Venezuela PdVSA Says Orinoco Takeover Won't Hurt Output

CARACAS Mar 27, 2007 (Dow Jones Newswires)

Venezuela does not anticipate any production problems at four heavy oil projects when the state firm takes over operations on May 1, said a director at Petroleos de Venezuela S.A.

Industry watchers and union officials have warned that the ongoing oil nationalization could leave the country long on equity control but short on talent, especially given contentious salary issues. Day-to-day operations will be at risk of accidents and declining output, they add.

Production suffered last year at 32 conventional oil fields that PdVSA took control of during a similar contract overhaul with private operators.

PdVSA has suffered from a gradual decline in production in recent years amid insufficient investment in exploration and production, contributing to a tight balance between global oil supply and demand.

But Eulogio Del Pino, a PdVSA director in charge of the negotiations with private firms, ruled out any output problems at the four projects that convert extra-heavy tar oil into commercial grades of synthetic crude at multi-billion-dollar upgrading plants.

Del Pino said the projects currently have a spare capacity of over 100,000 barrels a day due to Organization of Petroleum Exporting Countries-related oil production cuts, which Venezuela has levied on the Orinoco projects.

"From one day to the next, we can increase production at the Orinoco by 120,000 barrels a day," said Del Pino, speaking to reporters at an event late Monday.

PdVSA currently has an average equity stake of 40% in the four projects, and has vowed to take at least 60% stakes by mid-2007. Before completing the contract overhaul, PdVSA will take over daily operations by May 1. The company has set up transition teams with its partners, six western oil majors, to guarantee a smooth transfer of operations.

"We've had a lot of collaboration from all the companies," said Del Pino.

He said Exxon Mobil Corp. (XOM), the most outspoken critic of the contract change, "has done an excellent job of working with PdVSA."

Earlier this month Exxon chief executive Rex Tillerson said the company would leave its Cerro Negro project if the new terms are unfavorable.

Del Pino said each company will make its own decision to stay or go, and added that PdVSA has presented its partners with estimates of how much their stakes are worth.

"Everyone is studying" the proposals, said Del Pino.

Apart from Exxon, Conoco Phillips (COP), Chevron Corp. (CVX), BP Plc. (BP), Statoil (STO) and Total (TOT) have equity stakes in the Orinoco, the richest hydrocarbons deposit on the planet. These firms must either accept lower profits and a loss of operational control, or walk away from the oil reserves.

PdVSA has said it will absorb the 4,000 staffers at these ventures, but union leaders say many of the chemical engineers and processing managers are unwilling to take the lower salaries PdVSA is offering.

This puts PdVSA in a tight spot. It will either have to offer Orinoco workers a higher pay scale than other executives with the same seniority, or try to keep output going with reduced expertise.

"Workers are upset over the salary reduction," said Dulys Jose Morillo, a representative for the Sintracene union at Exxon's Cerro Negro.

Morillo said many refinery workers at the Jose complex are looking to relocate rather than accept a pay cut. The four refineries are Venezuela's newest, and the projects hired staff from other domestic refineries over the past eight years.

"It's a blow economically. A lot of workers will not stay, but go back to their regions where they have houses," said Morillo.

Puerto la Cruz, the closest city to the Jose complex along the Caribbean coast, has some of the highest rents in Venezuela outside the capital of Caracas, making it tough for these executives to adjust to a lower paycheck.

Morilo said PdVSA is compensating the salary cut with other benefits, such as housing loans, but doubts it will be enough to keep all the staffers in place.

One foreign oil executive said some Orinoco staffers have already begun networking for new jobs. Oil workers are in high demand the world over as both international and state-owned oil companies struggle to increase output amid rising oil demand.

Del Pino said PdVSA absorbed 95% of staffers during the 2006 overhaul of the 32 conventional oil field contracts, and expects a similar outcome at the Orinoco.

In any event, output has fallen an estimated 60,000 barrels a day to 440,000 at the 32 fields as the companies affected by PdVSA's takeover halted new investments. In its March Oil Market report, the International Energy Agency said there is a similar "moratorium" on new investment in the Orinoco until the revamped corporate structure of the heavy-oil projects is finalized.

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