MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING FRIDAY, MARCH 20, 1998 (6)
VENEZUELA, continued
Heavy Oil-Based Fuel A Tough Sell In U.S.
Morichal, Venezuela -- Open the spigot on an oil well here, and what looks like hot tar slowly creeps out of the pipe.
This is the extra heavy oil of the Orinoco Belt, so thick it has to be heated just to get it to the surface. To create a mass market for this hard-to-deal-with but plentiful grade of crude, known as bitumen, Venezuelans have created a concoction known as Orimulsion. This patented fuel is a mix of water and other chemicals that they hope will replace coal in many of the world's power plants.
So far, Venezuela has been successful selling Orimulsion in Denmark and Japan.
Indonesia also is expected to begin buying it as a boiler fuel soon. But after seven years of work, Venezuela has been unable to crack its biggest potential market -- the United States.
"The East Coast is our natural market," said Carlos Borregales, president of Bitumenes Orinoco SA, the subsidiary of Petroleos de Venezuela SA that oversees the production of Orimulsion. "With deregulation taking place in the U.S. electricity sector, this market is very strategic in our point of view."
Borregales is hopeful that with deregulation, older, more pollution-prone U.S. coal plants could be converted to burn Orimulsion.
Since 1990, PDVSA and Florida Power & Light have been trying to get state approval to convert FPL's Manatee Power Plant south of Tampa Bay from fuel oil to Orimulsion.
Environmentalists and Gov. Lawton Chiles have successfully blocked the use of Orimulsion in Florida so far, arguing that the environmental dangers of using Orimulsion outweigh any benefits, but the project is now getting a second hearing after being rejected two years ago.
Florida Power & Light estimates that it can save its customers $4 billion over 20 years by converting its Manatee plant to burn Orimulsion.
"This is one of the largest plants on our system, 1,600 megawatts, and that is why we feel we can get such tremendous savings from switching to Orimulsion," said Bill Swank, spokesman for FPL.
Plans call for Orimulsion to be delivered to the Port of Manatee in a double hull tanker and then moved through a 14-mile pipeline to the power plant.
Environmentalists say moving the heavy oil over sea and land is an accident waiting to happen, in an area with an economy built on tourism and agriculture.
"This is a filthy fuel and a spill is inevitable," said Gloria Rains, chairman of Manasota-88, an environmental watchdog group that has opposed the project from the outset. The group's funding comes from individual contributions.
The Clinton administration, Rains says, is being hypercritical when it champions efforts to reduce global warming but supports efforts to import Orimulsion into the United States to burn in power plants.
The matter now is before an administrative law judge, who will oversee public hearings beginning Jan. 15 on air emissions from burning Orimulsion and the environmental impact of a possible Orimulsion spill.
The judge will present his ruling to Florida's Department of Environmental Protection, which will then offer its recommendation to the Florida Power Plant Siting Board consisting of Chiles and his Cabinet.
The protracted legal fight over the fuel has stalled projects by U.S. companies and others to produce and sell Orimulsion.
Conoco has a joint venture with PDVSA, Norway's Statoil and a consortium of Venezuelan engineering companies to increase Venezuela's capacity to produce Orimulsion for sale in America and elsewhere. Conoco had hoped by this time to be in the process of increasing Vene-zuela's Orimulsion capacity by 100,000 barrels a day under its $320 million joint venture, said Tom Nicewarner, president of Conoco Venezuela.
But there's no need for added facilities now because PDVSA can produce enough Orimulsion to fulfill all of its current customers' needs.
Foreign Companies Racing To Get Piece Of Action
Caracas, Venezuela -- Conoco's Rob McKee describes Venezuela as "an oilman's paradise." But U.S. companies are discovering this oil-patch Eden has its downside.
With 73 billion barrels of oil reserves, Venezuela offers oil fields so vast that multinational companies have been fighting for the privilege to spend an estimated $30 billion in the country over the next decade.
