Venezuela bid has big risks, rewards for oil majors

CARACAS (Reuters) - Venezuela’s Carabobo auction presents global oil giants with a major opportunity to gain access to what the U.S. Geological Survey recently called one of the world’s largest reserves of crude oil.

But winners of the auction face risks that could include delays in development, a major financing burden and a thicket of problems building infrastructure from roads, pipelines and ports to high-tech facilities to upgrade the heavy crude.

The leftist government of Hugo Chavez has drawn the interest of global oil giants for projects in the Orinoco region despite nationalizations there just three years ago that boosted concerns about the OPEC nation’s political risk.

Companies are keen on low exploratory risk and manageable production costs offered by the three projects, which will produce 1.2 million barrels per day and hold total estimated 128 billion barrels of oil in place.

But developers also must build major infrastructure in isolated rural areas. Partners must provide nearly all financing for the $10 billion to $20 billion projects. And the government has mandated the fields must produce at more than double the rate of existing Orinoco belt projects.

“Convincing companies that these projects are viable has not been easy,” acknowledged Baldo Sanso, an oil ministry advisor running the bidding, before receiving bids.

Official results will be presented on Feb 10. Sources said Venezuela received bids for all three projects from companies including majors Chevron CVX.N and Repsol REP.MC along with national oil companies such as India's ONGC ONGC.BO and Malaysia's Petronas PETR.KL.

Those sources said other strategic partners including China's CNPC and Russian firms such as Lukoil LKOH.MM and Gazprom GAZP.MM did not present bids.


The Carabobo round is key for Venezuela, whose economy depends heavily on oil, to reverse years of slumping output caused by limited investments, tense relations with private oil companies and a lack of qualified personnel.

The projects produce ultra-heavy tar-like Orinoco oil and process it in multibillion-dollar upgraders to make valuable synthetic crude. The technology is much more complicated -- and expensive -- than traditional production.

The bid marks a turnaround from Chavez's five-year nationalization crusade that touched off a wave of resource nationalism in the Andean region. The government's takeovers at Orinoco prompted Exxon Mobil XOM.N and ConocoPhillips COP.N to leave the country and sue for compensation.

The final days of the bid coincided with a study by a U.S. Geological Survey described the Orinoco Belt as one of the world’s largest reserves of crude oil, lending credence to an assertion Chavez has repeatedly made for five years.

As oil majors scour the globe for increasingly scarce crude reserves, many are willing to push aside political risk concerns to lock in future supply and boost their chances of winning other projects down the road.

“The future of the Venezuelan oil industry could be approaching a flipping point,” said consulting group Oxford Analytica in a research note. “A major incremental investment in Venezuela with a Venezuela country risk premium, may be under serious consideration by some IOCs.”


Even companies that brush aside political risk face a range of challenges starting with basic infrastructure. The projects were sited in isolated rural areas of eastern Venezuela in hopes of spurring economic development. Some of the areas do not even have roads yet.

Rather than piggy-backing off existing infrastructure in the Jose industrial complex that houses four upgraders, Carabobo requires building all the power, gas and port facilities from scratch -- creating the risk of delays.

“Where are they going to get the natural gas? The electricity? How long is it going to take them to build those new ports? The pipelines? There’s just too much uncertainty,” said one bid participant who asked not to be identified.

Sources involved in the bidding process all described the expectation that the projects would require years of fierce negotiations with PDVSA to make sure deadlines are met.

Many also worry about human resources because Venezuela’s energy sector is notoriously lacking in qualified staff. Bringing in personnel from other countries is difficult because of rampant crime in Caracas and the high cost of living.

The projects are expected to recover at least 20 percent of the total oil in place, more than double the 8-9 percent recovery rate of existing Orinoco belt projects.

Companies must finance their stake in the project plus nearly all of the 60 percent that cash-strapped PDVSA will hold in the projects, a major concern in credit markets still reeling from the 2008 crisis.

“Oil companies know Venezuela needs the support of foreign investment,” said Roger Tissot, a consultant with Gas Energy Latin America. “The political risk is taken into account. But politics change, Venezuela’s oil wealth does not.”

Editing by David Gregorio