As One Venezuela Oil Auction Stalls, Bilateral Deals Blossom
July 30 2009 - 4:03PM
Dow Jones News
Three days, three countries, three bilateral oil deals.
While Venezuela may have been forced this week to postpone an
important oil block auction that's open to U.S. and other foreign
oil companies, that hasn't stopped it from making or reaffirming
direct oil deals with friendly countries - Russia on Monday, Japan
Tuesday and Spain Wednesday.
The agreements, in which Venezuela's oil company Petroleos de
Venezuela, or PdVSA, would drill for heavy and extra-heavy crude
alongside firms from those three nations, make it clear the
cash-strapped state oil firm doesn't want to look desperate as it
fields offers and negotiates contract terms on the highly promising
Carabobo block bidding.
But while Russia, Japan and Spain were clearly excited as they
took a gander at Venezuela's massive oil reserves, it remains to be
seen just how committed those countries are to laying down the
needed cash, given the uncertain future of oil prices.
Furthermore, the projects themselves would come at a huge
expense, as they require turning the tar-like crude in Venezuela's
Orinoco region into lighter oil that's easier to sell.
"These agreements are only memoranda of understanding that do
not oblige [Russia, Japan or Spain] to put down any immediate
money," said Patrick Esteruelas, an analyst with New York-based
Eurasia Group, a political risk consulting firm.
He added that, amid delays in the Carabobo project, where seven
blocks in the Orinoco belt are up for bidding, Venezuela "had no
other option but to advance parallel side agreements with countries
that are diplomatic allies."
The signing of the deals naturally came with all the pomp and
circumstance that usually accompanies occasions involving leftist
President Hugo Chavez. After spending years nationalizing huge
parts of the oil industry in a move toward socialism, and stripping
the assets of U.S. firms and those closely allied with "the
empire," Chavez is now courting other countries with offers of oil
riches.
Top officials and directors of oil companies from Russia, Spain
and Japan all made the long trip to Venezuela this week. Russian
Deputy Premier Igor Sechin donned a socialist-red construction
worker's helmet Monday as he stood in front of oil wells that used
to be operated by Houston-based ConocoPhillips (COP) before they
were nationalized.
"We look forward to more agreements with Venezuela," said
Sechin, speaking to journalists in Spanish.
Meanwhile, foreign oil companies interested in the Carabobo
bidding, which have so far said no to what many say are excessive
demands by PdVSA, are unlikely to be swayed by this week's
bilateral handshakes.
Even if these deals were to be followed through, it could be
years before they start making money for Venezuela and PdVSA.
For example, in the case of PdVSA's agreement with Spain's
Repsol YPF (REP), Venezuelan Oil Minister Rafael Ramirez said the
studies on the Junin 7 block could be finished this year. But then,
in 2010, the two countries would have to formally create a
joint-venture company, and only two years after that could
production begin, he said.
As such, companies like Chevron Corp. (CVX) and Royal Dutch
Shell (RDSB.LN) are likely to hold out a while longer on the
expectations that PdVSA will lower its demands on Carabobo. PdVSA
has been asking for up to $1 billion as an upfront payment, on top
of the $18 billion to $20 billion the companies would have to pay
in overall investment.
Another point of contention is whether arbitration would be
established in the contracts, in case there are any disputes down
the line. PdVSA says agreeing to it would undermine Venezuela's
sovereignty.
Still, oil companies are in the business of chasing reserves,
and Venezuela has plenty, some 99 billion barrels in proven
reserves. That means it's relatively risk-free geologically
speaking, if not politically.
As such, some observers say it might not be too long before
companies interested in the Carabobo project reach a middle ground
with PdVSA.
-By Dan Molinski, Dow Jones Newswires; 58-414-120-5738;
dan.molinski@dowjones.com
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