Technology Left in Venezuela by Exxon, Conoco May Aid Rivals

HOUSTON Oct. 9, 2007 (Dow Jones Newswires)

When Exxon Mobil Corp. (XOM) and ConocoPhillips (COP) pulled out of projects in Venezuela, they left behind more than their rights to produce oil.

The oil giants also abandoned technology and know-how that could fall into the hands of competitors eager to discover how to maximize production of heavy oil. This viscous type of oil is more difficult and expensive to process and refine into such fuels as gasoline than what the industry calls light crude.

But it has become increasingly valuable as rising oil prices make heavy oil more economically viable, and heavy oil now figures prominently in the global race to secure new supplies.

The two Western companies' technical legacy in Venezuela could offer competitors a chance to acquire expertise in drilling sophisticated wells, upgrading crude-oil quality and preventing costly accidents, analysts say. Access to this knowledge could prove to be a boon for national oil companies, which control the world's largest deposits yet depend on technology developed by the publicly traded, integrated energy companies to access the oil in those deposits.

Exxon Mobil and ConocoPhillips decided to abandon their projects in Venezuela's Orinoco Belt in June in the face of pressure from Venezuelan President Hugo Chavez, who demanded that all foreign oil companies in the region agree to less favorable contract terms. Exxon Mobil, which is seeking international arbitration, and ConocoPhillips, which is in compensation talks with Venezuela, declined to comment on their technology or the amount they have invested in it.

Unclear Fate

The fate of any technology left behind is unclear, though any company that draws from it could invite a legal challenge. "Venezuela's expropriation of particular assets from Exxon Mobil, for example, would not extinguish Exxon's rights to the intellectual property expressed in those assets, and someone who used intellectual property in violation of Exxon Mobil's rights would ordinarily be expected to pay compensation," said James Loftis, London-based chairman of the international dispute-resolution practice at law firm Vinson & Elkins LLC.

Venezuela's state-run oil company, Petroleos de Venezuela SA, known as PDVSA (PVZ.YY), has declined to comment on what it will do with the assets and technology left behind. Industry observers believe PDVSA will seek international partners, both to share the expense and technical challenge of developing the Orinoco's heavy oil and to strengthen political ties with other nations as Chavez continues to challenge the U.S.

"It will be very easy for any firm that gets into a partnership with Venezuela to benefit from the best practices both companies left in the Orinoco Belt," said Manuel Trevino, a former PDVSA employee and president of NCT Corporacion Petrolera Latinoamericana, a private company based in Spain that produces oil and gas in Colombia, Mexico and Texas, and offers consulting service to international companies in Venezuela.

"What happens now is that Venezuela will bring in new partners to work on those projects and will share with them all the experience and technology left," said Bob Fryklund, vice president of industry relations at energy consulting firm IHS Inc. in Houston and a former executive at ConocoPhillips.

Venezuela is one of several resource-rich nations that has strengthened its grip over oil and gas reserves as prices have skyrocketed. In many places, government moves are a backlash to agreements reached in years past, when oil prices were low and countries had to offer better terms to draw investment.

Geopolitical Preferences

Heavy oil, which is sticky and has a syrup-like consistency, is harder to produce and process than conventional oil. The world's new crude flows are expected to be predominantly heavy, and some of the biggest reserves are believed to be beneath Venezuela. PDVSA estimates the Orinoco Belt holds over 1.3 trillion barrels of oil, of which 235 billion can be recovered with existing technology.

Exxon Mobil and ConocoPhillips, the first- and third-largest U.S. oil companies by market value, had majority stakes in and operating control of three of the four energy ventures that pumped oil from reservoirs north of the Orinoco River.

PDVSA took over operations of the four projects, which include large heavy-oil wells and sophisticated upgrading facilities.

"Our studies signal that national oil companies from Latin America and China, India, Vietnam, Russia and Iran, as well as international oil companies, may be interested in getting a partnership with PDVSA to operate in the Orinoco," said Francisco Bello, director of the Americas for the IHS and a 20-year veteran of PDVSA. "We think that PDVSA will favor partners based on geopolitical criteria."

Iran's Petropars Ltd., India's Oil & Natural Gas Corp. (500312.BY), Russia's OAO Lukoil (LKOH.RS), China National Petroleum Corp. and Brazil's Petroleo Brasileiro SA (PBR) already have a presence in the Orinoco Belt. Venezuela has granted all of them the right to quantify and certify the oil reserves of seven of the 27 blocks in which the Orinoco belt is divided, but these companies don't yet produce or refine oil.

Petroleo Brasileiro, known as Petrobras, and Lukoil downplayed the role of technology. "We are not coming there as inexperienced learners," said a spokesperson for Lukoil. The other companies couldn't be reached for comment.

Most of the technology Exxon Mobil and ConocoPhillips used in the Orinoco is available on the market if companies are willing to pay a high price. But because PDVSA has operating control of the Orinoco Belt projects, the company could share equipment, infrastructure and information left behind, analysts said.

One of the most valuable pieces of expensive technology used in the Orinoco Belt is ConocoPhillips' delayed coking process, which converts viscous oil into lighter crude. Once the heavy oil is extracted, it is processed in a delayed coker, a chemical plant that uses high temperature and intense pressure to break down or combine molecules of the hydrocarbon, transforming the heavy oil into a solid residue that can be refined into fuel. ConocoPhillips installed the process in its upgrading facility in Venezuela's north.

Extensive use of multilateral, horizontal wells built by Exxon Mobil and ConocoPhillips has also been important in making Orinoco oil economically feasible. This type of well has several horizontal branches that extend from a single vertical shaft.

Although this type of drilling is used in other heavy-oil fields worldwide and is offered by several oil-service companies, the Orinoco Belt is the only region where multilateral wells have been drilled by the hundreds, said Fryklund of IHS. The effective and efficient way to manage and operate such complex infrastructure in a safe manner could be valuable, analysts say.

In the Orinoco Belt, "everything came together to transform in a few years what was considered a marginal resource into lucrative business," said Mariano Gurfinkel, project manager at the Bureau of Economic Geology at the University of Texas at Austin and former researcher at PDVSA. "Having access to the Orinoco Belt fields can be a great learning experience for anyone."

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

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