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A Political Minefield in Venezuela's Oil Fields

Prospects that Chavez will nationalize the export industry add to the market's anxieties.

April 12, 2006|Chris Kraul | Times Staff Writer

CARACAS, Venezuela — In the uneasy world of petroleum politics, fears that Venezuela will nationalize its oil industry may not rank at the moment with possible war in Iran or civil unrest in Nigeria. But Venezuela's recent actions directed at foreign energy companies are contributing to oil's relentless march toward record prices.

In New York futures trading Tuesday, oil pushed past $69 before closing at $68.98 a barrel, up 24 cents. That was just shy of the all-time high of $69.81 reached in August as Hurricane Katrina slammed the Gulf Coast.

Traders said the main driver was Iran's declaration that it had succeeded in enriching uranium for the first time, a prerequisite for developing a nuclear bomb. That raised concerns about a preemptive strike by the United States and its allies, which might threaten Iran's nearly 4 million barrels of daily oil production.

But worries that Venezuelan President Hugo Chavez might seize key fields containing large deposits of heavy oil in the Orinoco Belt also are spooking the market. Last month, Chavez grabbed majority control of 32 smaller foreign-operated drilling projects.

Such a move might spur the departure of at least some companies adept at managing heavy oil, which in turn would threaten production volume.

"There are a lot of coinciding events which are impacting global energy markets and causing people to question whether there will be enough oil supply," said Michelle Billig of PIRA Energy, a New York research firm. "Venezuela just adds another concern."

Venezuela exports an average of 1.5 million barrels a day to the U.S., the third-largest supplier after Canada and Saudi Arabia.

Since he took power in 1999, Chavez has pledged to "recover the sovereignty" of Venezuela's oil industry, which his predecessors opened up to foreign investment in the 1990s.

The first targets were the 32 operating agreements signed by state oil company Petroleos de Venezuela, or PDVSA, that gave foreign companies rights to take over aging oil fields. By 2004, the firms had raised the aggregate production of the fields to 550,000 barrels of crude a day from 100,000 in 1997.

Chavez set a March 31 deadline for 60% of each of the projects to be turned over to PDVSA. All but two companies, Total of France and Eni of Italy, complied. Exxon Mobil Corp. sold to partner Repsol of Spain rather than agree to relinquish control, saying Chavez was bound by the contracts signed by his predecessors.

Delegations led by Energy Minister Rafael Ramirez personally seized the Total and ENI operations on April 1. Chavez has promised to compensate the companies for their stakes, but the terms aren't known.

It might be more difficult for Chavez to assert control over the four Orinoco projects, in which companies have invested $12 billion, because Venezuela's National Assembly approved the deals. But Venezuela's relationships with foreign companies have grown increasingly unfriendly during the leftist populist's tenure in office.

"Will Chavez nationalize the heavy oil? I think there will be a bigger role for PDVSA which might even include taking over operations," said Roger Tissot, an analyst with PFC Energy consultants in Washington. "Uncertainty is the name of the game."

The four Orinoco ventures are Petrozuata, controlled by ConocoPhillips; Sincor, by Total and Norway's Statoil; Ameriven, by ConocoPhillips and Chevron Corp.; and Cerro Negro, by Exxon Mobil and Britain's BP. PDVSA owns a minority interest in each.

The output has become important for Venezuela because production of lighter crude has declined. The country's overall petroleum production has been hurt by the firing of hundreds of skilled employees in the aftermath of a strike in 2002.

The Orinoco projects also are important for the companies. They are the principal reasons ConocoPhillips and Chevron now derive about 10% and 9%, respectively, of their global oil production from Venezuela.

Beginning in the early 1990s, the partners in the four projects sank billions into developing technology to extract oil as thick as tar that was previously thought unusable. The companies built a set of "pre-refineries" in a new oil city called Jose on eastern Venezuela's Caribbean shore where the sludge was treated to make it more easily transportable by tanker.

The Orinoco projects account for about 25% of Venezuela's 2.4 million barrels of daily oil production.

Chavez has significantly raised royalties and taxes on foreign companies operating in the Orinoco. The royalty rate has climbed to 16.6% from 1% and the tax rate to 50% from 34%. After the last tax hike, Chavez promised five years of tax stability.

But Venezuelan Deputy Oil Minister Bernard Mommer, in an interview published Monday in the Financial Times, said that more tax hikes may be coming.

"The only guarantee you have is political," the newspaper quoted Mommer as saying during a visit to London. "The government can promise you whatever they want. It's not binding."

Insiders say Chavez's efforts to control the projects will cause operators to leave, depressing Venezuela's output. "Not that many companies can [operate those fields], only a few in the world," said an oil analyst in the capital, Caracas, who asked not to be identified.

Geopolitical factors were cited in a U.S. Energy Department report Tuesday that forecast high oil prices through the end of the year.

"With the market as tight as it is, any negative news puts upward pressure on prices," said Michael Lynch of Strategic Energy & Economic Research Inc.



Energy sources

Venezuela is the third-largest supplier of oil to the U.S.

(In millions of barrels a day and by percentage of all U.S. imports in 2005)

Canada: 1.98 (16%)

Saudi Arabia: 1.52 (12.3%)

Venezuela: 1.49 (12.1%)

Mexico: 1.38 (11.2%)

Nigeria: 1.15 (9.3%)

Source: Department of Energy

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