ConocoPhillips' Woes Mount in Venezuela; 'A Difficult Situation'

CARACAS Jan 24, 2007 (Dow Jones Newswires) U.S. oil major ConocoPhillips (COP) is licking its wounds in Venezuela as President Hugo Chavez tightens the noose on two of the firm's showboat projects.

In the 1990s, Conoco invested heavily in Venezuela when a previous, business-friendly administration opened the oil industry to foreigners. The Houston, Texas-based firm took equity stakes in two multi-billion-dollar tar oil projects in the Orinoco river basin - Petrozuata and Hamaca. It also won a so-called "risk-reward" concession to drill for oil in the shallow waters of the Gulf of Paria.

Last year, Chavez, a hard leftist ushering in what he calls "21st Century Socialism," announced he would take control of upstream production of tar oil, and is now also demanding majority control over the expensive refineries needed to turn the sludge into a marketable grade of synthetic crude.

Making matters worse, state-run Petroleos de Venezuela (PVZ.YY) has decided to levy the country's 195,000 barrel a day share of an Organization of Petroleum Exporting Countries production cut on tar oil output.

On Wednesday, Conoco admitted that this move, combined with other OPEC-related production cuts in Libya, could reduce the company's output by 30,000 barrels of oil equivalent a day in the first quarter.

"OPEC production quota restrictions impacting Venezuela and Libya are expected to reduce first-quarter production," said Conoco Chief Executive Jim Mulva in an 8-K filing to the U.S. Securities Exchange Commission, or SEC. On Wednesday, Conoco reported a 13% fall in fourth-quarter net profit of $3.2 billion, resulting from tighter refining and marketing margins and a revenue drop of 19% to $41.5 billion.

Of the six oil majors involved in the four Orinoco projects, Conoco is the most exposed. It has a 51.1% interest in Petrozuata and a 30% stake in Hamaca, representing around 110,000 barrels a day of capacity for the company.

The investment community is taking notice. Fitch Ratings downgraded Venezuela's four extra-heavy oil projects on Tuesday, citing the government order to reduce output in line with the OPEC cut. The agency downgraded the debt obligations on each of the four projects to 'CCC' from 'B+'.

While Conoco has more to lose than other oil majors, such as Exxon Mobil Corp. (XOM) and Total (TOT), which produce less Orinoco crude, Venezuela still only represents a small part of a company that pumped 2.05 million barrels of oil-equivalent a day last year.

"This is just a bump in the road for them," said William Edwards, a Houston-based energy consultant.

But Mulva is not taking Venezuela's moves lightly. In a Wednesday conference call, Mulva described Venezuela as a "difficult situation".

Conoco has suffered repeated delays at Corocoro in the Gulf of Paria, underscoring the Chavez's administration's seeming indifference in getting new oil to market.

The oil major hoped to be pumping 55,000 b/d by late 2005 after declaring the field commercial back in 2002. But in 2004 PdVSA hit the project with a major delay by forcing Conoco to buy a locally-built drilling platform.

Conoco finally began a 14-well drilling program last June, and PdVSA officials said commercial production would begin early this year.

Then, in November PdVSA President Rafael Ramirez announced yet another setback: the project's partners must give PdVSA a majority stake before commercial operations begin.

Regardless, in a Dec. 7 statement Conoco described Corocoro as its "primary focus" of South American oil exploration and production activities for 2007. The field contains and estimated 500 million barrels of recoverable oil.

Wednesday afternoon, Conoco's share price was up 1.1% at $65.69.

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