THE WALL STREET JOURNAL: Big Oil Presses Ahead in Venezuela: Royal Dutch/Shell Group, meanwhile, says it is looking closely at doing its own project. "We see it as an important opportunity for the company," Shell Venezuela President Joaquin Moreo said recently. (ShellNews.net)

Despite Chavez's Hand In Setting the Entry Terms, Energy Companies Pour In

By DAVID LUHNOW

Staff Reporter of THE WALL STREET JOURNAL

August 24, 2004; Page A10

CARACAS, Venezuela -- President Hugo Chavez's fiery anti-American rhetoric isn't scaring off one group of investors: Big Oil.

In recent weeks, major oil companies have unveiled plans for giant investments in Venezuela, the first since Mr. Chavez pushed through legal changes in 2001 that imposed tougher financial terms on foreign oil companies.

The Chavez government trumpeted the moves as a vote of confidence in his administration ahead of last week's referendum on recalling the president, which he won comfortably, 59% to 41%.

The investments come as global oil prices climb and supplies appear tight for the foreseeable future. Venezuela has the biggest proven reserves outside the Middle East. And while Venezuela has its own political turmoil, oil companies have been largely unaffected by the battles between Mr. Chavez and his opponents.

So the terms imposed in 2001 -- which require the state to be the principal stakeholder in any oil project and raise royalty rates to between 20% to 30% from about 16% -- no longer are stopping companies from betting on this sometimes-volatile Andean nation.

"I can't think of a better position for Chavez to be in," said Miguel Diaz of the Center for Strategic and International Studies, of Washington. "The international situation leaves oil companies with few investment options. By comparison, Venezuela looks attractive."

Despite his anti-American rhetoric, Mr. Chavez needs Big Oil as much as it needs Venezuela. State-run oil giant Petróleos de Venezuela SA, or PDVSA, has yet to return to its former output levels following last year's strike and subsequent purge by the government of thousands of company officials.

Many analysts estimate Venezuela is producing about 2.5 million barrels a day, with nearly one million of that coming from private companies. Before last year's strike, the country was producing roughly three million barrels a day.

Mr. Chavez also is using export revenue from the state oil giant to spend billions of dollars on social programs, leaving PDVSA with less money for investment than it otherwise would have with high prices.

"It's a win-win for Venezuela and the oil companies," said Fadel Gheit, an oil and gas analyst for New York brokerage house firm Oppenheimer & Co.

Mr. Gheit estimated that until the recent surge in prices, oil companies used to calculate an average for Venezuelan export prices in the low teens of dollars a barrel to judge whether an investment was worthwhile. Now the assumption is probably in the low 20s of dollars a barrel, he said. Venezuelan export prices are normally a few dollars lower than benchmark prices.

Most of the attention by oil companies is aimed at the country's Orinoco Belt, which has vast reserves of extra-heavy crude that could rival Saudi Arabia's oil pool.

This month, ChevronTexaco Corp., of San Ramon, Calif., said it was in talks with the Venezuelan government to upgrade heavy oil to produce as much as 400,000 barrels a day of synthetic crude oil from the region. The project could involve as much as $6 billion in investment.

The company already leads a joint venture with ConocoPhillips, of Houston, in the Orinoco region, which produces 160,000 barrels a day of blended crude and expects to inaugurate an upgrading plant with capacity for an additional 190,000 barrels a day of synthetic crude in the next few months.

Earlier this month, the company started exploratory drilling for natural gas off Venezuela's coast -- a project that could cost some $200 million in the next three years.

"ChevronTexaco is committed to Venezuela," Ali Moshiri, president of ChevronTexaco Latin America, said during a speech in front of Mr. Chavez to mark the start of the gas drilling. "We are prepared to enter into a contract governed by the new hydrocarbon law."

Royal Dutch/Shell Group, meanwhile, says it is looking closely at doing its own project. "We see it as an important opportunity for the company," Shell Venezuela President Joaquin Moreo said recently.

Another move this month was made by Exxon Mobil Corp., Houston, which announced a new petrochemical project with PDVSA that could cost as much as $3 billion.

Venezuela's huge pools of oil and gas can make it to U.S. markets in less than a week, making them a vital link in American energy planning, especially if supplies from the Mideast are disrupted. Indeed, the recent climb in energy costs began nearly two years ago, during the PDVSA strike.

What foreign oil companies fear most in Venezuela, as they do in many markets, is instability or unpredictability. While some opponents of Mr. Chavez say the leader can't be trusted, others say he is unlikely to further change the rules of the game.

"These are good times for Big Oil here," said Guaicaipuro Lameda, a former president of PDVSA. "As long as prices are high, the foreign companies can help invest, and PDVSA can spend its money on social programs."

--Jose de Cordoba contributed to this article.

Write to David Luhnow at david.luhnow@wsj.com