Exploration Venezuela's E&D round mostly successful

• Results of Venezuela's E&D Profit Sharing Round[34888 bytes]
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Venezuela's first profit sharing exploration and development licensing round has yielded generally positive results.

Although two of the 10 blocks up for bid received no bids, some of the remaining blocks received hefty ones. State owned Petroleos de Venezuela (Pdvsa) netted about $245 million in tiebreaker bonuses in the round, in addition to about $15 million from the sale of data packages to prospective bidders.

The 10 blocks, covering 4.5 million acres, are believed to contain potential oil reserves of at least 7 billion bbl of medium and light grade crude in addition to substantial potential volumes of natural gas (see map, OGJ, Sept. 18, 1995, p. 85). Preliminary estimates of potential oil reserves for the combined blocks ran as high as 23 billion bbl of light and medium gravity crude.

The tender marks the return of foreign companies to full equity participation in oil and gas E&D, a sector that Venezuela nationalized 20 years ago. It is expected to generate as much as $12 billion in added investment in Venezuela's upstream sector the next 10-15 years (OGJ, Jan. 15, p. 24).

The tender was marred by litigation stemming from concerns over clauses in proposed profit sharing contracts.

The push to expand foreign investment in Venezuela's upstream oil sector underlies the government's goal of doubling oil revenues in 7 years from the current $6 billion/year.

To meet that goal, Caracas is counting on investment by Pdvsa and private companies, especially foreign firms, to help jump productive capacity to 5.7 million b/d from today's 3.15 million b/d.

Venezuela currently claims to produce about 2.4 million b/d, close to its Organization of Petroleum Exporting Countries' quota of 2.359 million b/d. However, other sources have placed Venezuela's output considerably higher than that, exceeding quota by more than 300,000 b/d.

How the bidding went

Pdvsa voiced satisfaction with results of the E&P profit sharing license round. More than 75 companies prequalified for the bidding.

"We are very pleased with the results," said Pdvsa Pres. Luis Giusti. "The most important thing is that the massive attendance of large, medium, and small companies has ratified investor confidence in the country's petroleum industry."

Beyond concerns over tax and currency issues, international oil and gas executives praised Pdvsa for a smoothly run tender.

"In some cases, we declined to submit bids simply because the risks in those areas were far too high or because we just did not have sufficient geological data to make a final decision," said one executive whose company failed to obtain a contract. "This by no means points to a lack of interest in Venezuela, which remains an attractive oil country."

Pdvsa estimates $1 billion will be spent in the first 3 year exploration period for the profit sharing blocks and another $10 billion the following 7 years. The contracts call for outlays of at least $40-60 million/block.

In the event of a commercial discovery, license terms call for a Pdvsa affiliate to have an option to purchase a working interest by paying a pro rata share of costs incurred to date.

Pdvsa is expected to hand over the signed contracts early this month to the Energy & Mines Ministry, which in turn will send the documents to the cabinet of ministers, then to Venezuela's congress for final approval.

Exploration generally is expected to get under way in first quarter 1997.

Amoco blocks

Attracting the most interest in the bidding was the Guarapiche block in eastern Venezuela, which is believed to hold as much as 1 billion bbl of medium and light gravity crude.

A combine of Amoco Corp., British Petroleum Co. plc, and YPF SA unit Maxus Energy Corp. won the block based on a 50% pretax profit sharing bonus (PEG) plus a tiebreaker bonus of almost $109 million.

Amoco bid solo to win the Punta Pescador block in eastern Venezuela, just east of the Guarapiche block in which the company is a partner. Amoco offered a 50% PEG and a tiebreaker bonus of $10.7 million.

That topped a bid of 50% PEG and tiebreaker bonus of $5.6 million by a combine of France's Total and Norway's Den norske stats oljeselskap AS.

Amoco plans to spend at least $40 million to explore its Punta Pescador block. The block lies just south of gas fields Amoco is developing off Trinidad.

Ronald Pantin, Pdvsa strategic planning coordinator, expressed surprise that Amoco and the Total/Statoil combine each offered a 50% PEG. He noted industry sees only one major oil play in the area but added that a major natural gas strike is highly prospective there.

