Venezuelan Natural Gas: A Marriage of Convenience?
Nov 14, 2003
stratfor.biz
Summary
Russian oil major LUKoil has signed a memorandum of understanding with Venezuela to bid on the Latin American country's offshore Deltana natural gas project. LUKoil has no great hopes of working at Deltana, and its promise is purely a political move that will play well in both Caracas and Moscow.
Analysis
While on a three-day trip to Moscow, Venezuelan Energy and Mines Minister Rafael Ramirez managed to extract a memorandum of understanding from Russian oil major LUKoil to participate in the Venezuelan energy sector, Venezuelan state news agency Venpres reported Nov. 13.
Specifically, LUKoil supposedly showed interest in bidding on Blocks 3 and 5 of Venezuela's Deltana offshore natural gas project. However, the announcement is merely atmospherics.
Development in Venezuela's offshore natural gas sector hasn't exactly been stalled; it hasn't even started. Unlike tiny, well-run, foreign investment-friendly Trinidad and Tobago next door -- which boasts one of the world's most advanced offshore natural gas sectors -- the politicized, unstable, nationalistic Venezuela has yet to sink a single production well into the ocean.
In fact, progress in Venezuela has been so lackluster -- it has been trying to attract investment into its offshore natural gas sector for 25 years -- that in August, President Hugo Chavez agreed to allow foreign investors to pipe any gas produced to Trinidad and Tobago for processing and export. Though the move is certainly a step forward, no one has expressed great enthusiasm for investing in Venezuela -- even in an offshore project -- due to the country's unique political dynamics.
LUKoil is hardly Venezuela's knight in shining armor. Investment climate issues aside, the Russian oil major has negligible experience in both natural gas and offshore projects, making an attempt to implement a project that is unworkable. Instead, LUKoil's expansion plans are geared toward oil investments in the former Soviet Union, Central Europe and the United States. The few activities LUKoil has in natural gas are limited to its home turf in Russia and Central Asia.
That does not mean LUKoil wouldn't like to develop offshore and natural gas expertise. Stratfor sources within the Russian Energy Ministry indicate that LUKoil is talking with a number of Western firms about perhaps entering a joint bid, but with only a week to go before the Nov. 28 auction, chances of a last-minute marriage -- in which LUKoil would more or less be deadweight -- are slim indeed.
So why is Ramirez bothering? The minister's primary goal is to increase the income from the auction; the last round garnered only one-eighth of government targets, with bids so low that three of the five blocks on offer were not even awarded. French oil major TotalFinaElf (now Total) submitted the lowest bid at $100,000, and the winners of the auction for Blocks 2 and 4 in February 2003 -- ChevronTexaco and Statoil -- have yet to begin serious work. Ramirez's logic is most likely that Western firms will think that if a Russian company is willing to come halfway around the world to bid on Deltana, there must be something there worth looking at.
Considering LUKoil's utter lack of expertise, the strategy isn't particularly brilliant, but this is Venezuela, where politics regularly trump sound financial decisions.
If LUKoil were to actually make an offer, it would be the first Russian firm to bid on any project in Venezuela. If LUKoil were to actually win the bid, it would be only because there had been a political decision in Caracas to award it to the Russian firm. In the short term at least, that would spell paralysis for the affected Deltana block, since LUKoil simply lacks the expertise to operate it and would have to -- after-the-fact -- find a Western firm that would be willing to hook up with a partner that brought nothing to the table.
So why would LUKoil bother with even a token bid? For one, LUKoil now owns Getty Petroleum, a U.S.-based oil company. In the long run, LUKoil would like to reach some sort of agreement with Venezuela on oil production to supply its Getty refineries. Currying favor with Caracas is part of a longer-term strategy to get into Venezuelan oil.
There is also a political angle. Back home, the strategy of bolstering Venezuela -- even if only in the most superficial way -- meshes nicely with a plank of Russian, and Venezuelan, foreign policy that seeks to establish alternative poles of power in the international system independent of the United States.
For LUKoil, the promise is a zero-risk deal. It makes a pledge it has little intent of keeping, commits no money and gets some kudos from both Venezuela and the Kremlin for contributing to a key foreign policy goal. Considering all the hullabaloo reverberating throughout the Kremlin right now as a consequence of the ongoing Yukos crisis, LUKoil can use every brownie point it can get.
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