Offsetting the potential for huge payoffs are possible pitfalls, from unresolved tax issues that could make even huge oil fields only marginally profitable, to providing for basic needs such as housing and health care.
"So many foreign companies are coming in at the same time that their bureaucratic structure and infrastructure are really being tested," said Dennis Ulak, chairman of Enron Oil & Gas International, which will begin drilling on its Venezuelan block in the Gulf of Paria in mid-1998. "I believe they have handled it very well. They are having to develop new procedures for everything from taxation to environmental protections."
Major oil companies are flocking back to Venezuela 22 years after the country nationalized its energy sector. The plan to reopen the country's energy sector, from oil and gas exploration to retail service stations, is named La Apertura, or the opening: a $65 billion, 10-year plan by Petroleos de Venezuela SA to double the country's energy output.
"Venezuela has some very ambitious plans for foreign oil companies," said Walter Theokritoff, Schlumberger's project manager in Matur¡n, the base of operations for oil companies in eastern Venezuela. "Some of these fields are so prolific, it's difficult to drill a dry hole."
Some of the biggest fields are in the Orinoco Belt, an area in eastern Venezuela with fields holding an estimated 270 billion barrels of extra-heavy crude.
Conoco has a $2.2 billion joint venture with PDVSA named Petrozuata, which has already completed 10 wells in what is expected to be a 35-year project that will see 500 horizontal wells drilled to recover some 2 billion barrels of heavy crude.
Conoco expects to eventually produce about 120,000 barrels a day of extra heavy oil from its 55,000-acre site, said Tom Nicewarner, president of Conoco Venezuela in Caracas.
Drilling programs like that make oil-field service companies such as Schlumberger and Houston companies Camco and BJ Services some of the surest winners in the fevered search for new oil supplies in Venezuela. Their business is expected to thrive here for the next two decades, no matter how much new oil is discovered.
Unlike the major integrated oil companies, which were shown the door in 1976, oil-field service companies have been operating in Venezuela nonstop for the past 50 years.
"We have maintained a relationship throughout with PDVSA," said Dave Dunlap, vice president for international operations at BJ Services. "They have always needed service companies, even when everything was nationalized."
The company has doubled its work force there to about 400 in the past five years. It also has doubled the number of service barges it has working on Lake Maracaibo to eight, Dunlap said.
Grey Wolf, a Houston-based drilling contractor with 133 land rigs, has had six rigs working in eastern Venezuela for about four years. Recently, inquiries about contracting the company's rigs for long-term commitments have increased substantially after the third round of bidding for reactivating Venezuela's older oil fields, said Forrest Conley, senior vice president of international operations for the company.
"We are receiving quite a few bids as a result of the third round for jobs beginning in 1998," Conley said. "The operating agreements are for 20 years, so we expect to be down there for some time."
The value of some of those contracts, though, depends on the strength of Venezuela's currency, the bol¡var. Currently the bol¡var trades at 500 to one U.S. dollar.
"Devaluations always have an economic effect on a foreign company because it causes you to have foreign exchange losses," said Herb Yates with Camco, which sells drilling equipment in Venezuela. "Generally, you'll find that drilling contractors are now arranging for payment in dollars; that's a recent development."
In addition to concerns about the stability of the local currency, companies also must contend with high taxes, often levied at numerous levels of government.
Foreign companies with profit-sharing agreements face heavy taxes on the oil they produce in addition to the royalties they agree to pay PDVSA. They also face value-added taxes of 16.5 percent on equipment bought, and municipal taxes that can run as high as 12 percent per city, said Mike Valdez, director of the Latin American business center for Ernst & Young.
"They are getting hit with a value-added tax while making no sales until they have oil to sell, if they find oil at all," Valdez said. "In the meantime, they have a drain on their cash flow that's killing them. This is not a small amount of money."
On his most recent visit, President Clinton had been scheduled to sign an agreement that would provide safeguards for U.S. investments in Venezuela, but the deal was not ready by the time of his visit.
