Chavez & the Oil Companies: Welcome Back?

The International Herald Tribune (New York Times) and AP published back-to-back articles on 15 January about the apparent change in Venezuela’s treatment of foreign oil companies. The IHT/NYT article was published overnight time on 15 January, while the AP article was posted at 6:14 p.m. Caracas time. It’s possible the reporters who wrote the stories (Simon Romero authored the IHT/NYT article) were developing the same idea separately, but it appears more likely to this observer that AP reacted to Romero’s article and quickly spun out an analysis replicating the same theme.
Chavez reopens oil bids to West as prices plunge
Chavez da marcha atrás, ahora corteja a petroleras extranjeras
The articles say that:
· President Hugo Chavez essentially has rolled out the welcome mat again to foreign oil companies for pragmatic political reasons. “Welcome home, boys. All is forgiven”
· Proof of this changed attitude is Petroleos de Venezuela’s (Pdvsa) decision to open a public bidding process to develop between 2009-2014 up to 1.2 million b/d of extra-heavy crude production capacity and 600,000 b/d to 800,000 b/d of upgrading capacity. The bidding is scheduled to start in February and end with signed contracts in June 2009.
· The foreign oil companies are eager to come into Venezuela; some quite possibly even may be willing to shoulder most of the front-end capital expenditure costs even though they are only allowed a top minority stake of 30%, in exchange for access to the country’s very large crude and gas reserves.
The IHT/NYT article also cites unnamed oil executives allegedly in close contact with Energy Minister and Pdvsa President Rafael Ramirez who say Ramirez has been pushing hard to focus Pdvsa’s efforts more on expanding production capacity. Is Ramirez pushing the issue with President Chavez, or with Pdvsa’s boards of directors where the president’s first cousin Asdrubal Chavez is vice president for international marketing/supply?
At an international oil congress in Maracaibo in 2005, Ramirez said President Chavez personally made all the decisions at Pdvsa. Ramirez has always executed obediently all of the president’s orders. In the process, Pdvsa has been ruined institutionally, financially and operationally. Now, belatedly, Ramirez is pushing President Chavez to allow Pdvsa to refocus on its core oil and gas business? This would be very atypical of Ramirez.

More importantly, President Chavez never accepts criticisms or recommendations contrary to his will from any of his subordinates. Chavez is Die Fuehrer.
The theory that Chavez is now courting foreign oil companies to return to Venezuela is rebutted by two facts.
First, except for ExxonMobil and ConocoPhillips, the oil majors with the longest histories operating in Venezuela (Shell, Chevron, BP) have never left, not when the oil industry was nationalized and Pdvsa was created in 1975-76, and not when President Chavez went on a new oil nationalization spree in 2005-2007. Regardless of the operating environment, these companies are in Venezuela permanently. If they can reach good deals with Pdvsa they will develop new ventures.
Second, the Energy Ministry/Pdvsa imposed 60% of Venezuela’s Opec-mandated production cuts on joint ventures with minority foreign partners which account for 25% of the country’s total oil production. Practically all these production cuts affected crude exports to the US. Foreign companies are being invited to bid on the Orinoco projects Pdvsa plans to develop, but it’s still Bolivarian business as usual.

