Out with the old ...
Venezuela's national oil company, PdV, needs investment partners for its ambitious projects in the country's Orinoco heavy-oil belt. China's state-owned CNPC may be among them, writes Robert Cauclanis
ANXIOUS to reverse declining crude-oil output, Venezuela is offering its first new oil exploration and production (E&P) concessions in a decade – and the first of President Hugo Chávez' era. But having watched the government increase state control over other assets, few private-sector firms are likely to consider the large investments required. Chávez may have more luck with state-controlled companies.
The grand plan is for Venezuela to boost total crude output to 5.8m barrels a day (b/d) by 2012. The government claims production is 3.3m b/d, but estimates by independent analysts and private-sector oil executives are significantly lower – mostly around 2.4m b/d (see Figure 1). El Universal, an anti-Chávez newspaper, recently said output had dropped by 400,000 b/d over the last year, citing unnamed industry sources. And even Opec marks Venezuela down for production of just 2.5m b/d.
The government expects a significant part of incremental oil output to come from heavy-oil resources in the Orinoco basin. State-owned PdV's target is to add up to 1.4m b/d of production from the region. At present, output ranges between 0.5m b/d and 0.6m b/d from the four projects combined, all controlled by PdV.
In January, the energy ministry said it will award an E&P concession at the Carabobo-1 block, in the Orinoco basin, over the next few months. Rafael Ramírez, the energy minister, claims Carabobo-1 holds 45bn barrels of extra-heavy crude. And further opportunities will be presented to potential investors as PdV attempts to develop 235bn barrels of unconventional Orinoco oil.
Technological expertise will be needed if PdV is to achieve its target of doubling field-recovery rates – at present, the Orinoco projects built in the 1990s tap only around 10% of oil in place. But Venezuela's upstream industry has never recovered from the oil strike that began in 2002, which prompted Chávez to sack 18,000 workers in 2003 – including thousands of its most qualified technicians.
Perhaps more importantly, the proposed Orinoco basin projects will require considerable financial investments. Chávez expects PdV to spend around $57bn on upstream development in the area, with partners contributing an additional $20bn. However, the government has been channelling increasing amounts of PdV's earnings for spending outside the oil and gas sector. In 2006, PdV contributed $13.8bn – 14% of its revenues of nearly $100bn – to social-development programmes. Despite a 20% rise in revenues in 2006, the last year for which it reported earnings, PdV's net income fell by 15%, to $5.4bn, limiting its ability to reinvest in oil output.
'World's largest oil reserves'
Venezuela claims that once its Magna Reserva programme to certify the country's Orinoco deposits is complete, it will lay claim to the world's largest oil reserves (see Figure 2). PdV predicts the country will book over 260bn barrels of oil, or more than 20% of world reserves, perhaps by as early as the turn of the decade.
Under Magna Reserva, PdV has worked with more than a dozen national and international oil companies – from Spain, Argentina, Ecuador, Norway, Russia, Belorussia, China, Cuba, Bolivia, Brazil, Iran, Uruguay and India, among others – to certify the Orinoco reserves. StatoilHydro and Repsol YPF are two of the larger companies that have been involved in the crude-certification process.
Although the government has never formally said that companies taking part in Magna Reserva would earn stakes in the new development and production phase alongside PdV, the hints have been strong, and numerous letters of intent have been drawn up.
Other potential partners include Total, BP and Chevron, all of which hold minority stakes in the existing Orinoco facilities, which they helped construct in the 1990s. Last year, these companies agreed to comply with terms ceding majority stakes to PdV in the Orinoco ventures. However, two other former PdV partners at Orinoco projects, ExxonMobil and ConocoPhillips, exited Venezuela rather than agree to new terms, leaving significant assets behind (see box p13).
|Chávez on the ropes
WHEN Venezuela announces its new partners for its multi-billion-dollar Orinoco projects, do not expect to see ExxonMobil or ConocoPhillips on the list. The US majors were once among the biggest investors in the Orinoco heavy-oil region, but relations with state-owned PdV and the government have turned ugly.
Legislation that went into effect in May 2007 entitled PdV to take majority stakes in the US companies' ventures without guaranteeing compensation. ConocoPhillips abandoned large stakes at the Hamaca project (40%) and Petrozuata (50.1%), which will cost it up to $4.5bn in impairment charges. ExxonMobil left the Cerro Negro project, where the book value of its 42% stake was $0.75bn, but where future cash flow promised much larger returns.
