Alexander's Gas & Oil Connections = Changes in Venezuela

Alexander's Gas & Oil Connections = News and TrendsThere is a change in the way things are done in Venezuela



by Simon Romero and Brian Ellsworth



26-01-05 Venezuela may be increasing tension in energy markets with decisions that are confounding international oil companies, but the government there says it is merely seeking more income and new markets for its oil.

Peter Hill, CEO of Harvest Natural Resources of Houston, which gets all its oil from Venezuela, has one view of the policies unfolding there. Harvest's stock lost a quarter of its value after the Venezuelan national oil company unexpectedly told it to suspend exploration efforts.



ConocoPhillips's plan to develop a new oil field in Venezuela was put on hold about two weeks ago, and Rafael Ramirez, the Venezuelan energy minister, said that the government would review its 33 operating agreements with oil companies from the 1990s to see if they still made sense for Venezuela. Those delays come as officials have held talks with government-run oil companies from China, Russia and Iran.

"I'm a businessman, and I don't like to get involved in politics," Hill, whose company has operated in Venezuela for more than a decade, said. "But there's been a demonstrable change in the way things are done in Venezuela."



In Venezuela, the view is somewhat different. The government of President Hugo Chavez has said it would negotiate its disputes with Harvest and ConocoPhillips to reach agreement on production and spending. But analysts add that at a time of high crude oil prices and a shift in attention toward China, Venezuela is also trying to exert greater control over its resources and expand its range of buyers, as well as getting more lucrative deals.

Access to some of the most coveted oil reserves in the Western Hemisphere is at stake, with Venezuela exporting about 1.2 mm bpd of oil to the United States, or nearly 15 % of American imports. But the overtures to the Chinese, Russians and Iranians have added to worries among private oil companies that Venezuelan policies toward them are becoming increasingly unpredictable.



Concern is also rising over the possibility that Venezuela may eventually divert shipments from the United States, which receives more than half of the country's total production. The Venezuelans say they still consider the United States their principal market, adding that only new production would be moved to China.

All this concern has been acutely felt in Houston in recent days. Shares in Harvest, which produces about 30,000 bpd of oil in Venezuela, have plunged almost 30 % since it said that Petroleos de Venezuela, the government-controlled oil company, had told it to effectively cut its production by one-third.



"I'm not able to read the mind of the Venezuelan government," said Hill, who added that officials from the Venezuelan Energy Ministry had signalled they were open to negotiations on Harvest's activities in the country. He said he did not know why the government oil company "would want to restrict investment and production."

"The interface for communication with the government is becoming much cloudier to read," Hill added.



Investors are focusing on the Venezuelan operations of ConocoPhillips, one of the largest international energy companies operating there, after its $ 480 mm plan to develop an oil field off the eastern coast was put on hold amid feuding with Petroleos de Venezuela over the project's terms. ConocoPhillips gets about 7 % of its worldwide production from Venezuela. Ramirez was quoted as saying that the government was close to an agreement with the company.

Paul Sankey, an analyst at Deutsche Bank, wrote in a note to investors that "we are extremely concerned about what seems to be an escalating situation in Venezuela." He recommended reducing holdings of ConocoPhillips shares. Sankey said that American companies in Venezuela, including ConocoPhillips, Harvest and ChevronTexaco were the "main potential losers from the unpredictable situation."



Higher oil prices, which increased the flow of hard currency to Venezuela's treasury, appear to have emboldened the dealings of Chavez's leftist government with foreign energy companies, as the rise in oil revenue offset the effects of declining production.

Output fell to an estimated 2.7 mm bpd from nearly 3.5 mm bpd in the late 1990s, after strife in the state oil company resulted in a purge of employees, many of them virulently anti-Chavez. Venezuela's output is about 400,000 bpd short of its OPEC production quota of 3.11 mm bpd, according to the International Energy Agency.



But even as Venezuelan oil production has declined over all, foreign companies have contributed more of the output, accounting for roughly 1.2 mm bpd a result of the opening of the Venezuelan energy industry to greater foreign investment by previous governments in the 1990s. With oil prices and demand high, Chavez appears to be seizing the moment to get more favourable contracts from the oil companies and greater control of his oil resources.

"I tend to believe that these disputes have to do the government wanting a bigger share of the pie," said Roger Tissot, director for markets and countries at PFC Energy, a consulting group in Washington. He added that "in the past, they have been notoriously clumsy in asking for it."



But there is growing concern that oil production in Venezuela, which has the largest reserves in Latin America, could decline further if exploration ventures with international companies were suspended. That, in turn, could restrict global energy supplies and push prices even higher, producing an even larger windfall for Chavez's government.

"This type of strategy is fine as long as oil remains high," said Antonio Szabo, a former executive at Petroleos de Venezuela, who now runs an energy and software consulting company in Houston. "But if prices retreat, they'll have grave difficulty in fulfilling the promises that are now being made."