In addition, the swampy region poses logistical challenges.

La Ceiba block

A close second to the Guarapiche bid was the winning offer for the La Ceiba block along the southeast edge of Lake Maracaibo, thought to hold 790 million bbl of oil reserves.

Here, a Mobil Corp. led group that includes Germany's Veba Oil AG and Japan's Nippon Oil Exploration U.S.A. Ltd. made a winning bid of 50% PEG and tiebreaker bonus of almost $104 million.

Mobil and partners snared the 1, 793 sq km La Ceiba block on the eastern shore of Lake Maracaibo on the first day of bidding, Jan. 22 (OGJ, Jan. 29, Newsletter). Interests in the block are Mobil 50%, Veba 30%, and Nippon 20%. Their winning tiebreaker bonus bid topped bids by nine other groups that matched the 50% PEG bonus.

Closest to the winning bid was Exxon/Shell, which offered a 50% PEG bonus plus a $57.5 million tiebreaker bonus. Others bidding for La Ceiba were Amoco, Texaco Inc./Mitsubishi Corp./Maxus, Elf Aquitaine/Conoco Inc., Agip SpA/Norsk Hydro, Total/ Statoil/Petronas Carigali, Marathon Oil Co./Lasmo plc, Petroleos Brasil- eiro SA/Benton Overseas Petroleum & Investment Co., Unocal Corp./Japan Petroleum Exploration Co. Ltd., and Repsol SA/Enterprise plc.

Work commitment for the La Ceiba block in the first 5 year phase of exploration is about $50 million. The minimum work commitment calls for drilling of three wildcats. Plans call for seismic surveys to get under way this year.

Ronald Wilson, president of Mobil Latin America business development ventures, noting Mobil is familiar with the La Ceiba area, said, "We expect to find large accumulations."

Mobil first operated in Venezuela in 1934 and, with the country's new efforts to attract foreign investment, seeks to expand its presence.

Mobil is currently negotiating a $1.8 billion strategic association with Pdvsa subsidiary Lagoven SA to produce and upgrade 100,000 b/d of extra heavy crude from the Orinoco oil belt. In addition, Mobil recently returned to lubricant manufacturing and marketing in Venezuela last year, when it purchased 50% of local company CA Nacional de Gases & Lubricantes, the country's biggest lube plant.

Veba also has a long association with Pdvsa, dating to 1978 when it entered into a government backed accord between Germany and Venezuela for technical cooperation in the energy sector. In 1983, Veba and Pdvsa formed a joint venture, Ruhr Oel, to operate Germany's biggest refining system with throughput capacity of 440,000 b/d.

Conoco blocks

Conoco bid alone in winning the West Gulf of Paria block in shallow water off Venezuela's northeastern coast in the Caribbean Sea.

Competing against Conoco were the Canadian-South Korean group of Canadian Occidental Petroleum Ltd., Numac Energy Inc., Yukong Ltd., and Korea Petroleum Development Corp.; Agip/Norsk Hydro; and the Canadian-Argentine combine Talisman Energy Inc./Astra Capsa.

Conoco offered a 50% PEG plus a tiebreaker bonus of $21.2 million compared with the runnerup Canadian-South Korean group's bid of $20.2 million.

Terms call for a 4 year, $30 million commitment to drill two wells and acquire seismic data in the western Gulf of Paria between Venezuela and Trinidad. Exploration is to get under way right after the contract is signed.

Conoco combined with Elf Aquitaine 50-50 to take the Guanare block in Portuguesa state in western Venezuela. The block is in the foothills of the Merida Andes.

The work commitment calls for a 5 year, $30 million outlay to drill four wells and acquire seismic data. Work is to get under way immediately after the contract is signed.

Conoco also has a strong presence in Venezuela.

It formed a joint venture, Petrozuata, with Pdvsa unit Maraven SA to produce 1.5 billion bbl of Orinoco extra heavy crude and convert it to synthetic crude, most of which will be processed in Conoco's U.S. refineries. Construction on the $1.4 billion project is to get under way early in 1997.

