Venezuela oil bid brings cautious investor interest

By Brian Ellsworth

CARACAS, Dec 12 (Reuters) - 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.

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 authorized 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 multibillion dollar upgraders.

Producing and upgrading Orinoco oil may now appear less complicated than other nontraditional oil projects such as Brazil's deep-water production that involves extracting crude from up to 4.5 miles (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 (BP.L), Chevron (CVX.N), Shell (RDSa.L), Norway's StatoilHydro (STL.OL) and France's Total (TOTF.PA) as well as smaller companies such as Malaysia's Petronas (PETR.KL), Portugal's Galp (GALP.LS).

PDVSA said strong investor interest led it to expand the original bid by adding two production areas and a third upgrader.

RISKS ABOUND

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 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 nationalizing four multibillion dollar heavy crude upgraders.

This led U.S. oil giants ConocoPhillips (COP.N) and Exxon Mobil (XOM.N) to leave the country and file arbitration suits against Venezuela for expropriation of their holdings.