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Junin-6 shake-up on cards with Surgutneftegaz exit

The Russian consortium developing the Junin-6 Orinoco belt heavy-oil project in Venezuela is set for a shake-up after Surgutneftegaz’s board voted on 6 November to exit the project

The decision comes just weeks after the re-election of president Hugo Chávez and highlights concerns over the politicisation of oil deals in Venezuela and the profitability of heavy-oil projects under Venezuela’s harsh fiscal regime.

Surgutneftegaz, Rosneft, Gazprom Neft, Lukoil and TNK-BP, each own a 20% stake in the National Oil Consortium, which owns a 40% stake in the Junin-6 project. Venezuela’s state-run PdV owns the remaining 60% interest and operates the project, which announced the start of small-scale production in September.

Surgutneftegaz has long been rumoured to be seeking an exit from the project, mostly because of concerns over its profitability. The Orinoco heavy oil projects hold tens of billions of barrels of oil, but require expensive upgrading and transport infrastructure investments that make them some of the most expensive projects in the world. On top of that, the Chávez government has put in place one of the harshest fiscal regimes in the world, including steep windfall and other taxes, which make the economics of those projects questionable without tax breaks.

Nevertheless, Rosneft, which under the leadership of chief executive Igor Sechin has deepened its ties with the Chávez government and PdV, appears eager to pick up Surgutneftegaz’s stake. During a visit to Venezuela to mark the start of production at Junin-6, Sechin told reporters that his company was interested in increasing its stake in the project, calling Junin-6 “very good business”.

As well as Surgutneftegaz’s stake in Junin-6, Rosneft is likely to inherit TNK-BP’s interest in the project as part of its $54 billion takeover bid for the company. If Rosneft follows through on both deals it would give them a 60% stake in the consortium, in which it already plays a leading role.

That could roil the remaining partners. Lukoil’s president, Vagit Alekperov, said in October that he favoured equal participation among the partners. Rosneft increasing its stake to 60% within the consortium could relegate Lukoil and Gazprom Neft to junior partners with little say over how billions of dollars in capital expenditures will be spent on the complex project.

“If there is a situation which will not allow us to actively work within the consortium, we will consider options of withdrawal from it, if things reach this point. Today, we are not at that point,” Alekperov said recently.

Such an ownership structure could also complicate funding for the project. As Chávez has drawn on PdV’s cash flow to fund government programmes, the company has seen its debt soar and has struggled to finance its share of the Orinoco belt heavy oil projects. It has also had difficulties maintaining investment in mature fields and the country’s extensive oil and gas infrastructure.

For its part, Rosneft is also facing calls on its coffers, and will have to borrow around $35 billion to finance its purchase of TNK-BP.

Gazprom Neft has said that total development costs for the project are estimated to be around $25 billion, though that figure could end up higher as the project progresses.

Junin-6 is estimated to hold 10.96 billion barrels of recoverable reserves, though that assumes what many consider to be an optimistic 20% recovery rate of in place reserves of 52.6 billion barrels. Although the project partners agreed to start early production in September, which could reach as much as 50,000 barrels a day (b/d) in mid-2013, a final investment decision (FID) has yet to be taken on the project. If the partners do take a FID they will go ahead with construction of the PetroMiranda upgrader in the Orinoco belt, expected to take about five years to complete, that would allow production to ramp up to peak production of 450,000 b/d.

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