Venezuela's complex oil terrain

Mixed messages from Venezuela to foreign oil companies

By Charlie Devereux - GlobalPost
Published: May 31, 2009 10:12 ET
Page 3 of 3

The figures also obfuscate the company’s true profitability. An estimated 917,000 of these barrels are sold on the internal market at a subsidized rate, according to the trade paper Oil Market Intelligence. The government is believed to be losing about $8 billion per year subsidizing Venezuelan gasoline consumption, which at 18 cents per gallon is the cheapest in the world.

Another 180,000 barrels are sold to allied countries in the region under the Petrocaribe scheme, which allows Caribbean countries to pay using a low interest 25-year credit system, further eating into PDVSA’s profits.

Venezuela’s best oil customer is also public enemy No. 1 here: the United States, which buys about half of the country’s oil at market price and, crucially, pays on time. Chavez has looked to diversify sales to other countries. Last month he visited China and signed an accord to increase sales to 1 million barrels per day from 380,000 by 2013.

Whether Venezuela will be able to increase its production to meet this demand will depend largely on whether it can persuade foreign investors to help it fulfill the enormous potential in the Orinoco Belt.

The French giant Total has already spoken about forming a consortium with the China National Petroleum Company, while a consortium of Russian companies are believed to be toying with the idea. U.S.-based Chevron, which has managed to maintain amicable relations with Chavez’s government, is also believed to be interested.

But the sticking point will likely how confident these companies feel that Venezuela will honor their contracts and not change the rules of the game.

A recent report by the Economist Intelligence Unit ranked Venezuela 81 out of 82 countries in terms of a welcome environment for foreign investment. So why would international companies bother with the Caracobo bidding round, considering the risks? Venezuela’s potential is simply too great, Pitts said.

“If you look at this long term, then companies will be thinking, ‘Let's get in for whatever the price it might take and be there, letting the government do whatever they want to do,’” he said. “They will take a back seat, throw in whatever money is needed and hope that in the future Venezuela reverts to them to help them run these operations.”

Read more on oil:

The story in photos behind the fight for Nigeria's oil wealth

Cambodia's coming oil economy

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A crackdown on Chavez opponents?

Hugo Chavez: Re-writing history

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