The musius get squeezed first, and harder, than Pdvsa. Of course, this isn’t a problem for the oil companies over the long term. Oil companies operate with very long time horizons. They are able to adapt to changing conditions and continue operating in very difficult, hostile environments. Operating in Venezuela is still a picnic compared to Nigeria, Sudan and other African oil producing states.
Pdvsa’s move to finally launch a public bidding process in first-half 2009 is not breaking news for longtime observers of Venezuela’s oil industry. Long before Pdvsa started signing Orinoco agreements rapidly in 2005 with new “strategic” partners designated by President Chavez, the company planned to expand the oil belt’s extra-heavy crude production and upgrading capacity.
In fact, the conceptual and strategic framework for the Orinoco’s expansion was designed by the “old” Pdvsa back in the mid-1990s.
The “new” Pdvsa’s 5-10 year expansion plan, called “Siembra Petrolera” and unveiled officially by Ramirez at the end of 2005, is essentially the same plan developed originally by the “old” Pdvsa in the 1990s. Under Chavez and Ramirez, Pdvsa’s expansion plan is now over a decade behind schedule, since the capex plan Pdvsa was developing and continually updating in 1997-98 called for expanding Venezuela’s crude production capacity from 3.4 million b/d in 1998 to over 6 million b/d by the mid-2000’s.
The “Siembra Petrolera” plan has gone through many changes since end-2005 in terms of projected costs, the number of planned major projects, planned capacity growth, technologies, prospective partners, equity structures, etc. For example, at one point circa end-2007, Ramirez talked about building an 800,000 b/d mega-upgrader, but now the bidding will be on three or four upgraders with capacities of 200,000 b/d each.
Foreign oil companies are very interested in developing ventures in Venezuela. A very substantial and growing oil supply crunch will strike the world by 2013. Venezuela has some of the largest oil and gas reserves in the world outside the North Africa-Middle East-Central Asia “arc of instability.” If it gets its act together, Venezuela has excellent prospects well beyond the 2030s of continuing to be a major supplier of oil and gas to the world, and at very high prices.
But in the immediate future – 2009-2010 – Venezuela’s oil and gas prospects are lousy, which is fine with the oil companies. A financially (politically) weakened Chavez regime should be easier to negotiate long-term deals with.
But here’s the caveat. Chavez can’t be trusted. He’s the scorpion on the back of the frog swimming across the pond. Midway, the scorpion stings the frog because it’s his nature, even though the scorpion drowns as the dead frog sinks. Whatever Chavez agrees to today, he will change tomorrow or next week or next year when it pleases him to do so. Venezuela is his hacienda.
There are also some practical obstacles to wrapping up firm contracts quickly. Current low oil prices make Orinoco extra-heavy crude development less enticing, though interest will rise in tandem with future oil price growth. Venezuela has among the highest effective energy tax rates in the world, over 92%. Pdvsa demands a 70% majority stake, plus operational/decision-making control in all Orinoco production and upgrading joint ventures. Pdvsa will control deliveries to international clients. Pdvsa wants guarantees of free technology transfer (Chavez has said that without free tech transfer foreign oil companies won’t get deals with Pdvsa).
Venezuela’s government will not accept any language in contacts relating to foreign dispute resolution in foreign jurisdictions or international arbitration panels. All disputes will be decided only in Venezuela by national judges. Pdvsa also wants prospective minority foreign partners in its planned Orinoco joint ventures to put up most/all of the needed capital at the front end of the project. How will this be done? Capital now for guaranteed oil supply deliveries in the future, and if so on what terms and conditions?
Pdvsa is in ruins. It is very slow to make any decisions, a problem the Iranians, Chinese, Belarusians and Russians all complain about privately. The corporate environment is exaggeratedly politicized and political; even the Chinese are appalled by how commercial issues are subordinated to Bolivarian rhetoric in most meetings. Scores of agreements have signed but no substantial foreign direct investments in oil have materialized yet.
Pdvsa’s infrastructure is very deteriorated. Over 1,200 production wells are shut down from lack of maintenance. The company’s crude production capacity has dropped from over 3.4 million b/d in 1998 to about 2.3 million b/d at the end of 2008, a net capacity loss of at least 1.1 million b/d although some analysts like Ramon Espinasa calculate Pdvsa’s net capacity loss at over 1.5 million b/d over the past decade. Everything is falling apart at Pdvsa, including its refineries, pipelines, secondary and tertiary recovery systems, steam and gas injection units, export terminals and tank farms. The company now imports gasoline at a huge loss to cover local fuel supply needs.
Pdvsa’s payroll totaled over 95,000 people as of September 2008, compared with 40,000 before the 2002-03 oil strike and about 20,000 after the great purge of 2003, which gutted the company in terms of world-class talent and experience. Many (most?) of the “new” Pdvsa’s personnel were hired for their stated political loyalty to Chavez and the Bolivarian revolution, but as oil professionals they generally are subpar.
Inviting foreign companies to bid on the planned Orinoco production and upgrading joint ventures is not a sign of changing attitudes in the Chavez government. Many companies will place bids, and many of the bidders will lack something – capital, technology, knowhow – to actually develop a production or upgrading jv. This explains why Ramirez said in December that prospective bidders are free to form consortia, merge two production blocks being offered to bidders (at 200,000 b/d projected capacity per block) into a single block with a larger capacity (400,000 b/d), build three or perhaps four upgraders, combine production/upgrading bids, or bid only on upstream production or downstream upgrading projects, etc.
At this point the Energy Ministry/Pdvsa are not sure how the bidding process ultimately will develop. Originally 47 companies were invited to participate and less than half that number purchased information packages. And if firm contracts are signed by June 2009 as presently scheduled, it remains to be seen how quickly the joint ventures will advance given the majority controlling partner’s financial, operational, personnel and management deficiencies.
Given that Pdvsa by itself has not completed any major projects in Venezuela during the past decade, except the Antonio Ricaurte gas pipeline to Colombia inaugurated in October 2007, it’s possible the execution of the Orinoco expansion will suffers delays and quickly fall behind schedule practically from the beginning.


About Caracas Gringo

Representing less than 0.00000000001515152% of the world population as of 31 December 2011.
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