Two US Companies Reject New Contracts for Extra-Heavy Oil Projects

Four companies operating in the Orinoco heavy oil belt yesterday signed memoranda of understanding (MoUs) with the Venezuelan state oil company PDVSA for the conversion of their existing contracts to mixed companies in which PDVSA has a controlling stake. The companies were Chevron Corp., BP, Total, and Statoil. However, two of the participants in the four strategic associations, U.S.-based ConocoPhillips and ExxonMobil, rejected the new contracts. ConocoPhillips said in a statement that negotiations are continuing over “appropriate compensation for the company's interests”, but that it plans to record a US$4.5-billion impairment in its second-quarter results related to its interest in oil projects in Venezuela. The company said that its net production from the Petrozuata and Hamaca projects during the first-quarter averaged 82,000 barrels per day (b/d).

The Venezuelan state oil company PDVSA on 1 May took over operational control of the extra-heavy oil projects in the Orinoco Basin and gave companies until 25 June to sign up to new contracts or leave the country. The new mixed companies comply with an executive decree signed in February ordering the “nationalisation” of the existing strategic associations for the Sincor, Cerro Negro, Petrozuata, and Ameriven extra-heavy crude projects in the Orinoco Belt (see Venezuela: 27 February 2007: President Signs Decree Nationalising Extra-Heavy Oil Production in Venezuela). They are also in line with the 2001 hydrocarbons law that anticipated PDVSA taking a controlling stake in upstream projects. The new contracts have to be ratified by the National Assembly, but they are likely to pass without difficulty as the chamber is dominated by the government's supporters.

Petro-Canada Also Exits Venezuela

Three other companies that attended the signing ceremony, ENI, Sinopec, and Inelectra, agreed to migrate their risk exploration and production sharing agreements to mixed companies. Other companies that decided not to sign up to the new contracts were PetroCanada, which previously had a 50% stake in La Ceiba, and Taiwan's Opic, which had a 6.5% stake in the Western Paria Gulf and 7.5% in the Eastern Paria Gulf (renamed Posa). The Western Paria Gulf was the block where ConocoPhillips discovered the Corocoro oil field, which had been scheduled to enter production in 2008. However, by not signing new contracts ConocoPhillips has also lost its 32.5% stake in the Corocoro project and 37.5% stake in the Eastern Paria Gulf.

Outlook and Implications

Although the new contracts have still to be approved by the National Assembly, Venezuela is close to completing the re-nationalisation of the oil sector and achieving its stated aim of recovering “full petroleum sovereignty”. During the apertura period of the 1990s Venezuela signed three types of contracts for foreign-company participation in the upstream oil sector: operating contracts for marginal fields; risk exploration and production-sharing contracts between private companies and PDVSA; and strategic associations between PDVSA and private companies for extra-heavy oil projects in the Orinoco Belt. The operating agreements were last year replaced by mixed companies in which PDVSA has a controlling stake and the replacement of the strategic associations and the risk contracts will complete the process. Oil nationalisation has also become a key element of the government's “socialist” platform and is now being extended to other sectors.

That ConocoPhillips and ExxonMobil were the two companies not to agree to new terms for their continued participation in the Orinoco Belt will not come as a big surprise. ConocoPhillips is the company that has invested most in Venezuela's extra-heavy oil sector—participating in two projects—and was the only one not to sign an MoU prior to the 1 May deadline. Meanwhile, ExxonMobil was earlier the only company to object publicly to a royalty hike for the projects announced in October 2004 and opted to sell its stake in the Quimare La Ceiba field to its partner Repsol-YPF, rather than sign a transitory agreement to migrate its operating agreement to a mixed company.

Nonetheless, their loss will still be felt as newcomers to the Orinoco Belt do not have the experience and technical expertise of these companies required for extra-heavy oil production. Their decision to exit the country could also add to concerns about the need for greater investment in order to raise oil production volumes. Under its 2006-12 business plan, PDVSA hopes to increase its total crude production capacity to 5.837 million b/d—with extra-heavy oil production alone rising to 1.237 million b/d by 2012. Although the reduction of its workforce and the loss of skilled personnel in the aftermath of the strike, means that the 5.837 million b/d target was overoptimistic from the start, the Orinoco Belt is regarded as the prime location for any future increases in production.

The Orinoco Belt is regarded as an area with considerable untapped potential and, if Venezuela is to see any significant oil-production increase in the coming years, this is where it would be most to likely come from. PDVSA aims to confirm the potential of this area under the “Magna Reserva” project: a project to quantify and certify the reserves in the Orinoco Basin that Venezuela hopes will allow it to incorporate an additional 235 billion barrels of oil by the end of 2008, on top of the country's 80 billion barrels of proved conventional reserves. If confirmed, the total recoverable reserves figure of 315 billion barrels would allow Venezuela to displace several other countries in the ranking of oil reserves and, if Saudi Arabia does not see its own reserves increase, convert Venezuela into the country with the largest volume of reserves in the world. Confirming the potential of this area will be a fruitless exercise unless Venezuela has the technical and financial capability to develop its extra-heavy reserves.