ExxonMobil’s Venezuelan finale plays out

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ExxonMobil signalled on Wednesday that it could pull out of Venezuela if it cannot strike a deal with the government on handing over control of its oil operations in the Orinoco basin.

The warning follows a decree last week from Hugo Chávez, the country’s leftwing president, ordering PDVSA, the state oil company, to take a stake of at least 60 per cent in four oil-producing joint ventures in the heavy crude Orinoco Belt, a move that would affect Chevron, ConocoPhillips, BP, France’s Total and Statoil of Norway, as well as Exxon.

“It will be a function of can we shift ownership to a value proposition that works for us,” Rex Tillerson, chief executive of Exxon, told Dow Jones. “If not, everything else is moot because we won’t be staying, we’ll be leaving.”

Mr Tillerson indicated that the reaction of foreign investors was critical to the future of Mr Chávez’s pursuit of “resource nationalism”.

“If [International oil companies] feel they’ve retained value and stay involved, that gives a pattern for the future,” he said. “If IOCs leave, that gives another pattern.”

Mr Tillerson’s comments strike a different tone from a statement Exxon issued earlier this week, in which it suggested it would co-operate fully with the takeover.

Exxon said on Monday it would agree to participate in a transition committee to oversee the transfer of its control of the Cerro Negro heavy crude project to PDVSA, the Venezuelan state oil company. Exxon owns a 41.7 per cent stake in the venture, as does PDVSA. The remaining 16.6 per cent is owned by BP.

The Orinoco facilities are the last privately controlled oil installations remaining in Venezuela. PDVSA estimates that the Orinoco is the largest hydrocarbons deposit in the world, with nearly 300bn barrels in recoverable reserves. The region produces between 500,000 and 620,000 barrels per day, about a quarter of Venezuela’s total production.

Caracas has taken a hard line, warning that if the companies do not hand over control of the operations by a May 1 deadline, the government will take them over unilaterally. “If by the deadline there is no agreement, we will take direct control of all these operations,” said Rafael Ramírez, energy minister, this week.

In partnership with PDVSA, the foreign investors ploughed $17bn into Venezuela to set up the Orinoco projects in the 1990s. The projects, which convert tar oil into high-value synthetic crude, are now estimated to be worth about $31bn.

Total looks to be the most likely to agree to transfer operations at its Orinoco facilities after the company this week settled a year-long dispute with Caracas over the small Jusepin field, which the government seized last year.

On a visit to Caracas this week, Christophe de Margerie, the French oil company’s new chief executive, and BP agreed not to sue Venezuela and accepted $250m compensation for their entire stake in the Jusepin field.

Mr de Margerie suggested that the disagreements over Jusepin had been overshadowed by the company’s desire to proceed with negotiations over the future of the Sincor heavy oil project in the Orinoco.

“The priority is really the Orinoco,” he said. “It needs highly skilled labour, and our number one priority is to maintain production at the existing Sincor.”

Ultimately, the foreign investors with operations in the Orinoco basin are expected to agree to new terms – as did more than two dozen other inter-national companies operating under service contracts in the country’s conventional oil fields did last year. Although they must hand over control by May 1, Venezuela has given the companies until July to agree new contracts, which will then go to Congress to be approved.

As Mr Tillerson’s warning hints, one serious stumbling block will be over compensation. Mr Ramírez said on Monday that PDVSA would compensate the companies in crude oil rather than cash. The industry also fears that it might be offered credits toward future investments as compensation.

PDVSA used credit vouchers last year as part of its compensation to oil companies affected by its takeover of 32 mature oil fields. Caracas paid $913m in vouchers to companies that accepted minority stakes and new joint-venture structures.

The concern is that although in theory the credits can be used to bid in new licensing rounds, to expand existing upstream operations or can be sold to other companies, in practice it is difficult to use them. PDVSA has promised, but not delivered, new licensing rounds where the credits could be used.

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