Orinoco Heavy Oil Belt
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Venezuela is currently disputing the value of four oil projects that will come under state control on May 1, an issue that could determine if western oil majors remain in the country as minority partners.

Venezuela said it will only recognize the accumulated amount these companies invested in the profitable tar oil ventures, or the book value, instead of the market value for the assets. The difference is more than $10 billion for the total value of the four ventures.

According to figures from the state-owned oil company, Petroleos de Venezuela SA, or PdVSA, total investments in the four projects through 2005 reached $13.9 billion. The company was unable to provide an updated estimate.

The bulk of these investments took place during the construction of upgrading plants in the late 1990s, which turn the tar oil into a synthetic grade of crude that can be sold abroad.

These projects pump and then upgrade extra-heavy oil from the Orinoco river basin, the largest hydrocarbons deposit on the planet.

Oil consulting firm Wood Mackenzie puts the current value of the projects at roughly $25 billion, assuming a conservative long-term Brent oil price of $40 a barrel.

The difference between simply recovering investments and getting a fair price could lead to a showdown in the coming months.

"Negotiations are not going well," said one industry insider in Caracas. "The companies don't just want to get their money back. They invested and they want a return."

PdVSA is taking control of day-to-day operations at the projects on May 1, but the contract negotiations will drag on at least until the end of June.

The companies involved are ConocoPhillips (COP), Chevron Corp. (CVX), Exxon Mobil Corp. (XOM), Total (TOT), Statoil (STO) and BP Plc. (BP).

An executive at one foreign oil firm involved in the talks said PdVSA has new agreements ready to sign with its partners before May 1, but they only deal with technical and operational aspects, not compensation or future equity stakes.

President Hugo Chavez, emboldened by a sustained rally in world oil prices, has shown no mercy for outside oil firms as he puts the state in control of all "strategic" industries in an ongoing nationalization drive.

Last year he compensated oil companies with over $900 million in so-called investment vouchers for accepting minority stakes during a similar contract overhaul. These vouchers can only be used toward new projects in Venezuela.

PdVSA currently has an average 40% stake in the Orinoco ventures, and plans to lift this to a minimum 60% stake.

"The absolute, current value for international oil company assets is around $15 billion," in the Orinoco, said Matthew Shaw, an analyst at Wood Mackenzie who tracks the Orinoco contract changes. If PdVSA lifts its stake to 60%, international oil companies will be left with smaller equity stakes equaling $10 billion to $11 billion in value, Shaw said.

"There is about $4 (billion)-$5 billion of potential value lost, that is the kind of compensation you would expect," he said.

But PdVSA has no plans to recognize such a high figure. Instead, PdVSA President Rafael Ramirez insisted the company will only recognize the book value when handing out compensation. Judging by PdVSA's estimated investment figures, this would work out to $2.8 billion if the company increases its average stake by 20 percentage points.

At this point oil companies aren't even sure how they will be paid. Ramirez has mentioned paying them in crude oil instead of money to ease the blow on PdVSA's cash flow.

"I think this will be a major issue," said Roger Tissot, an analyst with PFC Energy, a consultancy. "As long as people are paid, it is OK, but they have to be paid fairly."

Copyright (c) 2007 Dow Jones & Company, Inc.