Despite the challenges, oil people here say the enticement of tapping Venezuela's 73 billion barrels of oil reserves -- and the relatively stable political environment here compared with other South American countries -- far outweighs the negatives.
"Venezuela is a key component of Amoco's broad strategy for the 21st century," said Alex Weisselberg, president of Amoco Venezuela Petroleum Co., which will be drilling for oil on three blocks in Venezuela. "We are focusing our efforts in areas where there are active petroleum basins and where there is still a lot of oil and gas to be found. Venezuela fits both of those objectives."
The country's strategic location, close to U.S. markets and accessible to European markets, as well as its relatively healthy investment climate, also convinced Amoco to return to Venezuela, where it operated before the nationalization.
In its June auction of mature fields for redevelopment, in which companies negotiated contracts promising spending to revive dormant fields, PDVSA attracted $2.2 billion of winning bids. That was more than double the amount it was expecting, despite lease terms that would be considered stiff in any country.
Under the terms of the profit-sharing agreements struck between PDVSA and foreign companies exploring for oil, the foreign firms would bear all the exploration costs. There is a maximum nine-year exploration period in which a foreign company would be required to spend a minimum of $40 million to $60 million per block.
After a commercially viable oil discovery, a joint venture with PDVSA to develop the field would be formed, 35 percent of which would be owned by the Venezuelan national oil company.
A company's total tax burden under a profit-sharing agreement would range from 85 to 94 percent, according to the Energy Information Administration in the U.S. Department of Energy.
Even at these terms, there is no shortage of companies wanting to get into oil and gas exploration in Venezuela.
In the most recent auction, the British oil company Lasmo bid an unprecedented $453 million for the right to redevelop the Dacion Field, a price that left many observers dumbfounded.
At the time, Emma Brossard of Brossard Petroleum Consultants in Houston, termed the bid "crazy" for a marginal field such as Dacion. It's a view that was shared by other participants in the auction.
The amount bid by Lasmo was considered astronomical for the field, estimated to be capable of producing 90,000 barrels of oil per day, said Donald MacDonald, Texaco's vice president of exploration for Latin America.
"Anyone who says they were not surprised by the bidding is not being honest," said Rafael Quijano, policy analyst with the Petroleum Finance Co. in Washington, D.C.
A fourth round of fields, older ones to be redeveloped, is expected in late 1998. There are now rumors circulating that another round of undeveloped fields will be offered for exploration in 1998 as well, MacDonald said.
Some of the largest projects announced so far are joint ventures aimed at tapping the extra heavy oil reserves of the Orinoco Belt in the eastern part of the country.
Mobil Corp., PDVSA and Germany's Veba recently signed such an agreement valued at $2.5 billion. Under the so-called Cerro Negro oil agreement, PDVSA will take a 50 percent stake in Mobil's Chalmette, La., refinery, which will receive 100,000 barrels a day of the tar-like crude.
"Venezuela is a very strong oil country with a tremendous amount of capital invested in the United States," Quijano said. "In terms of the future growth of U.S. supplies, Venezuela is paramount to the United States."
UPDATE - CURRENT EVENTS
Venezuela helps fragile oil off lows
March 18 World oil prices rallied from nine year lows on Wednesday after Venezuela called for an agreement among all oil producers to cut output.
Brent blend crude, the world benchmark grade, was up 24 cents at $12.50 a barrel at 1029 GMT having dipped under $12.00 on Tuesday, its lowest level since November 1988.
OPEC-member Venezuela is seeking agreement between Organisation of the Petroleum Exporting Countries and non-OPEC oil producers to withdraw up to two million barrels per day (bpd) from the world market to boost prices, the head of Venezuela's state oil company said on Tuesday.
Luis Giusti, president of Petroleos de Venezuela (PDVSA), said Venezuela had contacted oil producers both inside and outside OPEC to discuss the proposal.
He said Venezuela was seeking a world-wide reduction of ''anywhere between 1.5 and 2.0 million barrels a day.''
