Big Oil Can't Resist This Slick OfferJane Knight
Jan. 1, 1976, was a bitter day for executives of Mobil Oil Corp. and other foreign oil companies. That was when they cleaned out their desks and handed over nationalized operations, from exploration to refining, to state oil monopoly Petrleos de Venezuela (PDVSA).
Two decades later, a Venezuela in need of help is reopening its oil fields to foreigners. Mobil has set up shop again in Caracas, aiming to bid on 10 swaths of territory that PDVSA is offering for exploration in auctions starting next January. "It took me a while to convince Mobil's management that it was okay to come back," says Travis L. Crouch, who arrived in Caracas last October as general manager of Mobil's newly opened office. "But Venezuela has got the potential to be a major Mobil affiliate."
ROAD SHOWS. The lure of Venezuelan oil wealth is too strong to be dampened by old resentments. Executives of multinational companies flocked to a July 21 presentation by PDVSA in Caracas, the first in a series of "road shows" scheduled in Houston, New York, and London to launch the auction process.
PDVSA President Luis E. Giusti estimates that the exploratory parcels contain anywhere from 7 billion to 23 billion barrels of light and medium crude--a hefty prospective addition to the country's proven reserves of 64 billion barrels. "There aren't many places where you can hope to find large reserves, and Venezuela is one of them," says Juan M. Quevado, vice-president in Venezuela for Texaco Inc.--another foreign company that's back eyeing prospects after being booted out in 1976. Companies that find oil will set up joint ventures with PDVSA to produce it under a profit-sharing scheme approved by Venezuela's Congress on July 4.
What pushed nationalist legislators to approve the oil opening is Venezuela's desperate need for revenue, partly due to last year's $6 billion bailout of failed banks. And cash-stretched PDVSA needs outside help to carry out its $55 billion program to boost production capacity from 3.1 million barrels per day now, to 5.5 million barrels by 2005 (chart). Venezuela's output is currently limited by its quota as a member of OPEC to 2.4 million barrels daily, but foreign bidders are betting that OPEC quotas will ease as world demand rises.
The stakes, and the potential rewards, are high. Winning bidders will spend a minimum of $20 million to $60 million each to explore tracts strung across Venezuela from Lake Maracaibo to the Orinoco River delta. Investments to develop new oil finds will total around $11 billion, PDVSA estimates. Within 10 years, PDVSA expects the new fields to produce 500,000 to 800,000 barrels per day--worth up to $3.9 billion annually at Venezuela's current average crude price.
Venezuela's added attraction, by contrast with oil plays in volatile areas from Kazakhstan to the South China Sea, is the relative stability of a country that is one of Latin America's oldest democracies. As a bonus, winning bidders will gain a foothold in one of the half-dozen core OPEC members with large reserves. They are likely to control a rising share of the world's oil exports as reserves level off in the rest of the globe. But the other five--Saudi Arabia, Iran, Iraq, Kuwait, and the United Arab Emirates--are all clustered around the strife-torn Persian Gulf.
"WINDFALL" TAX. Even so, Venezuela's tough terms, including taxes that will take from 71% to 88% of profits from the new ventures, are making prospective investors cautious. The winning bidders will be those that offer to pay the highest "windfall" tax, ranging up to 50% of the profit remaining after payment of basic royalties and corporate income taxes. Moreover, PDVSA will wield a controlling vote in the joint ventures even though it will own shares of 35% or less in each. Still, potential partners are reassured by PDVSA's success as a multinational with major operations in the U.S. and Germany, and by its traditional insulation from Venezuelan politics.
"The terms are tough, but the prospectivity [of the parcels] and PDVSA's credibility are very attractive," says Uisdean R. Vass, an attorney for London law firm Clyde & Co., which advises a number of oil companies on the offerings. He predicts that the auction "will be a success, in that bids will be made on a significant number of areas."
To help reach its production target, PDVSA has already signed contracts with foreign companies to revive aging fields. It is also setting up ventures with companies such as Conoco Inc. and France's Total to build costly plants to upgrade vast heavy-oil deposits.
In the coming auction, the hottest bidding will be triggered by five tracts in the east, geologists say. If all goes well, the swamps of the Orinoco delta may one day replace Lake Maracaibo as the center of Venezuela's oil industry.