President Hugo Chavez's announced takeover of Venezuela's most promising oil-producing operations will likely increase strain on the country's heavily burdened state-run oil company and pressure production at the world's eighth-largest oil exporter.
Chavez decreed late Monday that the government would take a minimum 60 percent stake in four heavy oil-upgrading projects - the country's only oil-producing operations remaining in private hands. The projects are run by British Petroleum PLC, Exxon Mobil Corp., Chevron Corp., ConocoPhillips Co., France's Total SA and Norway's Statoil ASA. "The privatization of oil in Venezuela has come to an end," Chavez said, promising to occupy the fields in the Orinoco River region and fly the national flag over them by May 1. Industry analysts and company executives question, however, whether Petroleos de Venezuela SA, or PDVSA, has the money and capacity to take on the pricey, complex projects, which upgrade heavy tar-like crude into lighter, more marketable oils. PDVSA control of the operations will affect production "without a doubt," said Patrick Esteruelas, an analyst at the New York-based Eurasia Group. Companies have already put long-term investments on hold while negotiating their new stakes and terms, he said. Esteruelas noted that since PDVSA took control of 32 oil fields elsewhere in Venezuela last year, production has declined by as much as 70,000 barrels a day. "It could be similar in the Orinoco or greater," he said. The four projects have a total production capacity of more than 600,000 barrels a day. France's Total, which jointly owns the Sincor project with Statoil and PDVSA, expressed concern Tuesday that putting PDVSA in charge would hamper operations. "What bothers us is the Venezuelan state's desire for majority control of the projects, including Sincor, and the operational constraints this imposes," Total Chairman Thierry Desmarest said at a Paris news conference Tuesday, but said the company would continue to negotiate with the government to "keep a satisfactory profitability." Enrique Sira, the Caracas-based associate director of Andean energy for Cambridge Energy Research Associates, said most of the workers running the projects are Venezuelans and if they are transferred to PDVSA, the impact on operations could be "a lot less dramatic." A publication of Chavez's decree Tuesday set a firing freeze on workers contracted at the projects, indicating the government is keen not to lose their expertise. The four projects are pioneering development of the tar-soaked Orinoco River belt - an area of huge potential with heavy oil deposits that may outstrip Saudi Arabia's current proven reserves. As older fields elsewhere go into decline, development of the Orinoco is seen as key to Venezuela's future production. But it will require large investments - something PDVSA may not be in a position to provide. The company's financial commitments have been spiraling: as the cashcow of Chavez's socialist movement, PDVSA now spends well over a third more on funding social programs for the poor than on investment crucial to maintaining output. It has taken on dozens of preferential oil deals with friendly countries that represent little commercial benefit to the company. It plans to run the electricity sector that is also undergoing nationalization and is also entering the agricultural sector. Chavez has not said how the government will pay for its increased share in the projects that represent a total estimated investment of at least US$13.4 billion (euro10.1 billion). The companies also have US$3.9 billion (euro2.9 billion) in outstanding loans and bond issues that were raised to finance the projects. Sira said those loans will have to be paid for and restructured when PDVSA acquires its majority stake. The government has compensated companies reasonably in recent weeks for nationalizations carried out in other sectors, but those agreements were for assets valued far less than the oil projects. The decree gives the companies four months to negotiate whether they will stay on as minority partners.