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Venezuela sanctions offshore gas project

Venezuela's urgent need to exploit its gas resources seems to be outweighing President Hugo Chávez's dislike of Western firms

The government has given Chevron approval to proceed with what would be the country's first offshore gas production. Last month, the government said exploration in the Plataforma Deltana project in the Orinoco delta by Chevron and state-owned PdV's gas subsidiary had found enough gas to warrant a production programme. The firms, which signed an exploration agreement in 2003, are expected to start production from Block 2 in 2013, according to the country's Official Gazette. The project covers fields with proved gas reserves of around 7 trillion cubic feet (cf).

This follows a lengthy hiatus since the exploration programme on Block 2 was completed in 2007. PdV did not want to proceed with production then, as the government wanted the state to be the majority shareholder in any new projects. At that point, Block 2 was split three ways between PdV, Chevron and ConocoPhillips. But PdV's purchase of ConocoPhillips' stake in late 2009 means the state now has 61% and Chevron 39%.

Venezuela is keen to keep tight control of its gas reserves, which it hopes to liquefy and export to raise badly needed revenues. But the decision to push ahead with Block 2 is not just about control of the project or generating tax and royalty income. The government hopes it will help alleviate power shortages, which have resulted in widespread power cuts and affected petrochemicals production. Hydro-electric output has been significantly reduced by a drought, while gas imports from neighbouring Colombia have been jeopardised by frosty relations between the countries. This has forced many consumers to resort to using expensive diesel generators.

The attractions of developing power stations fuelled by much cheaper domestic gas supply are hard for the government to ignore. Venezuela's mining minister, Rodolfo Sanz, has said the country will buy two gas-fired power plants from GE for around $0.6bn to reduce electricity shortages. The plants will add a combined 880 megawatts to generating capacity.

A marriage of convenience

The latest phase in Venezuela's rapprochement with foreign energy firms follows the country's first oilfield-development agreements with foreign firms in more than 10 years, announced in February. A Chevron-led group and one including Repsol, Petronas and India's ONGC, were awarded a block each in the Carabobo heavy-oil field in the Orinoco belt.

However, these latest marriages of convenience between Venezuela and Western energy firms do not necessarily signal a return to the more benign pre-Chávez investment framework. While Chevron is reaping the dividends from its strategy of accommodating the more stringent demands of the present government, ExxonMobil, ConocoPhillips and others that left the country when they faced expropriation of assets, are unlikely to return in a hurry.

Chevron's Plataforma Deltana venture has yet to be finalised and could yet hit obstacles before being realised, analysts note. Meanwhile, efforts to attract investment and expertise to another offshore gas project, Mariscal Sucre, failed in January, after a group of foreign firms invited to participate found the conditions on offer insufficiently attractive. Venezuela is now believed to be trying to resurrect Mariscal Sucre, which is based on total reserves estimated at 14.7 trillion cf. Mariscal Sucre is envisaged as a liquefied natural gas (LNG) export project, but the gas could also be used domestically.

Despite the potential pratfalls, the sheer size of Venezuela's gas reserves, combined with a rosy long-term outlook for the global LNG market, may mean differences can be overcome. In the latest boost to the sector, 50:50 exploration partners Repsol and Eni have increased their reserves estimate for the Perla field of the Cardon 4 Block by 30% from the figure announced in 2009, after a recent discovery, raising it to around 10bn cf.

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