Financial Times: Fears over Chávez threaten oil auction

August 30, 2009


From the Financial Times by Benedict Mander: Fears over Chávez threaten oil auction

The future of one of the world’s biggest oil auctions is in jeopardy as Venezuela’s socialist government and oil companies remain at loggerheads over terms to develop a key oil field.

Repeated delays in the bidding for rights to exploit the Orinoco Belt – which was postponed for a third time at the end of last month – reflect investor concerns about political risk, onerous financing costs and the profitability of the projects. Lower oil prices and a stuttering global economy only add to the problem.

Chinese, Russian, Indian and Brazilian state oil companies are competing alongside oil majors such as Shell, BP, Chevron, Total, Eni and Statoil for access to the Orinoco’s Carabobo block, which could require collective investment of between $30bn and $50bn (€34.5bn, £30.6bn) in three projects together potentially producing up to 1.2m barrels per day.

“There is a high level of interest. The Orinoco Belt is just too large to be ignored, with no geological risk but huge potential,” said Rodolfo Guzmán, a management consultant at Arthur D. Little in Houston. Low production costs and a lack of alternatives elsewhere in the world add to the Orinoco’s attractions.

But in spite of this being the first opportunity to invest in Venezuela’s vast oil reserves in more than a decade, enthusiasm has been tempered by a long list of concerns.

At the top of the list were fears about the unstable political climate in Venezuela and the unpredictability of President Hugo Chávez as he championed his socialist revolution.

“Security is still the big X-factor,” said Pietro Pitts, the Caracas-based editor of Latin Petroleum Magazine. “Scarcely a month goes by without the government taking over another private company,” he said, highlighting the expropriation of the assets of more than 70 oil service companies this year.

Worries about the sanctity of contracts were deepened by the fact that tax rates for oil companies have been increased four times since 2004, while PDVSA, the Venezuelan state oil company, has been negligent at paying dividends to partners in joint ventures.

Such concerns explain why companies were insisting on having the right to settle contract disputes in international courts, particularly after ExxonMobil and ConocoPhilips saw fit to bring billion-dollar claims against Venezuela after Mr Chávez went on a nationalisation spree in 2007.

But PDVSA is believed to be reluctant to comply, arguing that this would compromise national sovereignty – even though international arbitration clauses were included in contracts signed with investors from Russia, a close ally of Venezuela.

Another serious obstacle relates to the stiff financial terms, particularly with tough conditions in international credit markets. In spite of companies being allowed at most a 40 per cent share in each of the projects up for auction, with PDVSA maintaining 60 per cent, they are being asked to fork out 100 per cent of the financing.

The fiscal terms are equally hard to swallow, with 33 per cent royalty rates and a newly introduced windfall tax generating deep disquiet.

On top of that the projects require high start-up costs, in particular because of the need for complex and expensive refineries known as upgraders necessary to process the tar-like “extra-heavy” oil found in the Orinoco.

“As a publicly traded company we need a minimum return on our investment,” said the local head of one of the oil majors bidding, questioning whether this would be feasible under the current terms and market conditions.

As Mr Guzmán put it: “For many companies here it’s going to be very hard to convince their bosses at home to put a serious offer on the table.” Given that PDVSA will have operational control of the new projects, the argument will be even harder to make, with many companies dissatisfied with their current joint ventures with the Venezuelan group.

Such attitudes have generated speculation that the bid round could attract very few serious offers and might even need to be suspended.

Others argued that even if private companies shy away, national oil groups from countries such as China and Russia remain committed.

A representative in Caracas of one of the state oil companies bidding said in spite of the high costs involved, national energy security is the overriding consideration.

“The project may require serious investment, yes, but given that there is no exploration risk and that this could be the last project of its size left in the world, we can’t afford not to get involved.”

11 Responses to “Financial Times: Fears over Chávez threaten oil auction”

  1. concerned Says:

    The deal breaker is PDVSA having operating control to steal and divert profits for any electorial whim that arises while neglecting and destroying the associated equipment. Where a similar venture may see a 30 year return, with PDVSA controlling you would be luckey to get 5-10 years. With the taxes and royalties, the upfront 6 billion would be hard to recoup. I don’t think there would be such reluctance to front PDVSA’s money if operating control was retained.

  2. bruni Says:

    And why state oil companies would be willing to bid, whereas the others feel it’s too much risk?

  3. bruni Says:

    The question is if Venezuela is riskier than Nigeria, Russia, Libia, Kazakstan, Iran, Iraq?

    If the oil companies do not want to get in because they do not feel it is a good deal, well that’s the law of the market.Now, don’t tell me that it is because of instability or fear..these companies are used to regimes much much worse than Chavez’s.

    IMHO the oil companies are playing hard ball to get a better deal.

  4. AnonIII Says:

    “Do you really believe that the big sisters and their new offspring will shy away from the largest reserves of oil in the world?”

    I have read the above so many times but nobody has been able to determine if the reserves have been proven and by whom.

  5. moctavio Says:

    Well, the auctions has been cancelled three times. The key is in the last section. PDVSA wants control with 60% of the field, but you are supposed to provide the financing for your 40% and PDVSA’s 60%. And the big sisters are mostly not even participating BTW.

  6. bruni Says:

    Oh come on!

    oil companies are not the sisters of charity, anywhere in the world. They have supported regimes much more unstable and complicated than Chávez’s just to get a piece of the oil cake.

    As they used to say, the best deal in the world is a good oil deal and the second best is a bad oil deal.

    Do you really believe that the big sisters and their new offspring will shy away from the largest reserves of oil in the world?

  7. Roberto Says:


    Russia and/or China. And you can bet that the terms will be decidedly in their favor.

  8. Bob Taylor Says:

    Everyone in Venezuela,apart from a few red monkeys who don´t know any better, are waiting for chavez to press his self destruct button ,before Venezuela is totally destroyed.
    Why on earth cannot his so called followers be told the truth about him ?
    Lets pray for a rapid end so we can all start to live again !!!

  9. m_astera Says:

    The good news is, if no one bids, the oil stays there to be exploited by a more enlightened group in charge. Same goes for all of the other resources that aren’t being utilized right now due to incompetency and greed.

  10. Gringo Says:

    Is there an international oil company out there stupid enough to sign a contract w Chavez in power?

  11. concerned Says:

    The scenarios are clear.

    With Chavez and his revolution to nowhere:

    1. Little or no foreign investment (At least the kind that is preferential to Venezuela)
    2. Continued decline in production due to no investment from PDVSA for repairs or modifications coupled with criminal stupidity.
    3. Incredible losses to the public from total manufacturing/processing facilities leaving the country or idled.
    4. Venezuela becomes totally dependent on outside resources and will feast or famine depending on Chavez’s mood or the proximity to any election.

    Without Chavez and his chavista hord:

    1. Immediate investment with idle projects reactivated
    2. Incredible opportunities for employment not just from construction, but also from the operation of the new facilities.
    3. Production can return and surpass previous limitations which equates to $$$$$$$$$$$$$ for all of Venezuela
    4. Reduced dependence on imports so you won’t have to be another country’s bitch just to have meat on the table
    5. This list is limited only by your imagination………………

    So is it surprising that all credible international companies are reluctant…No

    The ones still hanging around are either biding their time or waiting to see just how desperate Chavez will become and what he will sweeten the pot with when nobody else wants to play. Neither one is good for Venezuela.

    Where will you be on September 4th?

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