Worried: investors fear Chavez may change fiscal rules
Cautious interest in Venezuela round
Oil companies are showing cautious interest in Venezuela's tender of heavy oil blocks as they evaluate the risks of working with leftist President Hugo Chavez and making large investments as crude prices tumble.
Nineteen companies are participating in a bid to produce at least 400,000 barrels per day of tar-like oil in seven areas of the Carabobo region of the Orinoco belt, and build three heavy crude facilities that produce lighter, more valuable oil, wrote Reuters.
Factors driving investor interest include the Orinoco's plentiful reserves with little exploration risk, expectations of a medium-term oil price recovery and the possibility of producing high-quality oil with new upgrading technology.
"We're still reviewing the numbers, but the offer appears quite attractive," said an official of one oil company who asked not to be identified because he is not authorised to speak for the record.
PDVSA says its production costs are only $4 per barrel compared to an industry average of around $50, though this figure may not include the hefty financing costs associated with building multi-billion dollar upgraders.
Producing and upgrading Orinoco oil may now appear less complicated than other non-traditional oil projects such as Brazil's deep-water production that involves extracting crude from up to 7 kilometres below sea level.
Companies paid $2 million for the area's geological data, and winning bidders to become minority partners with PDVSA will likely have to pay a combined total of billions of dollars for access to the reserves.
Bidders in Carabobo include oil majors such as BP, Chevron, Shell, Norway's StatoilHydro and France's Total as well as smaller companies such as Malaysia's Petronas and Portugal's Galp.
PDVSA said strong investor interest led it to expand the original bid by adding two production areas and a third upgrader.
But the excitement is tempered by concerns over shrinking margins caused by falling oil prices, which this month dropped below $41 after hitting $147 in July, combined with risks Chavez may once again change fiscal terms and conditions.
He calls capitalism an evil and has attacked oil majors as plotting to topple him.
"The problem is Venezuela is perceived as a high-risk environment," said one consultant who asked not to be named.
"That means companies need higher returns than in other countries. And the further oil prices fall, the more difficult it is to justify the investment."
Venezuela has led the region's resource nationalism crusade to boost government revenues from energy production, hiking royalties and taxes four times since 2004 and nationalising four multi-billion dollar heavy crude upgraders.
Bid winners that ultimately partner with PDVSA must acquire the financing for the entire project, which is likely to be difficult given tight credit markets still trying to shake off the worst financial crisis in decades.
Officials involved in the process all asked to remain anonymous to be able to speak more candidly about the risks without upsetting PDVSA and jeopardising their work.
An executive at one of the participating companies said the bid seemed overly ambitious for PDVSA, which in 2003 fired 20,000 workers - including experts in bidding rounds - after they walked off the job in a failed effort to oust Chavez.
PDVSA since then has focused mostly on social projects and on taking back control of operations from private companies that were invited in during bidding rounds the 1990s.
"The project certainly looks interesting, but they made it bigger than it needs to be, and I'm not sure they will know how to manage it," said the executive, who asked not to be named.