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Energy reform takes another radical twist

As he starts a new, six-year term, President Hugo Chávez has promised further nationalisation measures. Foreign companies face an uncertain future, reports Robert Cauclanis from Caracas

FOREIGN energy companies are facing another difficult year in Venezuela. Power utilities are facing nationalisation, the majors are set to lose control of the Orinoco belt's heavy-oil projects and considerable uncertainty remains over how natural gas resources will be developed.

In 2006, President Hugo Chávez's government hit them with hefty back taxes, raised oilfield royalty and tax rates, and forced them into signing new contracts giving state-owned PdV majority control of the 32 mature oilfields awarded in the 1990s.

Facing ejection from Venezuela's oil patch, most oil companies, including Repsol YPF, Shell, Chevron and Petrobras, acquiesced to Chávez's demands. They also understood the government's desire to boost the state's oil receipts at a time of high oil prices. After all, the majors were offered generous terms to induce them into the country in the late 1990s, when the price of Venezuelan heavy crude dipped below $10 a barrel.

PdV takes control

Not all companies accepted the terms. In one case, ExxonMobil chose to sell a field stake to Repsol YPF instead. The two companies to refuse the terms, Total and Eni, had their fields seized last April. Total has reached an in-principle settlement with PdV on compensation for its 33,000 barrels a day (b/d) Jusepin field (terms have not been revealed); Eni has filed for arbitration with the World Bank, seeking compensation for its 60,000 b/d Dacion field. The Italian company values its stake at €0.65bn ($0.85bn).

So far this year, Chávez seems to have become more confrontational towards foreign companies. Instead of introducing measures to encourage foreign investment, to help PdV reach its goal of more than doubling Venezuelan crude production to 5.8m b/d by 2012, Chávez announced a spate of measures designed to diminish the role of the private sector in Venezuela.

He promised to nationalise five privately owned power utilities, including Electricidad de Caracas, controlled by the US' AES, and the country's largest telecommunications company, CANTV, owned by the US' Verizon.

Chávez also said PdV would increase its stake in the four extra-heavy oil projects in the Orinoco belt from 40% to a minimum of 60%. The projects, operated by ConocoPhillips, ExxonMobil, Chevron and Total (see Table 1 and Map 1), are valued at around $33bn. The ventures produce extra-heavy crude and pipe it to upgrading facilities that process up to 0.62m b/d of synthetic crude for export.

The private sector cannot expect fruitful negotiations with the government. Chávez said he will approve the new Orinoco oil-belt terms by decree, rather than engage in negotiations that he claims "take too long". In January, the country's legislature passed an enabling law allowing Chávez to legislate by decree in several areas, including energy, over the next 18 months. Additional measures Chávez has supported include nationalising gas projects, stripping the central bank of autonomy and launching a referendum that could end limits to the presidential term.

"I'm sure they will accept the new terms," Chávez said of foreign energy companies. "If not, they are always free to leave." The president has been preparing for some time to boost PdV's stakes in the extra-heavy crude projects, but earlier plans were said to involve negotiating with the majors for PdV to gain a simple 51% majority stake.

However, Rafael Ramirez, the energy minister and president of PdV, tells Petroleum Economist that the state-owned oil company will take at least 60% stakes in both the upstream and downstream units of the projects by 1 May. PdV also plans to operate the plants and will order a halt to the export of by-products such as petroleum coke and sulphur, which will be processed locally instead.

In late January, one group of leftist oil-worker's unions said ExxonMobil is unlikely to submit to a non-controlling role at its Cerro Negro project, but that workers are ready to take control of operations at the government's calling. ExxonMobil says it is looking for "an amicable solution" with PdV.

ConocoPhillips' chief executive officer, Jim Mulva, says Venezuela represents a "difficult situation" for the company. ConocoPhillips is the most exposed of the majors to the extra-heavy oil projects, holding a 50.1% stake in the Petrozuata and 40% in Hamaca – for a combined 128,000 b/d of capacity.

PdV sources admit the trickiest part of taking control in the Orinoco oil belt may be renegotiating project debt, as lenders could buckle under new terms. An outright seizure of control could result in defaults of up to $4bn due to the loan covenants, according to Fitch Ratings.