After fruitless negotiations on potential settlements, both companies have sought international arbitration to gain compensation for their abandoned stakes. On 7 February, ExxonMobil said it had won injunctions freezing up to $12bn in PdV's international assets, as collateral against the value of its stake at the 120,000 barrels a day Cerro Negro heavy-oil project.
This is likely to result in a further deterioration in relations between PdV and international oil companies. It may also encourage ConocoPhillips, once the largest investor in the Orinoco region, to a more aggressive pursuit of compensation from PdV for itself. Among the Venezuelan assets affected are shares in refineries in northern Europe and the Caribbean. In a UK court filing, ExxonMobil said it had been concerned that PdV would shift assets to Latin American countries or China so that they could not be seized by an international arbitration commission.
PdV talks about the new Orinoco projects as if they were cash machines. At times last year, upgraded syncrude produced in the Orinoco region and refined for export fetched more than $90 a barrel and PdV claims lifting and upgrading costs may amount to as little as $8/b in future projects – although they are likely to be significantly higher than this. In addition, the operating and investment terms that are likely to be on offer will probably deter most private-sector investors.
The majors do not expect new project terms to change from the legal framework Chávez fought hard to impose on existing Orinoco projects last year: PdV reserves the operating role and must hold a minimum 60% stake – previously, projects could be majority-owned by outsiders; during the 1990s, oil royalties were as low as 1%, but have been raised to 30%; and income tax, previously 34%, is now 50%.
"Everybody and their mum has been invited to certify the reserves," said Pietro Pitts, director of Caracas-based LatinPetroleum.com, a regional energy consultancy. "But the majors have been spooked here and nobody is committed yet to a partnership" with PdV.
Until recently, Petrobras coveted a role at Carabobo-1, where it helped PdV certify reserves. But, in December, the Brazilian state-controlled oil company said it would probably opt for a stake of up to 10% at Carabobo. PdV had offered 40%. According to sources at Petrobras, a planned venture at Carabobo to upgrade around 200,000 b/d of heavy crude was likely to cost up to $12bn.
... In with the new
China's CNPC seems more likely to become a significant investment partner. CNPC and PdV, which have conducted a joint survey of the Orinoco region's Junin block, say they plan to invest around $10bn to achieve production in the basin of 1m b/d. The proposed investment is far below the field-development costs projected by Petrobras. Nevertheless, if the Chinese company were to proceed, it would initially invest $4bn-6bn, which would make Venezuela the biggest recipient of CNPC funding, says PdV.
Chávez has, in turn, said Venezuela will triple the amount of oil it supplies to China to 1m b/d by 2011. The joint investment programme may also include new heavy-crude refineries in Asia. It is hard to ascertain whether increasing oil exports to China has necessitated a fall in oil flows to its biggest customer, the US, but there has been a general decline in exports to the country's main customer since 2004. The US government's Energy Information Administration recently estimated daily shipments were around 1.35m b/d in 2007, compared with 1.56m b/d three years earlier.
Venezuela has already signed contracts with China for the supply of at least 13 new – and desperately needed – drilling rigs. PdV has been trying to set up its own services unit to "compete", as Chávez put it, with large oilfield-service companies. However, the services side of Venezuela's oil industry seems relatively stable. According to Pitts, "there hasn't been a pull-back from Venezuela by service companies and they are unlikely to leave unless there is a real threat" to their assets.
|Growing gap for products
CRUDE oil production shortfalls are not Pemex's only problem. Under-investment in refineries has left the country with a large products shortage. Towards the end of last year, Mexico was importing more than 380,000 barrels a day (b/d) of gasoline – about half of the country's demand – and its plans to expand or build refineries capable of processing its heavy crude were moving slowly at best.
Last year, Pemex announced plans to spend up to $21bn to boost its crude-processing capacity to 1.8m b/d by 2016, from 1.3m b/d. This includes a $2.5bn expansion of the Minatitlan refinery, in southeastern Veracuz State, where capacity is set to rise by 100,000 b/d to 250,000 b/d.
However, cost overruns and a tight market for steel and other construction materials mean the project, originally scheduled for completion this year, will be delayed until 2009, according to industry sources.
A proposed greenfield refinery – the biggest under consideration – is a 300,000 b/d heavy-oil unit with a start-up date of 2015, but preliminary estimates show it will need $8.8bn of investment. Indeed, funding is likely to remain central to all of Pemex's concerns: the company's debt amounts to $55bn.