Venezuela has dismissed OPEC's quota system as outdated and given notice that it would cut oil output as part of a concerted effort involving both OPEC and non-OPEC producers.
Venezuela's other condition appeared to be that it would only cut from its current production level, which is well above its long-ignored OPEC quota.
Oil traders remained sceptical of Venezuela's move and many expected prices to stay weak.
Venezuela's call for an OPEC, non-OPEC agreement was a''red-herring,'' said Nigel Saperia, managing director of oil trading at Bankers Trust International in London.
Such a deal was still ''unlikely although there is no doubt that oil producers are feeling the pain,'' he added.
He said oil prices had not yet hit their lowest level for this year, while not discounting occasional rallies.
Analysts have predicted oil prices below $10 a barrel due to the oversupply of between one and two million bpd.
OPEC alone pumped 1.2 million bpd above its self-imposed quota in February according to a Reuters survey, while non-OPEC members have also seen growing output.
OPEC has rarely looked in more disarray and last week announced a two-week delay in a market review meeting.
The group's linchpin producer Saudi Arabia is locked in a dispute with Venezuela and has hinted that it will not support holding emergency talks while others cheat on their quotas -- a remark aimed mainly at chief violator Venezuela.
But Venezuela has refused to cut a single barrel as part of an OPEC-only deal, while a PDVSA official rubbed salt into the wound by repeating allegations that Saudi Arabia was also cheating on output.
The oil glut this winter has coincided with faltering demand from cash-strapped Asian buyers, warm winter weather in the West and brimming oil storage tanks.
Oil wipes out gains after Venezuela catalyst
March 19 World oil prices ran out of steam on Thursday, wiping out earlier gains after an upward assault from nine-year lows on Venezuelan calls for an agreement among all oil producers to cut output.
The world benchmark grade, Brent blend crude opened nine cents higher in London at $13.20 a barrel, surged to a high of $13.52, but slumped by the close of trading as dealers liquidated positions despite positive headlines.
Iraqi Oil Minister Amir Muhammed Rasheed's remarks that Baghdad would act with other OPEC and non-OPEC producers in the coming weeks to stabilise oil prices pushed Brent up to mid $13.40s before the sell- off began.
''There are intentions to discuss actions,'' Rasheed said without elaborating.
At 2030 GMT, May Brent settled at $13.11, unchanged from Wednesday's floor settlement.
''Venezuela's comments acted as a catalyst for the market's run up,'' said Tony Machacek, a broker at Credit Lyonnais Rouse.
Venezuela, a member of the oil cartel the Organisation of the Petroleum Exporting Countries (OPEC), said it was seeking agreement between OPEC and non-OPEC producers to withdraw up to two million barrels per day (bpd) from the world market to boost prices.
Luis Giusti, the head of Venezuela's state oil company, said on Tuesday that his country had contacted oil producers both inside and outside OPEC to discuss the proposal.
But Venezuela's move was treated with some scepticism by oil market players.
Venezuela, which has dismissed OPEC's quota system as outdated, said it would only cut from its current production level. The country produces well above its long-ignored OPEC quota.
''Venezuela doesn't recognise OPEC quotas, why all of a sudden should they bother about production levels?'' asked one Brent dealer. ''This won't be easily achieved, these countries do not have a track record in co-operation.''
Non-OPEC producer Norway said it had not had any contact with OPEC regarding a meeting, but Oman said it would be prepared to cut if OPEC members did the same.
''Venezuela is serious about this and there have been some private contacts but there is no formal agenda or proposal at this point,'' one OPEC insider said.
The proposed cut-backs could have a rejuvenating affect on what has been a weak market since October.
Analysts earlier predicted oil prices below $10 a barrel due to the oversupply of between one and two million bpd.
OPEC alone pumped 1.2 million bpd above its self-imposed quota in February according to a Reuters survey, while non-OPEC members have also seen growing output.
OPEC has rarely looked in more disarray and last week announced a two-week delay in a market review meeting.