In a separate blow to the majors in the Orinoco oil belt, Chávez recently ordered the projects to cut back exports by around 138,000 b/d – the lion's share of the 195,000 b/d Venezuela agreed to hold back from markets to comply with two recent Opec production cuts. The move prompted Cerro Negro to declare force majeure on supplies.

The US Department of Energy has called Chávez's proposed energy nationalisations "a disturbing trend" and claims that they will hurt Venezuela's plans to develop its natural resources. Despite the government's dismal rapport with Washington, the US still buys a large proportion of Venezuelan supply, which typically makes up 15% of US crude imports.

Straining relations

By straining relations with the majors, Chávez could alienate the companies best qualified to help Venezuela expand heavy-oil production. Since the 1990s, each Orinoco project has considered multi-billion dollar expansion plans, which would roughly double production if put into effect. But none has yet gone ahead.

In part, PdV has rejected several expansion proposals because they generally called for tapping new reserves, rather than boosting recovery rates at reservoirs already under development, according to industry sources. PdV and Chávez want recovery rates to rise to at least 20%, up from 8-9%. To boost them, the company wants the projects to adopt more expensive steam-injection techniques, especially after reservoir-pressure levels fall. So-called hot production, which could double costs on future Orinoco projects, would still be worth the investment, PdV claims. A company source says one Orinoco project is producing and upgrading its crude at a cost of only $4.50/b.

Adding to the majors' woes, PdV now wants to take majority stakes in successful oil exploration blocks – in which companies had been promised controlling stakes – before commercial production has even begun.

One example is ConocoPhillips' Corocoro offshore concession, in the east of the country. The US company declared the field commercial in 2002, with around 0.5m barrels of recoverable oil, and plans production of 55,000 b/d. The same applies to the La Ceiba field, in western Venezuela, where ExxonMobil and Petro-Canada each hold 50%. PdV has demanded a 51% stake of the field, which it expects to produce 20,000 b/d this year, ramping up to as much as 40,000 b/d later.

Production in doubt

There is little doubt PdV requires help to boost domestic oil production if it is to come close to meeting its ambitious 5.8m b/d target in 2012. PdV claims the country is producing 3.2m-3.3m b/d, but the International Energy Agency estimates output at closer to 2.6m b/d and falling (see Figure 1). Most experts doubt PdV's claim that is has fully recovered from a crippling two-month oil-workers' strike from December 2002, when anti-Chávez PdV staff sought to force him from power.

According to analysts' estimates, in late 2006, production at the 32 mature fields in which PdV now holds majority stakes fell to around 430,000 b/d, from earlier peak levels of over 0.5m b/d. PdV says it will invest $0.5m to maintain the fields, with its partners contributing $300m.

Declining oil production capacity and high government spending are part of what makes Venezuela a leading price-hawk among Opec members. Ramirez says he and Chávez consider it "unacceptable" for the price of the country's crude to fall below $50/b. Venezuela's heavy-crude basket was worth $47.96/b in the first week of February, according to PdV. In January, Chávez said Opec should consider "drastic [production] cuts" if world oil prices declined further.

What's a windfall?

In a recent note to investors, PFC Energy, a consultancy, estimated that Venezuela needs oil prices to remain at or above $60/b in order to meet government-spending requirements (see box p30) – a far cry from the situation when Chávez came to power, in 1999, and the government considered proceeds from Venezuelan crude exports priced above $9/b to constitute windfall earnings.

Chávez may ooze disdain for the majors, but he is laying down the red carpet for state-owned companies from far and wide to encourage them to form partnerships with PdV in new projects, particularly in the Orinoco oil belt, but also abroad. Overseas projects include building refineries in Brazil, Ecuador, India and Indonesia, and the improbable Great Southern gas pipeline through the Amazon to Brazil (PE 2/07 p27).

Another 236bn barrels of extra-heavy oil lies in the 55,000 square km Orinoco region, according to PdV. This, when added to Venezuela's existing, 81bn barrels of proved reserves, would push the country ahead of Saudi Arabia.

