Shell’s dim view of Venezuela

Royal Dutch Shell’s Chief Financial Officer Simon Henry told reporters on the sidelines of a press conference in London this week that international oil majors have mostly lost interest in investing in Venezuela.

“They are desperately inviting people back in, but no one’s going there,” Henry was quoted as saying by Reuters.

Today, Shell Venezuela issued a statement saying that what Henry meant to explain was the challenges for international oil companies with regards to access to global markets, and how decisions are made based on several factors, including “the availability of capital for mega projects.”

Was it a reporter’s misinterpretation, an executive’s wrong choice of words and phrasing, or was it deliberate?

Pdvsa awarded a project in the Orinoco oil belt’s Carabobo section on 10 February to a consortium led by Chevron.

A consortium led by ONGC of India and Spain’s Repsol was awarded a second project in the Carabobo section.

Pdvsa also has signed Orinoco strategic agreements with the Russia Consortium (LUKoil, OAO Gazprom, TNK-BP, Rosneft, and Surgutneftegaz), with CNPC, Sinopec and CNOOC of China, and with Italy’s Eni.

Pdvsa has a 60% stake in all of these planned joint ventures, which on paper are worth over $80 billion, according to President Hugo Chavez and Energy Minister Rafael Ramirez.

But Pdvsa also has been tasked with developing Junin 10 and Carabobo Project 2 by itself, together costed at over $40 billion.

Pdvsa also is responsible for funding some $26 billion of basic infrastructure in the project areas including pipelines, roads, electricity, communications, potable water and sewage, thousands of housing units and related health care and education facilities.

Chavez dreams of urbanizing the Orinoco River Basin and simultaneously making it a great energy, agricultural and ranching region.

But the revolution can’t do it without the international oil companies, Chavez said on 10 February.

However, the list of international majors which have decided to not do any new business at all with Venezuela, at least for now, includes Shell, ExxonMobil, ConocoPhillips, and BP.

Total of France and Norway’s Statoilhydro also withdrew in January from joint venture talks with PdV in the oil belt’s Junin 10 block.

Brazil’s state-controlled Petrobras also has decided to not invest in Venezuela, although it did bring in Pdvsa as a 40% stakeholder in the Abreu de Lima refinery in Pernambuco. But Pdvsa still has not made the first $300 million payment that it owes Petrobras for its share of expenses accrued in the refinery’s construction.

Pdvsa’s relations with China’s oil companies are not as glowing as Chavez claims. A big problem is Pdvsa’s chronic inability to fulfill its oil export commitments to China.

Chavez said recently that Pdvsa currently exports 300,000 b/d to China. But official Chinese government data shows that China’s oil imports from Venezuela have averaged about 80,000 b/d during the past several years.

Still, China’s oil companies aim to be in Venezuela for the long haul.

The Russia Consortium also may be seeking to build a large presence in Venezuela. But Russia, unlike China, does not have any urgent need for Venezuela’s oil and gas resources.

The expanding Russian footprint in Venezuela – built on arms and energy deals, and soon nuclear cooperation – reflects Russian leader Vlamidir Putin’s determination to restore Russia’s status as a global power and bring the US down a peg or two in its own hemispheric backyard.

How quickly these partnerships break ground on planned projects depends on many global and local economic, political and social factors. Capital is one of the biggest factors, and certainly could be Pdvsa’s biggest obstacles to advancing these planned Orinoco projects.

Pdvsa has to come up with $48 billion for its 60% share of the $80 billion dollars of Orinoco joint ventures it hopes to launch with Chevron, ONGC, Repsol, Eni, the Russians and Chinese.

But Pdvsa also has to find another $66 billion to develop the Junin 10 and Carabobo 2 projects by itself – unless, as Ramirez has indicated, another successful public auction is held. However, Pdvsa likely will not risk another auction unless it is 110% certain that it will get firm proposals from foreign oil companies.

Pdvsa’s total Orinoco investment obligations, on paper, work out to $108 billion over the coming six years, approximately.

However, this total does not include additional planned investments worth tens of billions more in new refining capacity in Venezuela (4 refineries), China (4 refineries) and at least a half-dozen other countries including Ecuador, Nicaragua, Vietnam, Syria, and Brazil, among others.

It also does not include Pdvsa’s ambitious offshore gas production, liquefied natural gas and associated petrochemicals investments.

And it doesn’t include up to $30 billion of potential liabilities created by Chavez’s wholesale nationalizations since 2007.

But Pdvsa is a collapsing (collapsed?) oil company, even with oil prices at over $70/bl.

Like Shell said: it’s all about capital, which Pdvsa doesn’t have.

About Caracas Gringo

Representing less than 0.00000000001515152% of the world population as of 31 December 2011.
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3 Responses to Shell’s dim view of Venezuela

  1. Juancho says:

    “Pdvsa also is responsible for funding some $26 billion of basic infrastructure in the project areas including pipelines, roads, electricity, communications, potable water and sewage, thousands of housing units and related health care and education facilities.”

    The above contains two closely related issues. First, the hard cash Pdvas needs to fullfill their part of the proposed “mega-projects.” CG has repeatedly shown, with convincing accounting models, that such money is unlikely to appear anytime soon. The word on the street is that Pdvas has no plans to come up with a single Real, but intends to proceed with whatever funds the minority “owners” pony up. Usually, minority owners will need to see some proof of funds per Pdvas’ cut before matching foreign funds will be forthcoming. So it may be that till Pdvas has cash in hand, none of these projects will ever even begin.

    The second, and perhaps more telling and certainly more sobering point, concerns Pdvas’s capacity, or total lack thereof, to actually build the “basic infrastructure” Caracas Gringo has spelled out above. Given the Chavistas inabiity to even maintain existing resources, such as the power grid, and the Guri turbines, to mention tow of a thousand, who actually believes that a single aspect (say, one sewer system) of the aforementioned laundry list will ever get made? Venezuela is full of competant individuals, but with no effective executive branch, a mega-project can never happen. As we all know, most all of Chavez’ civic bodies are top-loaded with rubes, crooks, charletans
    and sketchy academics – not exactly the crew to execute nation building, as the $26 billion porject surely is.

    JL

    Like

  2. Mérida says:

    Problem is this stuff is hardly talked about in any news formats outside of blogs, leaving a large part of Venezuela’s population completely ignorant of how badly mismanaged PDVSA is. Seeing electricity problems, and water problems is easy, knowing that thier national wealth is being squandered, robbed, mismanaged and being put to poor use is a lot harder to see.

    Like

  3. Ricky says:

    I may be wrong, but in the 90’s, when Venezuela invited the multi-nationals back, for the ‘apertura’, all the winning bidders were required to put up front cash into the deal, this being part of PDVSA’s share of the investment, and the remaining was backed out with royalty & production deals, so, PDVSA didn’t put up any cash.
    I read somewhere, that this is basically the same process, even with Chavist accounting practices, they know there is no money for any of these projects.

    Like

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