Chevron, Statoil Exposed to Venezuela Push to Control Gas

CARACAS Jan 11, 2007 (Dow Jones Newswires)

In 2003, Statoil (STO) and Chevron Corp. (CXV) took advantage of business-friendly natural gas laws to launch multi-billion-dollar offshore projects in Venezuela's Atlantic waters.

Four years later, President Hugo Chavez is changing the rules, demanding majority control of projects they expected to operate themselves. Venezuela hopes to begin exporting natural gas before the end of the decade, but the contract uncertainty will likely slow the development of existing projects and push new licensing rounds off corporate radar screens.

Industry sources say there were no bidders for four Caribbean gas blocks that Petroleos de Venezuela S.A. (PVZ.YY) was trying to sell last year. The recent announcements will surely increase the chances for another failed auction.

"They had to postpone it, the terms were not attractive," said one industry executive.

With new projects a harder sell, firms will focus on how to proceed with existing deals, and are likely to move more slowly than before. Unlike Total (TOT) and Repsol (REP), which launched more modest gas projects in central Venezuela that supply the domestic market, Chevron and Statoil hoped to export the fuel to the U.S. after building massive liquefied natural gas, or LNG plants. The idea was to sell the gas at market prices, guaranteeing an acceptable return on investment.

Chevron has two exploration blocks in the Plataforma Deltana, a continental shelf off Venezuela's eastern coast. At Block II it has finished an exploration program. At Block Three, where ConocoPhillips (COP) has a minority stake, Chevron plans to carry out additional seismic work this year.

Meantime, Statoil (STO) is punching the second of three exploration wells in the deepest water ever drilled in Venezuela. France's Total (TOT) has a minority stake in the project.

Spokespeople in Caracas from both Chevron and Statoil said they are not commenting on negotiations. Regardless, the Chevron spokeswoman said "we abide by the laws and respect the decisions of the governments in the countries where we operate."

Chevron and Statoil are also negotiating a contract overhaul with Chavez over extra-heavy oil operations along with four other foreign oil majors.

Waiting On Tax Policy

Following Chavez's decision last year to go for majority stakes in all private oil operations, gas executives were not taken by surprise when he extended this policy to natural gas.

"It is something all of us in the industry expected," said a source at a firm with gas operations here.

The remaining question is what will happen to gas taxes. The gas executive said companies are hoping Chavez only modifies the equity structure, leaving tax rates unchanged.

"There need to be incentives to invest in gas," said the source. "The profits are not the same as in the oil business."

Last year, companies escaped a hike in gas taxes. Officials originally said they would hike gas rates, which currently amount to 34% on income and 20% on royalties. The government later dropped the increased levies proposal from a reform to the gas law.

Despite the largest reserves in South America, Venezuela has a domestic natural gas deficit because the oil industry consumes 70% of gas output to power its operations.

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


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