Big Oil in Orinoco Patch

Some words on this before I turn it over to the sponsors. When you read these stories always be thinking of the present situation. Saudi through OPEC is telling Angola it shouldn't count on more than about 2.0 mbpd - probably in line with what would be equitable given reserve/production standards of OPEC. Meanwhile Venezuela is in a constant running war of words with the US. A farce. We are their biggest customer. Citgo. They are trying to get the Orinoco "certified." They need this to be able to pump more oil. Without certification of these as reserves(effectively putting them on Saudi turf), Saudi would never let them exceed 3.0 mbpd. At the same time we have some saying Saudi is on an 8% downslope. So what is going on. Does any one player know all the cards that all the other players hold?

With all the talk in the oil world, you would think this situation would get more attention. If one can believe the numbers, the Orinoco produces at least 500,000 barrels per day of what would be termed Syncrude in Canada. We have allread about Alberta. With all the fanfare, it produces about 1.2, maybe 1.4 mbpd. So Venezuela is not doing badly. The fact that Big Oil is sitting down to talk rather than simply walking is hugely significant. I would walk if I was an American company. I would go elsewhere. Let Statoil and Total deal with it. Let the Chinese in. Hugo Chavez will be dead one day. If Big Oil is going to make concessions to nationalization somewhere, it should be Mexico. Mexico is a friend of the United States. Ignore Chavez and Correa. It isn't worth it.

This lies in the fact that Chavez simply can't put production online fast enough in his lifetime as a political candidate to make a difference in his own personal power equation. The Saudis stand in the way of this. Unless, of course, the Saudis are in terminal decline. Hmm.

Big Oil Faces Tough Talks on Their Stakes in Orinoco Patch
by Peter Millard

Mar 15, 2007

Six western oil majors are sitting down with Hugo Chavez's government to plot the future of the world's largest hydrocarbons basin. But they face a stark choice: Play a supporting, not leading role, and accept less profit from operations involving Venezuela's massive tar oil reserves, or take a hike.

On Wednesday, France's Total (TOT) and Norway's Statoil (STO) set up a "transition team" to hand day-to-day operations at the Sincor project over to the state oil company, and meet a June 26 deadline to draft a new corporate structure. Partners in the other three heavy oil ventures have set up similar technical and negotiating teams over the past month.

Venezuela has come to epitomize resurgent oil nationalism, where resource-rich states such as Russia and Algeria force less-attractive terms on international energy firms from oil-importing countries. The Orinoco talks will show other petro-states just how far they can push the oil majors before these firms hit the road.

The tar oil, located in an area the size of Kuwait alongside the Orinoco river, is one of two so-called unconventional oil regions that will be key to meeting world oil demand for decades to come. The other is Alberta's tar sands, which supply an increasing percentage of U.S. oil imports.

The upcoming negotiations encompass future equity stakes, compensation, financial, commercial and operational arrangements. The six companies have an estimated value of some $30 billion in the projects, which together now produce around 525,000 barrels a day of synthetic crude but have a capacity of 600,000 barrels a day. The projects also have a total $4 billion in outstanding commercial bonds and bank loans.

Chavez, a fierce nationalist who is wiping out private ownership of "strategic" areas of the economy such as energy, power and communications, began unwinding the previous Orinoco contracts in 2004 as oil prices entered a sustained rally.

After hiking taxes and royalties, Chavez is now going for majority control, insisting on a minimum equity stake of 60% in each venture.

It is unclear how much of a say the majors will have over the projects. At the start of this year, Oil Minister Rafael Ramirez announced Orinoco negotiations had ended, saying the companies would have to accept Venezuela's terms after failing to meet the first end-2006 deadline.

Since then, he has toned down the rhetoric, saying this week he would like these
companies to remain as minority partners and that negotiations could go on past
the end-June deadline. Just the same, Venezuela has a history of heavy-handed
treatment.

These six companies were hit with a 2004 royalty hike with no warning - Chavez made the announcement on national television. The government also set the new negotiating deadline unilaterally through a decree. Many of these firms, including Chevron Corp. (CVX) and ConocoPhillips (COP), have said Venezuela was slow in launching talks.

Ramirez also announced a scheme to compensate these firms with crude oil instead of cash before three of the transition teams had been established, indicating the government will continue setting the new terms with little to no consultation.

Big Oil took a gamble in the Orinoco in the 1990s, setting up four huge projects to extract the extra-heavy crude and upgrade it into low-carbon synthetic grades that can be processed in most foreign refineries.

At the time these companies - which also include Exxon Mobil Corp. (XOM) and BP Plc. (BP) - won substantial tax breaks to compensate for the high cost structure at a time of rock-bottom oil prices.

In private, executives at these firms regret not negotiating with the government as a group, which could have increased their leverage in current talks. Divergent positions made it difficult to form a unified front.

Exxon is the only firm to publicly say it could leave if profitability is too low. The company, with more booked reserves than any of the other majors involved, has taken a harder line with Venezuela since 2004. At one point it suggested international arbitration over the royalty hike.

Other companies like Chevron and Statoil are said to be willing to suffer through
periods of nearly flat profitability to maintain a foothold in Venezuela, and be
well-placed in case the government offers better terms in the future.

Copyright (c) 2007 Dow Jones & Company, Inc.
URL: http://www.rigzone.com/news/article.asp?a_id=42617