Venezuela Signs MOUs with Foreign Oil Companies

CARACAS Apr 25, 2007 (Dow Jones Newswires)

Venezuela signed a series of agreements to take operational control of foreign oil projects on Wednesday amid a nationalization drive, but industry majors ConocoPhillips (COP) and ENI (E) didn't appear at the event.

"Today we are signing memorandums of understanding for the transfer of operations," said Petroleos de Venezuela SA President Rafael Ramirez.

Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), Statoil (STO), BP Plc (BP) and Total (TOT) signed agreements to transfer operations to PdVSA. These companies have until June 26 to agree on the final terms of new joint ventures where PdVSA will have at least 60% stakes.

By taking control of day-to-day activities PdVSA is getting a leg up in further contract negotiations. Some observers, however, caution that this plan could backfire if PdVSA finds that it does not have the technical expertise to run the projects alone, and has to turn to its minority partners for help.

If PdVSA runs into operational issues "it will be a horse of a different color," said one Caracas-based oil executive who expects efficiency to decline at the oil projects PdVSA is taking over.

Analysts also caution that Venezuela could scare international oil companies away from future projects with its heavy-handed treatment of private partners.

"The problem has been future investments. Where is the next growth going to come from?" said Roger Tissot, an analyst with PFC Energy, a consultancy.

Venezuela's output has fallen at its conventional oil fields in recent years as revenue has been diverted to state spending. Furthermore, PdVSA is tapping foreign, state-owned companies with less experience and capital than international oil majors for new projects in the Orinoco.

The oil projects that signed over include three ventures that produce and upgrade tar oil in the Orinoco river basin, as well as the La Ceiba conventional oil field run by Exxon.

The Petrozuata extra-heavy oil field and the Corocoro offshore oil field, both run by ConocoPhillips, weren't included. ENI is also a partner in Corocoro.

"ConocoPhillipsPhillips did not participate in today's signing ceremony, however, the company is continuing its discussions with the ministry," said ConocoPhillips spokesman Bill Tanner.

ENI had its Dacion field seized by PdVSA during a similar contract overhaul last year. The case is currently in international arbitration.

Ramirez said PdVSA will continue holding talks with ConocoPhillips, the most exposed of the six oil majors involved in the Orinoco projects with stakes in two of the four ventures.

"We will see how conversations continue," Ramirez told reporters after the signing ceremony, adding that ConocoPhillips is "not managing things well."

Chevron, ConocoPhillips's partner at Hamaca, signed with PdVSA despite ConocoPhillips's absence.

"Every company needs to decide on its own," said Ali Moshiri, Chevron's head of Latin America operations.

Venezuela is taking over day-to-day operations by May 1, but these companies have until the end of June to hammer out the details of what new contracts will look like. PdVSA is demanding at least a 60% stake in all oil projects.

When asked about what kind of a stake Chevron would be left with in Hamaca, Moshiri said, "You know how the process works; that will be the next step."

A spokeswoman for Statoil, which has a 15% stake in the Sincor venture, said "we expect an outcome which is acceptable to both the government and Statoil."

Ramirez said negotiations over how partner companies will be compensated for accepting smaller equity stakes in the projects are in an advanced stage.

"We have a preliminary agreement on compensation with a majority of the projects," said Ramirez.

Venezuela claims it will only compensate for the book value of these projects, not the market value. The difference for the four Orinoco ventures is at around $10 billion.

Moshiri said the most important issue for Chevron in upcoming negotiations is to "protect our value for our shareholders."

The Statoil spokeswoman said the company is still in negotiations on what the new terms and conditions will look like.

On May 1, President Hugo Chavez will travel to the Orinoco oil upgrading plants to celebrate the transfer of operations to PdVSA. Chavez has made the nationalization of what he considers strategic industries one of his political platforms. Apart from oil, Venezuela is also nationalizing private electricity companies and the country's largest phone company.

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

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