Arcaya & Asociados
June 11th 2007
Will Chinese oil companies survive from Venezuela's move of nationalizing its oil industry? Or will they get more benefits from such kind of move?
Venezuelan President Hugo Chavez on May 1 announced that the nationalization of his country's oil industry was put an end. The Venezuelan government has reclaimed oil resources of the Orinoco Belt, the world's biggest heavy oil deposit, from companies such as BP, ExxonMobil and Total.
On the one hand, the Venezuelan state oil company PdVSA, which replaces these big oil majors, assumes at least a 60% stake in any heavy crude projects. On the other, Chavez is seeking to do more business with China, Russia and Iran.
Such kind of move will certainly bowl some transnational oil companies out and reshuffle the energy market, which will bring about both opportunity and challenge to Chinese oil companies.
Venezuela-China energy cooperation enhanced When squeezing these oil majors out of the Venezuelan market, Chavez extended his welcome to the state oil companies from China, Brazil and Russia for further development of the four large Orinoco Belt projects. It is reported that on May 15, PdVSA and Sinopec joined hands to seek a rig to develop the Posa oilfield in the Gulf of Paria, which is located at the shallow offshore waters in eastern Venezuela.
In addition, PdVSA has also launched a series of projects with CNPC. During the visit of Jiang Jiemin, general manager of CNPC, to Venezuela, the Information Ministry of Ven-ezuela said CNPC would sign a preliminary deal to take a 40% stake in various Venezu-elan heavy crude projects.
Venezuela will also allow China to expand its oil exploration activities in the Orinoco River region. CNPC has already conducted its business in the Junin 4 block and is reported to expand its Orinoco operation with an investment of 'billions of US dollars'.
Moreover, it is learned that CNPC will cooperate with the Venezuelan side to build three refineries in China with a total capacity of processing 800,000 barrels of Venezuelan heavy crude per day, which would be likely completed in two or three years.
Chavez emphasized that Venezuela and China would also establish a joint oil shipping company to carry crude and other products between the two countries, and do business in the Caribbean and take shipments to Africa.
With these moves, China has become a strategic partner of Venezuela, which will help the country reduce dependence on oil export to the U. S. At present, the U. S is still the biggest oil customer of Venezuela, although oil export to the U. S. has declined from 1.5 million barrels per day in March 2006 to 1.2 million in the first quarter of 2007.
Chavez said China is set to replace the U. S. as Venezuela's top oil buyer, as Venezuela plans to raise oil export to China to one million barrels a day by 2012 from its current level of about 150,000 barrels a day. Besides, PdVSA hopes that Chinese oil companies will produce at least 400,000 barrels of crude a day in Venezuela by 2011.
Two sides of the coin
The nationalization of oil industry in Venezuela does bring on opportunities to Chinese oil firms, which has accepted new regulations set by the country, while some transnational oil majors could not. This will be a good foundation for the future oil cooperation between Venezuela and China.
The reshuffle of the Venezuelan oil market triggered by the nationalization move will also stir Chinese oil companies, either state-owned or privately owned, to go further in Venezuela. However, sometimes such friendly relation between the two will put Chinese oil companies at a disadvantageous position.
Currently, the fact that Venezuela is quite close to China has aroused complains from some international oil giants, which is likely to put some obstacles on Chinese oil companies in their way of going overseas. Such nationalization will increase development cost and risk for foreign oil companies in Venezuela. It is not an exception for Chinese oil firms, and so they will adhere to the principle of equality and mutual benefit when conducting international cooperation, while strengthening the E&D activities in the country.
Venezuela's nationalization road As the international oil price rises, oil producing countries, most of which are developing ones, have conducted a new round of nationalization on oil industry and the wave has swept across South America and Africa.
Compared with the nationalization move taken during the 1970s oil crisis, this time the nationalization action doesn't sideline foreign oil giants completely out. For instance, Chavez has invited big oil companies to stay as partners but with a minority stake. These countries, which launched the nationalization campaign, have not confiscated or expelled the assets owned by foreign oil companies. Instead, they still attempt to carry out cooperation with foreign oil companies.
In 2006, the Venezuelan government required foreign oil companies to sign new agree-ment with PdVSA on the establishment of joint ventures. Differing from the previous PSCs (production sharing contracts), the new agreement would enable PdVSA to as-sume a 60-70% stake in each joint venture.
On March 5, 2007, the Venezuelan government formally purchased all equities in the Jusepin oilfield from Total and BP at a cost of US$250 million. Rafael Ramirez, Venezuela's oil minister and the head of PdVSA, however, said that he would grant companies, which would like to relinquish control over the projects in the Orinoco river basin, with oil, not cash.
The Jusepin oilfield boosts a daily crude production of 35,000 barrels. Total and BP pre-viously had a 55% and 45% stake, respectively. In April 2006, PdVSA took control over the oilfield after Total rejected to set up a new JV with PdVSA.
The announcement made by Chavez on May 1 is regarded as the culmination of the nationalization campaign. In fact, almost all international oil majors such as BP, ExxonMobil, Chevron, Total and Statoil but except ConocoPhillips, have agreed on the state control strategy taken by the Venezuelan government in principle. The government warned it would expropriate the assets of these companies if they refuse to follow suit. This means a big loss for them, since they have invested over US$30 billion in the Orinoco Belt and see a yield of 600,000 barrels of crude oil every day. (OGP)