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THE WALL STREET JOURNAL: Venezuela's Tar Oil Attracts Oil Majors Despite Tax Rows: "We've been in the country for 90 years, and we'll be here for another 90 years," said Sean Rooney, Shell's new president for Venezuela. He said Venezuela's heavy oil reserves are too large to ignore, provoking a steady stream of corporate interest. (ShellNews.net) Posted 18 Feb 05

 

DOW JONES NEWSWIRES

 

CARACAS -- Venezuela has been anything but generous to oil firms over the past year, with the Hugo Chavez administration ending favorable tax arrangements where it sees fit.

 

Despite such painful and abrupt tax moves, major oil companies appear eager to invest in the Andean nation's massive reserves of heavy tar oil.

 

"I thought (oil firms) were going to be afraid of Venezuela - and people seem to be falling over themselves to cosey up to Chavez," said William Edwards, a Houston-based oil consultant who has worked for large oil firms in Venezuela.

 

Leading executives from France's Total (TOT), Royal Dutch/ Shell Group (RD SC), Russia's Lukoil, Brazil's Petrobras (PBR) and Houston-based ConocoPhillips (COP) have all visited Venezuela this month to make their case with the Chavez government for increasing investments.

 

Surprisingly, the interest comes at a time when Venezuela has arbitrarily altered contract terms on a number of projects, claiming high oil prices justify an increase in state revenue from oil.

 

Last October, Venezuela scrapped a royalty tax holiday on four heavy crude projects in the Orinoco region. In addition, the companies involved had no advanced warning of the tax hike, finding out only when Chavez made it public during a weekly radio broadcast.

 

This year brought only more tax suffering for private oil companies here. Conoco had an offshore oil drilling project frozen for two months until the company agreed to a 16 2/3% royalty tax rate, up from a mere 1% under the original contract signed in the 1990s.

 

"The 1% royalty tax was not worth it for us," Oil Minister Rafael Ramirez said this week, referring to the Conoco project.

 

Ramirez has said more of the 33 operating contracts signed in the 1990s are under revision. Those pacts were negotiated under the previous administration of Rafael Caldera.

 

"The contracts of the past were poorly designed," said one PdVSA director, who asked not to be named.

 

"I don't think we should leave behind certain parts of the contracts, we have to clean up the past," he said.

 

But oil majors appear willing to stomach more onerous tax regimes for new projects - and the risk of the rules changing arbitrarily - to get a foothold in Venezuela's vast oil reserves.

 

"We've been in the country for 90 years, and we'll be here for another 90 years," said Sean Rooney, Shell's new president for Venezuela.

 

He said Venezuela's heavy oil reserves are too large to ignore, provoking a steady stream of corporate interest. Meanwhile, analysts describe Venezuela's tax and investment climate as risky.

 

Shell hopes to set up a new heavy oil project with PdVSA in the Orinoco region, using technology it currently employs at projects in Canada's tar sands. Canada and Venezuela have similar reserves of extra-heavy oil, which needs to go through a complex refining process to be turned into marketable synthetic crude.

 

Rooney was upbeat on Venezuela's long-term outlook, but said he does not expect to start investing in the tar belt until 2006 or 2007, after the terms of the project are finalized.

 

Shell is not the only company looking for a stake in Venezuela's tar deposits, which hold over 200 billion barrels of reserves. Lukoil and Petrobras recently sent top executives to the country and agreed to explore investment options in the heavy tar oil.

 

Total - which operates the Sincor heavy crude project along with PdVSA and Norway's Statoil (STO) - hopes to see things come together faster than the newcomers. The company's president, Thierry Demarest, said he hopes to see a preliminary deal signed for a $5 billion Sincor II project by the end of the first half.

 

According to Edwards, oil majors are willing to take risks thanks to robust revenues amid current high oil prices.

 

"There are two offsetting factors. That activity is making money right now, but Venezuela could take it away from you on the tax side," said Edwards.

 

"They have to balance this," he said.

 

Venezuela is the world's fifth largest oil exporter, and hopes to nearly double its output to 5 million barrels a day by 2009 with the help of private oil companies.

 

Private firms have invested a total of $25 billion since Venezuela opened its oil industry to private investment in 1992, mainly in exploring mature oil fields and the heavy crude projects.

 

By Peter Millard, Dow Jones Newswires; 58-212-564-1339; peter.millard@dowjones.com;


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