Tumbling oil prices, a global credit crunch and political risk concerns will likely leave Venezuela struggling to attract investor interest in a bid process for three heavy oil blocks that opened on Thursday.
The government of socialist President Hugo Chavez is courting global oil companies to develop the tar-like reserves in the Orinoco belt a year after nationalizations that forced oil majors to rewrite contracts and pay higher taxes. But companies seeking to avoid risk amid falling crude prices and a possible global recession will likely shy away from the high-cost Orinoco development in favor of less expensive projects in more stable investment environments.
"I don't see anyone jumping on the bandwagon to get into Venezuela," said Jorge Pinon, an senior research associate with the Center for Hemispheric Policy at the University of Miami. "In this environment you're going to see a run for areas where the risk is known and the risk is manageable."
Venezuela on Thursday invited companies to a ceremony to tender the blocks believed to contain billions of barrels of heavy oil, hoping to attract partners ranging from Chinese state-run firms to private majors such as Chevron.
The government notes it has done exploration in the Orinoco belt to certify the reserves, meaning companies face almost no risk of drilling wells that turn out to have no oil. And in contrast to Canadian tar sands, Orinoco oil flows through pipelines rather than having to be moved with bulldozers and later boiled to extract oil. But Pinon said Orinoco projects must compete for investment with less expensive regions such as Angola, which has higher quality oil and more consistent terms and conditions.
Oil blocks in the U.S. Gulf of Mexico, where investors see clear conditions and little chance for regulatory changes, are also likely to appear more attractive as a global financial crisis threatens to weaken energy demand worldwide.
HIGH COST, HIGH RISK
Many companies are likely to cautiously enter the bidding to maintain a foothold in Venezuela, which supplies about 10 percent of U.S. crude imports. And Venezuela may offer favorable terms to companies from China, which has lent the Chavez government billions of dollars this year in exchange for fuel shipments. But Orinoco projects are at a disadvantage to traditional oil fields because the crude must be "upgraded" into synthetic oil to be processed by traditional refineries.
This leaves the minimum price tag for a new project, including drilling operations and a special upgrading facility, at a hefty $8 billion -- a figure difficult to finance at a moment when credit markets are in turmoil. "We may well end up with a batch of mostly state-owned companies bidding for the fields but not doing much with them," said Patrick Esteruelas of the Eurasia Group in New York.
The seemingly unstoppable rise in oil prices for years left companies begging Caracas for access to the Orinoco belt, but as prices fall the risks of Venezuela's frequent shifting of terms and conditions may become a significant deterrent.
Chavez has raised taxes and royalties four times since 2004 -- including a windfall tax created this year to tap into soaring oil prices -- and ordered companies to give up operational control over projects.
Venezuela in 2006 launched a bidding round for offshore natural gas fields, but two years later decided to directly assign development rights to specific companies -- leaving many questioning the transparency of the bidding process. Oil giants Exxon Mobil and ConocoPhillips are currently suing Venezuela for expropriating their Orinoco holdings.
"You would expect fairly lukewarm interest, given the concerns about investment climate and issues about the economics of the projects, and also the credit crunch," said Antoine Halff of the brokerage Newedge in New York.
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