Reliance Industries Ltd. plans to spend more than $2 billion on Venezuelan oil fields, betting President Hugo Chavez’s failing health won’t lead to political upheaval, said a person with direct knowledge of the decision.
The operator of the world’s biggest refining complex is jointly assessing investments in four oilfields in the South American nation with state-run company Petroleos de Venezuela SA, said the person, who asked not to be identified, citing confidentiality terms. Reliance is waiting for data on the blocks from PDVSA, as Petroleos de Venezuela is called, to start the due diligence process, the person said.
Venezuela, which holds the world’s biggest proved oil reserves, produces cheaper, heavier grades of crude, ideal for processing at the two adjacent refineries run by Reliance, which posted its first profit increase in a year last quarter. Chavez, who was re-elected in October to a third six-year term, is fighting cancer in a hospital in Cuba and hasn’t been seen or heard since Dec. 10 when he reached Havana for a fourth surgery.
“It’s unlikely there will be a major change in policy after Chavez, unless it’s accompanied by some kind of regime change,” Pierre Noel, a senior fellow for economic and energy security at The International Institute for Strategic Studies, said by phone from Singapore. “Under Chavez, Venezuela has linked its oil policy with its broader foreign policy and this has been supportive of Asian investments.”
Reliance, controlled by billionaire Mukesh Ambani, climbed 2.2 percent to 919.95 rupees at the close of trading in Mumbai. The shares have gained 9.6 percent this year, compared with a 3.5 percent increase in the key Sensitive Index.
Tushar Pania, a spokesman for Reliance, didn’t reply to an e-mail seeking comments on the company’s Venezuelan investments. PDVSA spokesman Alfredo Carquez didn’t return calls to his mobile phone or answer e-mails.
Reliance’s planned investment in Venezuela comes at a time when the company is struggling to reverse a drop in natural gas production from its biggest field in India. Gas production from the KG-D6 block in the Bay of Bengal declined 37 percent to 275 billion cubic feet in the nine months ended Dec. 31 from a year earlier, Reliance said Jan. 18. The drop was because of reservoir complexity and a natural decline in output, it said.
Net income rose 24 percent to 55 billion rupees ($1 billion), the biggest increase in two years, in the period ended Dec. 31 compared with a year earlier, Reliance said Jan. 18 in a filing. The company earned $9.6 for every barrel of crude it processed in the quarter, compared with $6.8 a year earlier and $9.5 a barrel in the previous three months.
“Processing heavier grade of Venezuelan crude will allow Reliance to improve margins at its refineries,” Ehsan Ul-Haq, senior market consultant at KBC Energy Economics, said by phone from London. “Reliance will depend on countries like Venezuela for heavy crude supplies as the Middle East refiners use more and more of their own heavy varieties.”
China has lent Venezuela more than $36 billion since 2007 to invest in infrastructure projects, some of which Venezuela is repaying through crude supplies to the world’s biggest energy consumer. China Petroleum & Chemical Corp. and China National Oil Offshore Ltd. own stakes in Venezuelan fields.
Besides the Chinese, Indian and Japanese companies have signed contracts with PDVSA. India’s biggest energy explorer Oil & Natural Gas Corp. acquired a stake in the San Cristobal project in 2008 and is a partner in the Carabobo 1 project that started producing oil last month. Inpex Corp., Japan’s biggest energy explorer, owns 70 percent of the Copa Macoya and the Guarico Oriental fields.
India’s government said in July it planned to invest $2.2 billion in the Carabobo 1 block.
PDVSA is in investment talks with India’s state-run energy explorer ONGC and Reliance, the Caracas-based company’s Planning Director Fadi Kabboul said in New Delhi on Oct. 17.
Venezuela wants to increase ties with India to tap the South Asian nation’s rising demand and capacity to process heavy crude, Venezuelan Oil Minister Rafael Ramirez said on Sept. 26. PDVSA signed a long-term supply agreement with Reliance to boost exports of heavy crude to Asia and an accord to develop offshore natural-gas projects -- the Boyaca 4 block and a section in the Ayacucho area of the Orinoco belt, he said.
Essar Oil Ltd., controlled by billionaire brothers Shashi and Ravi Ruia, also imports crude oil from Venezuela for its 405,000 barrels-a-day refinery in western Gujarat state. The plant is about 8 miles (13 kilometers) away from the Reliance complex, which has a daily capacity of 1.24 million barrels.
“We don’t expect any disruptions because we have supply contracts with the national oil company,” Essar Chief Executive Officer Lalit Kumar Gupta said on a conference call on Jan. 15.
The average price of the basket of crude oil handled by PDVSA was $99.25 a barrel in 2012, 11 percent cheaper than the average Brent key oil price, according to data compiled by Bloomberg.
Venezuelan Vice President Nicolas Maduro said the head of the national assembly would assume power and call elections to be held within 30 days if Chavez dies or steps down before he is sworn into his new term. Maduro, in an interview with the Spanish newswire EFE published Jan. 17, said Venezuela’s constitution is clear about the succession process.
“I don’t expect an Arab springs in Venezuela,” said Jagannadham Thunuguntla, head of research at New Delhi-based SMC Global Securities Ltd., referring to a surge of protests that began in Egypt against governments and spread to other parts of the Middle East, including Libya. “Venezuela has the oil, and India needs it. It’s an opportunity.”