his rhetoric and posturing as any individual. This president is no fool. And at the end of the day, you go where the oil is."
Jens Gould contributed reporting for this article from Caracas.
The New York Times 06 01 06
Copyright © 2006 New York Times. All Rights Reserved.
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