Venezuela Takes Over Two Maersk Rig Contracts

CARACAS, (Dow Jones Newswires), Jul 27, 2007 (Dow Jones Commodities News)

Venezuelan state-owned oil company Petroleos de Venezuela, or PdVSA, has taken over two contracts this month to operate drilling rigs from Danish oil services firm Maersk Oil & Gas.

According to several industry executives and one PdVSA official, Maersk was one of some 14 companies operating in Lake Maracaibo to have rig operating contracts expire.

PdVSA has vowed to take back as many as 26 oil rigs that have been leased to third parties. Overall, the company planned to have a total of 191 oil rigs on hand for this year, but officials have scaled back that goal and now expect to have only 120.

The trend raises concerns that PdVSA, already stretched for qualified staff in all its business divisions, will see output decline even faster as some drilling operations move to state from private hands.

Maersk, a unit of Danish company AP Moller-Maersk AS (MAERSK-B.KO), was not immediately available in Venezuela to comment on operations. The company has around 5% of the domestic oil services market, according to PdVSA.

President Hugo Chavez's administration claims it is breaking with a neo-liberal practice of handing service contracts to outside firms, who then charged inflated rates to manage PdVSA's own equipment. PdVSA also hopes to begin making its own rigs under a joint venture with China National Petroleum Corp., freeing Venezuela from dependence on foreign service companies like Schlumberger Ltd. (SLB), Baker Hughes Inc. (BHI), and Maersk, who provide rigs and services to PdVSA.

The two jack-up rigs operated by Maersk will put PdVSA to the test. They are the largest of all the rigs the company has taken back to date - the rest are smaller workover rigs used to maintain oil wells.

The two jack-ups are deployed in the in Lake Maracaibo's Tomoporo field, Venezuela's most recent large discovery that involves difficult geology.

One industry executive said it often takes a full year to drill one 16,000-foot well in Tomoporo, compared to more easy formations where a dozens of wells can be drilled in a year.

"We'll se if they can do it or not," said the executive, referring to PdVSA's new challenges on Lake Maracaibo.

PdVSA has an uneven record at Tomoporo. In 2003 it had to abandon three wells after a botched campaign that, according to some local industry executives, caused damage to the reservoir. PdVSA executives have denied these reports.

Apart from scrapping rig operating contracts, PdVSA is placing stiffer terms on companies that have their own equipment on the ground here, such as required social spending. The increased cost structure has led to deserted tenders and companies that fail to deliver on their winning bids.

Speaking to Congress last week, PdVSA exploration and production director Luis Vierma described the situation as an operational emergency.

There are growing signs that PdVSA is starting to court oil service firms to keep their equipment in the country as oil production falters. Executives say PdVSA is offering five-year contract renewals.

Indeed, Mario Isea, a lawmaker for the energy and mines commission told Dow Jones Newswires on Thursday that PdVSA may soon have to offer new incentives to attract drilling companies to cover the rig shortage. Isea said PdVSA should also strengthen its agreements to retain the Chinese oil rigs and find ways to manufacture rigs at home.

Plans for domestically produced rigs are years off, and international demand for new equipment and rentals have been strong since oil prices began to boom in 2004.

Despite this environment, PdVSA managed to attract four new rigs in June, according to data from Baker Hughes. But this is unlikely to reverse recent declines in oil production. the country's total fleet of drilling rigs in operation stands at 82, two less than the same period of last year. Baker Hughes only includes drilling rigs, not workover rigs in its database.

Venezuela says it is pumping over 3 million barrels a day in crude, but industry groups such as the International Energy Agency put Venezuelan output closer to 2.4 million barrels a day.

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

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