Chevron, Total, BP, and Statoil have come to terms with Petroleos de Venezuela (PDVSA), but ConocoPhillips and ExxonMobil have refused, saying that they would leave the Orinoco Belt and "write off their $4.5 billion value . . . because it couldn't reach a deal for relinquishing control to the country's oil company under socialist President Hugo Chavez," the Houston Chronicle reported Tuesday.[1]  --  (This is not quite accurate, since the oil is already under Venezuelan control; see below.)  --  "Considered the largest energy reserve in the Western hemisphere, the Orinoco Belt may hold up to 260 billion barrels of extractable crude," Kristen Hays and John Otis note.  --  "If that is certified, Venezuela will surpass Saudi Arabia as No. 1 in proven petroleum reserves.  Daily output from Orinoco fields is 483,000 barrels today."  --  The Financial Times of London said that "The loss of its Venezuelan operations would be a particular blow to ConocoPhillips.  Its operations in the Orinoco belt were valued at about $6bn and accounted for about 10 per cent of the company’s reserve base and 4 per cent of its worldwide production."[2]  --  Benedict Mander put the possible number of barrels of crude in the Orinoco Belt at 270 billion.  --  BACKGROUND:  When oil was discovered at the Maracaibo strike in 1922, Venezuela's corrupt, brutal dictator, Juan Vicente Gómez, who ruled by "terror," allowed Americans to write Venezuela's petroleum law (Daniel Yergin, The Prize: The Epic Quest for Oil, Money, and Power [Simon and Schuster, 1990], pp. 233-36; 432).  --  But oil history was made in 1943 when Standard Oil of New Jersey accepted a new agreement in Venezuela based on the 50-50 principle, "a landmark event" (ibid., p. 435).  --  William F. Buckley Sr. (father of the conservative journalist and author) denounced the new law.  --  But terms even more favorable to Venezuela were negotiated in 1945, after a coup brought to power a left-leaning government that included Juan Pablo Pérez Alfonso.  --  That government was overthrown by the military in 1948 (ibid., pp. 435-37).  --  But in 1958 a new government again included Pérez Alfonso, who devised a plan for the international oil cartel that would become OPEC (ibid., pp. 510-13).  --  In 1973 Venezuela voted to nationalize its oil industry outright, effective Jan. 1, 1976, with Petróleos de Venezuela (PDVSA) taking over and presiding over a number of holding companies, and in subsequent years, Venezuela built a vast refining and marketing system in the U.S. and Europe (ibid., p. 767).  --  In 2001 Venezuela adopted a new hydrocarbons law, but there is thus nothing new about oil nationalism in Venezuela, a fact obscured in articles like these in the Houston Chronicle and Financial Times of London, which represent investors' interests.  --  What is new in Venezuela is not oil nationalization, but rather the use oil profits to finance social spending instead of to enrich investors....


1.

Business

TWO OIL GIANTS DEFY CHAVEZ
By Kristen Hays and John Otis

** ConocoPhillips to leave projects in Venezuela; Exxon Mobil refuses to sign **

Houston Chronicle
June 26, 2007

http://www.chron.com/disp/story.mpl/headline/biz/4923380.html

ConocoPhillips will walk away from its oil projects in Venezuela and write off their $4.5 billion value, the company said Tuesday, because it couldn't reach a deal for relinquishing control to the country's oil company under socialist President Hugo Chavez.

Exxon Mobil Corp. also refused to sign a deal with Petroleos de Venezuela, or PDVSA, regarding its Orinoco River basin project. Analysts said that likely means Exxon Mobil, the industry's biggest player, will ditch operations in Venezuela to focus on protecting operations in other countries with energy under government control -- notably Russia.

"The costs of caving in to government pressure, and the precedent it sets for other sovereign nations where they are currently much more prolific, far outweigh the benefits of staying put," Patrick Esteruelas, an analyst with political risk consulting firm Eurasia Group, said of Exxon Mobil.

Tuesday was PDVSA's deadline for six major foreign oil companies to reach agreements outlining their reduced roles in tapping Venezuela's vast resources. Analysts value the combined oil projects at $25 billion to $30 billion.

The companies had already turned over operations to PDVSA on May 1 under a decree issued by Chavez, a critic of the Bush administration and the years-old contracts giving foreign operators majority control over Orinoco projects.

Former operators Chevron Corp. and Total signed agreements, as did minority partners BP and Statoil, Norway's state-controlled oil company.

"In the case of Exxon Mobil and ConocoPhillips, they will end their participation in the Orinoco Belt," Rafael Ramirez, Venezuela's oil minister and president of PDVSA, announced in Caracas on Tuesday.

Both companies say they are continuing talks regarding compensation.

Ramirez said PDVSA hopes to reach such agreements.

Exxon Mobil did not elaborate on the value of its Cerro Negro project, which produces 120,000 barrels a day of heavy oil that is upgraded into synthetic crude.

"We continue discussions with the Venezuelan government on a way forward," spokeswoman Susan Reeves said.

ConocoPhillips said although it hopes compensation negotiations will succeed, the company "has preserved all legal rights, including international arbitration."

U.S. State Department spokesman Tom Casey said Tuesday that the Venezuelan government has the right to change ownership rules or other regulations, but the United States wants "fair and just compensation" for the companies in such cases.

THE ORINOCO BELT

Considered the largest energy reserve in the Western hemisphere, the Orinoco Belt may hold up to 260 billion barrels of extractable crude. If that is certified, Venezuela will surpass Saudi Arabia as No. 1 in proven petroleum reserves. Daily output from Orinoco fields is 483,000 barrels today.

