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Venezuela: Between a rock and a hard place

IT IS NEVER easy choosing between two disagreeable options, but that is what oil majors must do by 26 June. President Hugo Chávez has given the owners of the country's Orinoco Belt extra-heavy-crude projects an ultimatum: cede 60% of the control of projects worth $30bn to state-owned PdV or leave the country – perhaps empty-handed.

On 1 May, PdV assumed control of the four extra-heavy-oil upgraders that produce refinery-ready synthetic crude – projects with production capacity of more than 0.6m barrels a day (b/d) in which ConocoPhillips, ExxonMobil, Total, Chevron, BP and Statoil hold stakes. But Chávez's take-over of the physical assets, with soldiers standing by, was just the mise-en-scène for the main event: board-room talks.

PdV has demanded its stake in projects in the Orinoco Belt extra-heavy-oil patch rise to at least 60%, from an average 40% previously. Last year, Chávez mandated a majority role for PdV in the country's conventional oilfields.

ConocoPhillips, which has majority stakes in two of the four Orinoco projects – which are believed today to be producing a restricted 450,000-0.53m b/d because of Venezuela's Opec commitments – is the most exposed. ConocoPhillips is also the only major player so far to call Chávez's bluff by refusing to sign a memorandum of understanding with PdV signalling its intentions to give up control.

According to Lehman Brothers, ConocoPhillips, at worst, could face a pre-tax Venezuelan write-off of up to $4.5bn. The company has been pumping around 100,000 b/d in the country and holds large reserves there.

The oil minister, Rafael Ramírez, has said the government is ready to compensate "some" players for handing over stakes to PdV. But analysts say PdV is unlikely to part with the $6bn at which their stakes are valued. PdV sources say all options are open for settlements, including payments in oil or asset swaps, with majors perhaps gaining stakes held by PdV in assets overseas.

However, Ramírez has also said PdV "expects to spend nothing" and will simply take control of 100% of the ventures if the majors fail to co-operate. He ruled out any plan for the government to buy or assume around $4bn in debt that the majors have taken on in the Orinoco projects since they began in the 1990s. Meanwhile, in May, Chávez threatened to remove Venezuela from the International Monetary Fun and World Bank, including its International Centre for Settlements of Investment Disputes (ICSID), where arbitration of the Orinoco Belt asset transfers could take place. The ICSID is already analysing a claim brought by Italy's Eni against PdV after its Dación oilfield was seized by the state last year.

There is a great deal at stake in the Orinoco negotiations for the majors. But their outcome may also profoundly affect the country's ability to continue boosting oil production. PdV relies on the technical expertise of foreign companies to tap oil in the Orinoco basin and elsewhere. While booming oil prices helped push GDP growth to 8.8% in the first quarter – registering the country's 14th consecutive quarter of growth – the International Energy Agency estimates oil output has recently fallen to near 2.35m b/d, or around 1m b/d less than PdV claims is being produced. Oil exports fell in the first quarter, according to Central Bank data, and Nigeria surpassed Venezuela as the number four supplier of crude to the US.

The numbers hardly bode well for PdV's goal of reaching 5.8m b/d of production by 2012. If it wants to approach anywhere close to that, analysts say, the country will probably need to enlist the help of the foreign majors it is now alienating.

Also in May, the government threatened to "nationalise" 18 oil rigs operated by foreign oilfield services companies. In reality, PdV owns these rigs, but the government says it is unhappy with the high prices it pays foreign firms to operate them. Picking a fight with rig operators, with demand high worldwide, will not help PdV boost oil production.

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