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Venezuela's autocratic ways exasperate foreign oil firms
October 11, 2013 / 5:27 PM / in 4 years

Venezuela's autocratic ways exasperate foreign oil firms

CARACAS/HOUSTON, Oct 11 (Reuters) - The exit of Malaysian and Russian partners from key oil projects in Venezuela points to long-running disputes that could force out other companies, even as the government talks up its efforts to develop the huge Orinoco extra heavy crude belt.

For years, state oil company PDVSA has made it the responsibility of its partners in about 40 joint ventures to boost stagnant national production of around 3 million barrels per day, at times threatening to take away their licenses or stop them repatriating dividend payments.

Those often fraught relationships are essential for the OPEC nation’s vital oil industry. Future growth hinges on a string of ambitious projects in the Orinoco, one of the planet’s last largely-untapped major crude reserves.

Russia’s second-biggest oil producer Lukoil said this month it wants to sell its Orinoco stake, just weeks after Malaysia’s state oil company Petronas said it was quitting one of the biggest projects.

Senior sources close to the deals said both companies were fed up of repeated disagreements with PDVSA and the government.

The sources also said export income from early production at key projects went to the state oil company, instead of the joint ventures - adding to partners’ cash flow problems.

The private companies that remain, which include U.S. major Chevron and Spain’s Repsol, have tough choices to make. Various sources at Orinoco joint ventures said PDVSA refused their repeated requests that it relax its conditions.

“There are companies which have decided to be in Venezuela with a long term vision. There are others whose presence depends strictly on the cash flow they get from the country,” said Luisa Palacios, analyst at Medley Global Advisors in New York.

“Their projects in Venezuela compete with their others, especially under a scenario where oil prices don’t guarantee a clear return on investment.”

PDVSA did not respond to questions from Reuters about its dealings with foreign companies in the Orinoco. Despite the recent departures, top officials are seldom anything but upbeat about the area’s long term appeal.

Petroleum Minister Rafael Ramirez said this week that new output from the Orinoco meant Venezuela expects to produce a total of 4 million bpd in 2014 - a huge, and unlikely, leap from today.

“We’ve got pipelines that are reaching design capacity, and we brought in equipment from outside that will allow us to accelerate the increase in production ... it is generating a lot of interest (from investors),” Ramirez said.

In a rare acknowledgment of problems, however, he said the provisional logistics set up for Orinoco projects under an “accelerated early production” plan had created bottlenecks.


The late Hugo Chavez nationalized almost all of Venezuela’s oil industry, which the Venezuelan economy is almost entirely reliant upon for foreign currency income.

Potential oil industry partners are torn between fears of possible state takeovers and hoping for a share as the country parcels out its estimated 296.5 billion barrels of reserves.

The departures come from countries including Russia that are political allies of Caracas, and which were urged by Chavez to work with Venezuela after ExxonMobil and ConocoPhillips left amid disputes over state takeovers in 2007.

They add to an increasingly challenging economic situation for the government of Chavez’s successor, President Nicolas Maduro, who faces shortages of consumer goods and annual inflation that last month hit 49.4 percent.

Saying the Orinoco was not a priority anymore, Lukoil announced last week it wants to quit a Russian consortium that has a 40 percent stake in Junin Block 6, one of the richest areas and forecast eventually to produce some 450,000 bpd.

Less than a year ago, Russia’s fourth-largest crude producer Surgutneftegaz also voted to leave the block.

The most likely buyer for Lukoil’s stake is Rosneft - a move that would give it almost complete dominance of the Junin 6 consortium and add to the Russian state oil producer’s ever-wider operations in the South American country.

Igor Sechin, powerful deputy prime minister and Rosneft’s chief executive, has been a regular visitor to discuss energy deals and arms sales - even donning a Chavez T-shirt to pose with PDVSA workers in the run-up to last year’s election.

Alongside China’s CNPC, Rosneft has become the biggest foreign player in Venezuela, buying the interests of TNK-BP including a stake in a heavy crude upgrader, while also being unexpectedly awarded another Orinoco block to run, Carabobo 2, and a role in PDVSA’s fledgling offshore gas plans.

Almost from the start, executives with foreign companies complained about work in the Orinoco being held up by lack of infrastructure, uncertainty over taxes, delays in payments from PDVSA, and what they called its autocratic behavior.

Unless PDVSA softens its terms and listens more to its partners, other companies could leave, foreign executives say.

“There’s no governability ... PDVSA wants the joint ventures to function as appendages of itself,” said the president of one foreign oil company working on new projects in the Orinoco.


Those issues were among the reasons for the departure of Malaysia’s Petronas last month from its 11 percent stake in a flagship Orinoco project called Petrocarabobo that has planned investments of about $20 billion over 25 years.

The foreign executive said top Petronas leaders visited Venezuela but left disappointed, saying PDVSA repeatedly refused to involve its foreign partners in decision-making.

That consortium also has investment from Repsol, India’s ONGC, and two smaller Indian companies.

Eventually, the Orinoco developments aim to add more than 2 million bpd to Venezuelan output - twice the rise Ramirez forecasts for next year - for total investment of $80 billion.

Two senior sources involved in the deals said export income from early production at key projects such as Petromiranda, with the Russians, and the Junin blocks where ENI and Petrovietnam operate, went to PDVSA instead of to the joint ventures, causing cash flow problems from the start for the smaller companies.

Those financial difficulties will only get harder in later stages of the projects, such as the construction of upgraders.

The amounts involved now are relatively small - some 25,000 bpd - but it is seen as a sign PDVSA may again be behaving in a way that starves the joint ventures of funds - something the sources said PDVSA had repeatedly promised to avoid this time.

More surprising is the failure to begin production at Carabobo 3, a joint venture with Chevron and several Japanese firms, and at Petrourica, a joint venture with China’s CNPC. Maduro’s government is meanwhile seeking to renew a $20 billion credit line with Beijing.

Foreign executives said Ramirez recently softened his stance towards private companies working in the Orinoco.

“It’s not enough. The rival factions within PDVSA slow everything down. There are lots of sudden changes of opinion,” said one foreign oil company president, adding he was in no rush to pour funds into the project. “We’re proceeding with our project, but step by step. We’re not forcing the pace.”

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