Foreign oil companies invested about $11 billion to develop Venezuela's heavy crude industry in the 1990s when oil prices dipped into the teens. But as prices more than tripled, Venezuela increased taxes and demanded more control.

Chavez has invited more than a dozen state-run oil companies from Argentina to Vietnam to explore and develop the Orinoco region, but they don't match international companies in heavy oil expertise.

Fadel Gheit, an oil analyst with Oppenheimer & Co., said the move would be "short-term gain for Venezuela, but long-term pain" because it would chill future investment.

Ramirez insisted PDVSA can manage the heavy oil projects.

"For us, there are no costs. We gain national sovereignty," Ramirez said.

LOOKING TO RUSSIA

Even with Venezuela's potential bounty, Exxon Mobil and ConocoPhillips have reason to bypass PDVSA's demands, analysts said.

Exxon Mobil produces less than 1 percent of its global output from Venezuela, Eurasia Group's Esteruelas said.

Before Tuesday, Exxon Mobil held a 41.7 percent stake in Cerro Negro, while BP held 16 percent and PDVSA the rest. PDVSA took Exxon Mobil's stake.

The U.S. company also gave up a 50 percent stake in another conventional oil project.

Exxon Mobil is more invested in Russia, including a massive oil and gas project on Sakhalin Island, off Russia's far east coast.

Gazprom, Russia's state-controlled natural gas company, wrested control of a Sakhalin natural gas project from Shell in December and last week bought out BP's interest in a major Siberian gas field.

"Political risk is alive and well, and you only have to look at Venezuela and Russia," Gheit said.

A MORE DIFFICULT POSITION

ConocoPhillips has more exposure. Its Orinoco interests represent 10 percent of the company's reserves and 4 percent of its global production.

ConocoPhillips had a 50.1 percent interest in Petrozuata and a 40 percent interest in Hamaca, producing a combined 82,000 net barrels of crude per day in the first quarter this year after Venezuelan government-imposed reductions.

ConocoPhillips also had a 32.5 percent interest in Corocoro, an offshore project slated to begin production next year.

But profits from ConocoPhillips' Venezuela operations shrunk, Gheit said. It earned $27 million in the first quarter this year, compared to $800 million in 2006.

"Even if you adjust for higher oil prices last year, the impact of higher taxes and the government take really squeezed all the profit out of Venezuela," Gheit said. "It's not as attractive as it was in the last three years."

Standard & Poor's analyst Ben Toscano said Tuesday, while ConocoPhillips' Venezuelan operations were "clearly a loss," high oil prices should allow the company to meet capital spending and debt reduction goals despite less cash flow.

REMAINING INTERESTS

Of the companies that signed agreements, Chevron kept a 30 percent interest in Hamaca but is no longer the operator. BP maintained its 16 percent interest in Cerro Negro.

Total's 47 percent stake in its Sincor project fell to 30.3 percent, while Statoil's stake fell to 9.7 percent from 15 percent.

Chevron said terms and conditions of their agreements won't be disclosed until they recieve final approval from Venezuela's National Assembly.

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--Jose Orozco in Caracas, Venezuela, contributed to this story.

2.

Companies

Energy utilities mining

VENEZUELA TAKES OVER U.S. OIL PROJECTS
By Benedict Mander

Financial Times (UK)
June 26, 2007 (updated Jun. 27)

http://www.ft.com/cms/s/776105b8-2417-11dc-8ee2-000b5df10621.html

CARACAS -- Venezuela’s state-owned oil company is taking over multibillion-dollar projects owned by ConocoPhillips and ExxonMobil, Rafael Ramirez, the country’s energy minister, said.

The action was being taken following a failure to agree the terms of a handover of operations in the oil-rich Orinoco belt, said Mr. Ramirez.

The oil groups refused to sign an agreement on how the Venezuela’s state-owned oil company PdVSA would take majority control of heavy crude oil projects in the Orinoco belt, which are valued at a total of at least $25bn.

The loss of its Venezuelan operations would be a particular blow to ConocoPhillips. Its operations in the Orinoco belt were valued at about $6bn and accounted for about 10 per cent of the company’s reserve base and 4 per cent of its worldwide production.

Mr. Ramirez said PdVSA was increasing its share in the four projects, which lie above some of the largest heavy crude oil reserves in the world, from an average of 40 per cent to 78 per cent.

Hugo Chávez, Venezuela’s president, announced the state takeover of majority control of operations in the Orinoco Belt this year, along with the nationalization of Venezuela’s largest electricity and telephone companies.

Mr. Ramirez, who is also the president of PdVSA, said Chevron, Total, BP, and Statoil had said they would sign agreements allowing them to continue operating in the area, which can produce 600,000 barrels of oil a day, a quarter of Venezuela’s output.

However, analysts said that both ExxonMobil and ConocoPhillips, which was the most exposed of the private companies in the Orinoco, refused to accept minority positions in the ventures for compensation that they considered to be below market value. The companies appeared still to be in talks with Venezuela over the handover.

Petro-Canada also pulled out of the country, saying: “We have decided not to migrate to the new commercial structure, so our working interest passes to the Venezuelan government.”

Analysts said the country needed the expertise of private companies. Venezuela’s oil industry has stagnated in recent years, with production falling 10 per cent during the past decade.

ExxonMobil said it was “disappointed that we have been unable to reach an agreement on the terms for migration to a mixed enterprise structure. However, we continue discussions with the Venezuelan government on a way forward.”

ConocoPhillips said it expected to take an impairment of about $4.5bn in the second quarter for its entire interest in its Venezuelan oil projects as negotiations continued with authorities over compensation for the company’s stake in the projects.

The Orinoco belt could contain 270bn barrels of oil, an amount that would leave Venezuela with the largest reserves in the world -- above Saudi Arabia and Canada.