Venezuela to Set New Conditions for Carabobo Auction

Venezuela Oil Minister, Rafael Ramirez
(Click to Enlarge)

CARACAS (Dow Jones), Oct. 1, 2009

Venezuelan state energy firm Petroleos de Venezuela said after a meeting with top oil companies that it will set new and final conditions on the Carabobo oil drilling auction on Nov. 12.

In a statement late Wednesday, the company also said the auction in which PdVSA will receive oil firms' offers is being pushed back to Jan. 28. The planned bidding has already been delayed several times amid lower global oil prices that have sapped some of the excitement out of Venezuela's first oil licensing round in years.

Most analysts said they expected that PdVSA would sweeten the conditions on Carabobo to ensure the project's success and hopefully ramp up the country's oil production, which has dwindled in recent years.

Venezuela counts on oil sales for 90% of its export income, and lower prices and less production helped lead Venezuela's economy to contract in the second quarter for the first time in five years.

The new Carabobo schedule gives the companies "two months to evaluate the new conditions and organize their consortiums," PdVSA said in the statement.

PdVSA officials said as early as last week that the auction would take place by the end of the year.

Analysts say that lower royalties and taxes may be among the changes to the bidding conditions, as companies have argued the government was asking for too much. All winners of the auction will by law enter into a joint venture with PdVSA in which PdVSA will control 60% and the company or companies the other 40%.

More than a dozen private and state-run oil companies have expressed interest in the bidding, including Britain's BP PLC (BP), Calif.-based Chevron Corp. (CVX), China National Petroleum Corp., Spain's Repsol YPF (REP), France's Total (TOT), Italy's ENI S.p.A.(E).

The government says the seven blocks on auction could produce a total of 1.2 million barrels of crude a day, and will require investments of $30 billion.

Analysts say the geological risks to Carabobo are minimal, as studies have proven the basin has huge and accessible reserves.

A problem, however, is the regulatory risks given that President Hugo Chavez has ushered in nationalizations of many sectors of the economy, including parts of the oil industry, in a push toward what he calls "21st-Century Socialism."

In some cases, Chavez' actions have led to allegedly illegal seizures of private companies' equipment. Some nationalized companies have also complained that the Venezuelan government was paying pennies on the dollar for firms it expropriated, although some firms have reportedly said they were fairly reimbursed.

Notably absent from the list of companies that have expressed interest in the Carabobo bidding is Exxon Mobil Corp. (XOM), which is in a compensation dispute with Venezuela over a nationalized heavy oil venture.

But Chavez doesn't deserve all the blame for the delays to Carabobo. Some say, in fact, that his endurance as Venezuela's leader -- he's been president for a decade and may remain there for at least another decade -- actually suggests the political risks to Carabobo are rather small.

Contracts with foreign companies that Chavez has ripped up or ignored were usually from those signed by previous leaders, not those agreed to by his own administration.

Instead, the delays to the Carabobo bidding may largely be related to the market itself. The oil in the Orinoco region is extra-heavy, tar-like crude, which requires massive investments for upgraders and refineries to convert it into marketable oil products.

These investments pay off handsomely when prices are high and demand for new oil sources is strong. But with the global economy still in the dumps and demand for energy rather low, the market finds it's easier to stick mostly to lighter crude that's cheap to produce and available.

Venezuela reports crude production of 3 million barrels a day, although the International Energy Agency and others says production is closer to 2.2 million barrels a day.  

Copyright (c) 2009 Dow Jones & Company, Inc.

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