Loss of three companies could hurt Venezuelan investment

The withdrawal of ExxonMobil Corp., ConocoPhilips, and Petro-Canada from Venezuela under government pressure to nationalize private industry in that country could potentially limit the development of four heavy-crude projects, which could produce 600,000 b/d from the Orinoco reserve, analysts say.

Jun 29th, 2007

Sam Fletcher
Senior Writer

HOUSTON, June 29 -- The withdrawal of ExxonMobil Corp., ConocoPhilips, and Petro-Canada from Venezuela under government pressure to nationalize private industry in that country could potentially limit the development of four heavy-crude projects, which could produce 600,000 b/d from the Orinoco reserve, analysts say.

ExxonMobil and ConocoPhilips quit their Venezuelan operations when officers of the two companies refused this week to sign a memorandum of understanding that would make them minority partners in multibillion-dollar heavy-oil projects after surrendering controlling ownership to Petroleos de Venezuela SA (PDVSA), the national oil company.

Petro-Canada, Calgary, said it also is pulling out of Venezuela, having rejected new nationalistic terms for oil projects and passed its working interest in an oil discovery to the Venezuelan government. Through its predecessors, Petro-Canada has had assets in Venezuela since 1996.

In western Venezuela, Petro-Canada had a 50% working interest in the ExxonMobil-operated La Ceiba Block on the eastern shores of Lake Maracaibo. The partners submitted a field development plan to PDVSA and the Venezuelan government in December 2005. In March 2006 PDVSA shut down ExxonMobil's 12,000 b/d production from La Ceiba oil field. Petro-Canada said at that time its production had already been shut in. PDVSA gave no reason for its decision to halt the loading of oil from La Ceiba (OGJ Online, Mar. 24, 2006).

Prior to the expropriation of its interests, ConocoPhillips held a 50.1% interest in Petrozuata, a 40% interest in Hamaca, and a 32.5% interest in Corocoro heavy oil projects in Venezuela (OGJ Online, June 27, 2007). The only operation ConocoPhillips retains in Venezuela is a minority interest in development of an offshore natural gas field.

The company said it expects to record a complete impairment of its entire interest in its oil projects in Venezuela of $4.5 billion, before and after tax, in its second-quarter financial results. Although hopeful that the negotiations will be successful, ConocoPhillips has "preserved all legal rights including international arbitration," it said.

Negotiations for compensation settlements for the international companies could last for up to 6 month and must go to international arbitration if no accord is reached. In the process, US companies may seek to attach PDVSA assets in the US, such as refineries of its subsidiary, Citgo Petroleum, pending a final agreement. Venezuela President Hugo Chavez has said he might sell Citgo or cut off oil sales to the US, which gets 14% of its oil imports from Venezuela.

A number of relief options may be available to the companies, said Neil Popovic, an attorney in the law offices of Heller Ehrman, and Alex Lathrop, a member of Heller Ehrman's Insurance Recovery Group. "Among these are political risk insurance (PRI), bilateral investment treaties (BITs) and other analogous bilateral and multilateral treaties, and any investment agreement between the company and the host government. For some companies, recovering under a PRI policy and assigning their direct claims against the host government to their insurer may be preferable to direct arbitration against the host government," they said (OGJ, June 25, 2007, p. 20).

ExxonMobil
In response to Venezuela's demand for a 60% or more stake in the Orinoco basin heavy oil projects by May 1, ExxonMobil announced Mar.1 that it would hand over to PDVSA operations of Cerro Negro-one of the four Orinoco basin oil fields that it operates as part of a JV with BP. ExxonMobil has not yet indicated what other steps it might take. Attempts to reach company representatives June 28 in Houston and at its Irving, Tex., headquarters were unsuccessful.

ExxonMobil was the only major international oil company to challenge Venezuela's 2004 royalty increase on heavy oil production and the only one to sell its interest in a field to avoid having to negotiate a new contract with PDVSA as the operator. In 2006, it ceased investments and postponed drilling in Venezuela.

ExxonMobil sold its 25% interest in Venezuela's Quiamare-La Ceiba field to Repsol YPF SA, which held the remaining 75% interest. The field, located in Anzoategui, produced 15,000 b/d of oil. Repsol YPF agreed to migrate the terms of the field's contract to a joint venture that PDVSA controlled under changes in the country's hydrocarbons law. PDVSA subsequently removed ExxonMobil from a multibillion-dollar petrochemical project, claiming the company was holding up the project launch.

ExxonMobil has no other operations in the country, having earlier sold its 49 branded gas stations in Venezuela.

Other companies' actions
Without investment capital to develop fully its extensive oil and gas reserves, Venezuela in the 1960s entered into service contracts with numerous foreign oil companies to invest in and operate Venezuela's oil fields. During that time, almost 60 foreign companies, many from the US, participated in the Venezuelan oil sector at the government's invitation.

In recent years as rising oil prices spurred the country's rapid economic growth, Venezuela's gross domestic product increased by 17.9% in 2004, 9.3% in 2005, and 10.4% in 2006.

The Venezuelan government then sought a greater share of revenue by forcing renegotiation of contracts and by nationalizing entire companies. In 2005, Venezuela gave foreign oil companies operating conventional oil fields 1 year to convert their service contracts into joint venture agreements under which PDVSA was to be granted the minimum 60% stake. In April 2006, after Total SA and Eni SPA refused to enter into the proposed JV agreements, the Venezuelan government seized the oil fields operated by those two companies. The remaining companies either sold their stakes or acceded to the government's demands.

Chavez set June 26 as the deadline for international oil companies to accept terms for the government to take a majority stake in four heavy-crude upgrading projects valued above $30 billion that produce 600,000 b/d of heavy oil from in the Orinoco reserve. That move is part of Chavez's nationalization drive that includes taking over US companies' assets in telecommunications and electrical power.

Four other international companies—Chevron Corp., Statoil AS, BP PLC, and Total SA—apparently accepted the accord that will keep them in the massive Orinoco projects.

Seeking more investment
Despite the expropriations, the Chavez government hopes to attract more than $21 billion in foreign investment to boost Venezuela's oil production 5.2 million b/d by 2012, up from 2.4 million b/d currently. The fourth-largest producer among the Organization of Petroleum Exporting Countries, Venezuela plans to spend $77 billion over the next 5 years.

However analysts say the nationalization program likely will disrupt those plans. Venezuela's oil production has fallen 25% since Chavez took office in 1999, largely as a result of the layoffs of more than 20,000 experienced PDVSA engineers and executives after they joined a 2002-03 strike to remove Chavez from office.

Contact Sam Fletcher at samf@ogjonline.com.

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