Conoco also is a partner with Bitumenes Orinoco SA to convert Orinoco bitumen to Orimulsion. Pdvsa's proprietary heavy oil/water/ surfactant emulsion is used as a boiler fuel.

LL&E group block

A group made up of Louisiana Land & Exploration Co. (LL&E), New Orleans, Norcen Energy Resources Ltd., Calgary, and Benton Oil & Gas Co., Carpinteria, Calif., won the Delta Centro block in eastern Venezuela.

Operator LL&E will hold a 35% interest in the block. Norcen will take 35% and Benton 30%.

The Delta Centro block lies in a mostly marshy region of the Orinoco River delta in Northeast Venezuela's Delta Amacuro state.

The group's work commitment calls for acquiring and processing 1,300 line km of seismic data and drilling three wells in 5 years with an option to extend the exploration period 4 years.

Work is to get under away after the contract with Pdvsa is signed.

LL&E Chairman H. Leighton Steward noted the Delta Centro block's marshy terrain is similar to marshlands in Louisiana where LL&E has long operated.

Other bidding

Perez Companc SA took the San Carlos block in Cojedes and Portuguesa states of Southwest Venezuela.

The Argentina company topped a bid by Elf by offering a 40% PEG. Perez Companc currently is involved in reviving oil production in Venezuela under the country's marginal fields participation program.

A combine of Enron Corp. and Inelectra won the East Gulf of Paria block.

Catatumbo block, southwest of Lake Maracaibo, and El Sombrero block, in Central Venezuela, failed to attract bids.

Noteworthy for their absence from the list of winning bidders was a combine of Exxon Corp. and Royal Dutch/Shell Group that was expected to dominate bidding. However, the combine bid conservatively for the La Ceiba and Punta Pescador blocks and came away empty handed.

Some prospective bidders were daunted by the stiff terms Venezuela imposed on the profit sharing deals. They call for income taxes totaling 67.7% and royalties of 16.7% in addition to the PEG and tiebreaking bonuses.

A second try

Pdvsa on Jan. 29 tried again and failed to attract bidders for the Catatumbo and El Sombrero blocks.

Representatives from several private companies said high risks, low prospects for crude oil discoveries, and lack of geological data discouraged interest in those areas.

Juan Szabo, president of Venezuelan Petroleum Corp. (CVP), said, "The lack of interest in some areas is relatively normal because each company chooses those blocks that fit their figures and their particular strategies."

CVP, a once defunct Pdvsa subsidiary, was revived specifically for the bidding process and given the portfolio of blocks to be tendered.

Winning bidders will sign the profit sharing contracts and set up joint ventures (JVs) with CVP. The Pdvsa unit will own as much as 35% of the JV stock, with the remainder held by foreign partners.

Pdvsa is considering putting together another tender for new blocks as part of its apertura, or "oil opening" policy, which includes profit sharing contracts, operating agreements, strategic associations, and alliances. A new round of bidding could occur as early as the end of this year or early next year.

Legal concerns

The tender was held against a backdrop of optimism in government and oil industry circles and concern among many oil executives regarding aspects of the proposed joint venture tax issues and Venezuela's onerous currency control regulations.

Venezuela currently is negotiating an economic restructuring accord with the International Monetary Fund, under which it had agreed to lift currency exchange controls in first quarter 1996.

In addition, a group of intellectuals including Central University of Venezuela Rector Simon Munoz and chamber of deputies (lower house) energy and mines committee Chairman Ali Rodriguez filed two lawsuits in Venezuela's supreme court over the proposed profit sharing contracts. They claimed the proposed clauses allowing international litigation to settle differences and barring municipal authorities from exercising autonomy on tax matters violate the constitution.

Giusti said there are no legal grounds for the lawsuits because under the constitution, municipal authorities have no autonomy to set taxes for the oil industry.

Regarding currency controls, Giusti said regulations currently allow companies to hold offshore dollar accounts and make profit remittances in foreign currency.

However, private oil companies contend issues such as municipal and other taxes and currency controls should be clarified in the contracts.

Government sources said a decree is being written to allow foreign companies operating in Venezuela to choose dollar accounting as the nation's stiff currency control system is put aside.

Copyright 1996 Oil & Gas Journal. All Rights Reserved.