To certify these reserves, PdV has joined forces with state-controlled companies such as Petrobras, Russia's Gazprom, China National Petroleum Corporation (CNPC), India's Oil and Natural Gas Corporation, Malaysia's Petronas, Argentina's Enarsa, Iran's Petropars and PetroVietnam, some of which have little or no experience of developing oil reserves. The only privately owned company involved is Repsol YPF. PdV has signed numerous memoranda of understanding, but none have led to concrete deals for oil and gas development.

However, at least three significant new Orinoco oil-belt projects are under serious discussion, the company claims. One would pair Petropars with PdV in part of the block known as Ayacucho, where PdV says there are at least 31.2bn barrels of oil in place, with at least 6bn barrels recoverable. Local reports put the potential project costs at more than $4bn.

A second would see Petrobras join PdV to develop certified reserves of more than 9bn barrels at the Carabobo-1 block. PdV would take a 60% stake, says Petrobras, in a project that could produce 200,000 b/d, with first oil possible by 2010. The third project, Junin-4, would pair PdV and CNPC, producing 200,000 b/d as early as 2010, says PdV.

Further joint ventures with China's CNPC and Sinopec could lead to production of another 200,000 b/d of conventional crude by 2011. The ventures would exploit onshore fields and one eastern offshore block, known as Posa, says PdV.

Petrobras has said it wants to form PdV-led "mixed companies" to develop five more mature onshore oilfields with combined reserves of 464m barrels. Repsol YPF says it could also form upstream ventures with PdV, with the aim of boosting its Venezuelan production from 100,000 b/d to 160,000 b/d. However, neither Petrobras nor Repsol YPF has given dates or investment estimates for the plans. 

Mixed messages

VENEZUELA could move into the world's top-five gas-reserves holders if PdV proves correct about new discoveries. The country boasts the largest proved gas reserves in Latin America – 152 trillion cubic feet (cf), according to BP's Statistical Review of World Energy (see Figure 1) – and the state-owned oil and gas company estimates another 100-200 trillion cf will be found offshore.

Although the country has export aspirations, daily output of around 2.8bn cf/d will be unable to meet rising domestic demand. Oil-industry activities consume about 70% of production, and if PdV pursues major steam-injection programmes at future Orinoco heavy-oil projects, domestic demand could rise substantially. In the short term, a $335m pipeline is under construction to import 152m cf/d of Colombian gas.

Vague terms

But investment terms in the gas sector are vague. Companies narrowly avoided gas tax hikes last year after a government backtrack. Then, in January, President Hugo Chávez threatened to require PdV to hold majority stakes in gas projects – although officials later said existing gas contracts would remain unchanged.

The law allows privately owned players, such as Chevron and Norway's Statoil, to hold majority stakes in non-associated gas projects after reserves are declared commercial. On paper, up to 90% of the gas can be designated for export. However, Venezuela has threatened to change the ground rules. Officials have said no gas can be exported until domestic demand is satisfied. Complicating matters, Chávez says the planned Great Southern Pipeline will take priority over other export projects.

Companies with gas interests fear production will not be available for export under a free-market scheme and that they will be forced to sell to the domestic market, which has some of the world's lowest fuels prices. PdV hopes to develop around 13 trillion cf of reserves in the Mariscal Sucre offshore area with Petrobras. The Brazilian company wants guarantees that some production will be exported, preferably to Brazil, but PdV says output may all be sold locally.

PdV moving in

In 2003, Chevron, with ConocoPhillips, and Statoil, with Total, were awarded operating stakes in natural gas exploration acreage in the eastern-offshore Plataforma Deltana, aiming to set up liquefied natural gas (LNG) export terminals. The companies have found significant gas reserves – Ramirez claims the ventures discovered around 7 trillion cf each, although the project companies have not confirmed this – but PdV has said it wants a controlling stake in the country's first LNG project.

What is unclear is how much control Chávez and PdV will eventually allow the majors to have over gas exports, or the reserves themselves. With so many mixed messages, it is no surprise that Venezuela failed to sell any new gas concessions last year.


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