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Big oil to stay even as Venezuela wrests control
By Jasmina Kelemen
MarketWatch
HOUSTON
Petroleumworld.com 01 25 06
Venezuela's President Hugo Chavez has upped the ante in his bid to assert control over his nation's hydrocarbon industry, this time setting his sights on the multi-billion dollar heavy-oil projects currently run by the world's biggest oil companies.
And while such moves might make the industry think twice before seeking further opportunities in Venezuela, companies such as Exxon Mobil Corp, are unlikely to walk away from the billions they have already sunk into what could be one of the world's richest oil fields, no matter how much Chavez tightens the financial screws, said analysts.
"Once you've invested billions to upgrade extra heavy oil... it becomes very difficult for you to leave," said Enrique Sira, a Caracas-based associate director for Cambridge Energy Research Associates.
"Those companies don't leave [Venezuela]; they try to manage the news laws in the best possible way."
Amidst ongoing negotiations with foreign oil companies, Chavez recently announced he would unilaterally claim majority stakes for his nation in four extra-heavy crude projects in the Orinoco River basin.
"If someone wants to stay on as our partner, then the door is open but if he does not want to stay as our minority partner then hand me the field and goodbye," Chavez said in a recent address to the nation.
Exxon, Chevron, BP, ConocoPhillips all have stakes in the projects, which together produce about 600,000 barrels a day, or around a fifth of Venezuela's total production.
Coaxing marketable oil out of the extra-heavy sludge and coal-like deposits of the Orinoco is extremely expensive, labor-intensive, and has required both the technological muscle and cash of Big Oil.
Not only were foreign companies allowed to explore for oil, they were also invited to invest billions of dollars into building specialized upgraders to turn Orinoco oil into a lighter grade of crude that overseas refiners can process.
Analysts, citing subsequent announcements by various government ministers, believe Venezuela plans to grab anywhere from 60% to 80% stakes in the heavy oil projects.
The self-proclaimed socialist leader's move to seize the nation's oil industry comes amid recent declarations to fully nationalize Venezuela's electricity and telecommunications sector.
Venezuela, a founding member of the Organization of Petroleum Exporting Countries, was the world's eight-largest oil exporter in 2005. It has an estimated 79.7 billion barrels of proven conventional oil reserves, placing it among the world's top-ten producers, according to the U.S. Energy Information Administration.
Estimates of the Orinoco basin's oil equivalent reserves run in excess of 1.3 trillion barrels. Using today's technology, about 300 billion barrels of those reserves are believed to be recoverable, which, if correct, would mean Venezuela has the world's largest oil reserves.
Revolving door policy
Venezuela nationalized its oil industry in 1976, kicking out some of the same companies that are now among the biggest investors in its oil industry.
"Countries nationalize and then deregulate and then nationalize again. It's a cycle that many countries fall within," said Sira of CERA. "It's tightly linked to oil prices."
As oil prices fell into the teens in the early 1990's, the national oil company, Petroleos de Venezuela SA (PDVSA), lost money selling extra-heavy oil at a steep discount to higher quality crudes. The company could not afford to upgrade its production equipment, leaving it no choice but to lobby the government to allow private companies back into the sector, said Sira.
As a result, Venezuela crafted a series of laws that spawned 32 operating service agreements (OSAs) with 22 foreign oil companies. Under these contracts, PDVSA paid foreign companies a fee to operate the oilfields and bought the crude at a price formula pegged to market rates. PDVSA then resold the product on the international market.
Luring private investment to the challenging Orinoco basin required additional legislation, offering foreign operators even lower tax rates and production royalties.
When the agreements were initially inked in the late 1990's, foreign operators faced only a 1% royalty fee and 34% tax rate.
Since 2004, Chavez has raised the royalty to almost 17%, enacted an extraction tax of 33%, and threatened to bump up those figures to 33% and 50%, respectively.
Betting that oil companies wouldn't abandon the country's rich deposits, Chavez last year dissolved the OSAs and created new joint ventures, giving the state an ownership claim.
Nearly every operator agreed to the tougher terms, even when facing lower output volumes, which many analysts believe emboldened Chavez to go after the massive Orinoco projects.
For example, Chevron, which had controlling stakes in two conventional oil fields, announced late in 2006 that it expected fourth-quarter 2006 production in Venezuela to fall by 90,000 barrels a day once the new, joint-venture terms went into effect.
Chavez's incendiary rhetoric aside, some observers stress that he probably isn't angling to kick private investment out of the nation's hydrocarbon sector, but is aiming to bring the entire oil sector under a single legal framework.
"I have not heard of [Chavez] saying he wants these companies out completely, but rather he wants to convert them to minority interests," said Jose Varela, a partner at King & Spalding's Global Transactions Group in Houston.
"So this is not quite like the electricity or [telecommunications] sector, where he's saying he's going to confiscate their property," said Varela.
Saying "I do"
And while the stakes are much higher in the Orinoco, most of the operators there are expected to comply with Chavez's latest dictates.
"A majority of oil companies are expected to abide by new, tougher terms to ensure future revenues and recoup the value of their original investments," said Patrick Esteruelas, an analyst with Eurasia Group, in a note to clients.
ConocoPhillips and Chevron are unlikely to offer much resistance since Venezuela represents approximately 10% and 9% of their worldwide production, said Esteruelas.
Industry-titan Exxon Mobil, whose production in Venezuela accounts for 2% of its total output, could prove the exception, he said.
Though it's still far from clear how the state will ultimately enact Chavez's declarations over the Orinoco basin projects, Sira believes most of the foreign oil companies are there to stay, even if they cut back on future investments into the nation's energy sector.
"You cut a lot of steel, you put it together and once [the project] is operating it's hard to get rid of," he said. "You have to stick to your iron and continue operating."
- Jasmina Kelemen is a MarketWatch reporter based in Houston.
MarketWatch 23 01 07
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