Oil Majors at Crossroads in Venezuela's Tar Oil Patch

Dow Jones Newswires

CARACAS, Nov 9, 2006 (Dow Jones Newswires)

Six hundred former employees from the likes of Royal Dutch Shell PLC (RDSB.LN) and Repsol YPF SA (REP) were chanting pro-government slogans on Tuesday, offering a preview of what the corporate atmosphere at four multi-billion-dollar Venezuelan tar oil projects will look like in a year's time.

Six western oil majors must forfeit operational control or face the wrath of an administration steeped in oil nationalism at the peak of a domestic electoral cycle.

On Tuesday, the workers picked up identification cards from their new boss, Petroleos de Venezuela S.A. (PVZ.YY) President Rafael Ramirez, who has spearheaded a nationalist drive to convert 32 privately-run oil fields into state-dominated joint ventures.

With that process nearly completed, PdVSA is now pressuring its six partners in the Orinoco belt, the world's largest oil deposit, to ink similar contract overhauls that would put day-to-day operations under the control of PdVSA, one of the country's most politicized public institutions.

The new staffers sported red tee-shirts on Tuesday, an unmistakable sign of support for President Hugo Chavez's political movement, and defended Ramirez amid claims he is coercing employees to vote for Chavez in a Dec. 3 presidential election.

Exxon Mobil Corp. (XOM), ConocoPhillips (COP), Chevron Corp. (CVX), Total (TOT), Statoil (STO), and BP Plc. (BP) must decide either to adhere to Venezuela's "revolutionary" energy policy terms or to walk away from projects that took years and nearly $20 billion to develop.

Ramirez insists these firms must sign initial agreements by year-end that bring the projects into line with legislation passed by pro-Chavez lawmakers in 2001. That would give PdVSA at least a 51% stake in upstream operations.

PdVSA admits that most of the fine print will be hammered out next year before the new contracts are taken to Congress for approval. Chavez supporters control every seat in the single-chamber National Assembly.

The timeline remains foggy, but December marks a point of no return if history serves as a guide. When PdVSA demanded majority stakes in the 32 conventional oil fields, only Exxon (XOM) refused to sign a preliminary agreement before the end-2005 deadline.

The Irving, Texas-based firm was able to unload its stake to partner Repsol, and watch the grueling contract talks unfold from a safe distance.

According to industry sources, Total (TOT) and ENI (E) regret not following Exxon's lead. They both signed memorandums of understanding to turn their fields into "mixed companies" last December, but then refused to sign the final agreement this March due to the unfavorable terms - less than a 40% equity stake.

PdVSA promptly seized both their fields and neither company has secured compensation. ENI is considering international arbitration to recover the value of its lost asset, the Dacion field.

With Chavez trumpeting "Full Oil Sovereignty" on the campaign trail as one of his main policy achievements, his government is unlikely to back off on the Orinoco.

Surprises Abound As Deadline Nears

With the deadline closing in, PdVSA has been popping surprises as to what future operations will look like, such as a planned merger between two of the four companies - Petrozuata and Hamaca.

PdVSA and ConocoPhillips are the main investors in both projects, and PdVSA Director Eulogio Del Pino said the contract migration offers a cost-cutting opportunity for the partners. Chevron Corp. (CVX) is the only other stakeholder with 30% of Hamaca.

"There's no reason to have two general managers, two upgrading managers. There's a very large redundancy," he said in comments to reporters last week.

Del Pino pointed out that they have already taken the first step toward integrated operations by naming the same man, Ruben Figuera, as the president of both ventures.

Spokespeople from Chevron and Conoco said negotiations with PdVSA are ongoing, without providing details.

Not all of the surprises are bad news for foreign oil. This week, Ramirez reiterated that he is only demanding a majority stake in the upstream side of the businesses, and could leave private partners in control of the refineries that break down the tar oil into smaller, lighter oil compounds that can be processed at conventional refineries abroad.

Unlike conventional oil, low-quality Orinoco tar oil is essentially manufactured into a more expensive grade of synthetic crude before hitting the export market.

Oil firms teamed up with PdVSA in the 1990s to build integrated oil production and refining operations that produce roughly 500,000 barrels a day. Venezuela recently ordered the Orinoco to cut 138,000 b/d of output to comply with an Organization of Petroleum Exporting Countries' quota reduction.

Amid record oil prices and a domestic policy of resource nationalism, the Hugo Chavez administration has already hiked taxes and royalties on these deals.

The projects, which were developed in the 1990s and cost $17 billion to build, have nearly $4 billion in foreign bonds and bank loans. Del Pino has said PdVSA will compensate the oil majors for their diminished equity stakes by authorizing higher output ceilings for each venture.

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