Venezuelan oil minister Erwin Arrieta said on Wednesday that he would attend the rescheduled market monitoring committee on March 30.
OPEC had issued invitations to all of the group's oil ministers to attend the meeting before its postponement from March 16.
That had momentarily raised market expectation that a full OPEC meeting may have been on the cards to thrash out a strategy to combat the fall in prices.
But an OPEC official on Thursday said that no other OPEC oil minister other than those on the committee had said they would attend.
By late Thursday, Iraq's Rasheed, in Monaco for a conference, said he hoped to attend OPEC's March 30 meeting but if he did not go, then some other senior Iraqi official would attend.
The group's linchpin producer Saudi Arabia is locked in a dispute with Venezuela and has hinted that it will not support holding emergency talks while others cheat on their quotas -- a remark aimed at chief violator Venezuela.
But Venezuela has refused to cut a single barrel as part of an OPEC-only deal.
The oil glut this winter has coincided with faltering demand from cash-strapped Asian buyers, warm winter weather in the West and brimming oil storage tanks.
Oil prices steady, focus on Venezuela plan
March 20 World oil prices held steady on Friday as mystery deepened as to whether Venezuela had made any progress on a plan for OPEC and non-OPEC producers to cut crude output.
Speculation has been heightened by confusion over visits to Europe this week by energy ministers from Venezuela, OPEC's
only Latin American member, and Mexico for behind-the-scenes talkswith other producers about prices.
But traders said the market was sceptical that the fractious group would be able to support prices which have tumbled over
eight dollars a barrel since October.
''The market is perpetually looking for a white knight,'' said Peter Gignoux on the energy desk at Salomon Smith Barney. ''But
the downtrend remains intact.''
Bellwether Brent blend crude was trading 12 cents higher at $13.23 a barrel at 1236 GMT in thin volume.
Prices closed unchanged on Thursday after trading erratically as the market waited to see what moves Venezuela was planning to end the price slump.
Calls by Caracas for an agreement between OPEC and non-OPEC producers to remove 1.5 to 2.0 million barrels a day of production from world markets helped prices recover from a nine-year low of under $12 on Tuesday.
The slump over the last four months was sparked by OPEC's decision to raise its production ceiling by 10 percent which
coincided with a slowdown in demand from Asia and a mild winter in the northern hemisphere which cut heating oil consumption.
Speculation of secret get-togethers was bolstered by a surprise visit on Thursday by Mexican Energy Minister Luis Tellez to
Norway for talks with his Norwegian counterpart Marit Arnstad.
''They discussed and exchanged opinions about general bilateral problems in oil policy. In addition, they discussed the current
market situation and possible future developments,'' said a statementfrom the Norwegian government.
It did not say if the two non-OPEC members reached any agreements.
Mexican officials had originally said Tellez was on a private visit and had no plans to talk about oil.
His visit coincides with a trip to Europe by Venezuelan Energy and Mines Minister Erwin Arrieta on unidentified business.
Venezuela is the main proponent of the rescue attempt but the move has been greeted with some scepticism by market players as the country has long-ignored its own OPEC production quota.
The fate of any agreement will depend on the position taken by OPEC kingpin Saudi Arabia which has not revealed its stance on the Venezuelan initiative.
Speculation of a possible deal was boosted by remarks in Monaco on Thursday by Iraqi Oil Minister Amir Muhammed Rasheed that Baghdad would act with other OPEC and non-OPEC producers in coming weeks to stabilise oil prices.
''There are intentions to discuss actions,'' Rasheed said without elaborating.
Other analysts said Rasheed's comments mean that the Venezuelan plan could meet with some success.
''It is now likely that a production cut will be agreed, we believe, but the point is how much and for how long,'' said Leslie Nicholas of brokers GNI in his daily report.
''Globally, the market could do with something like a four million cutback (assuming Iraqi production rises) to reduce global inventories to acceptable levels and this will be difficult,'' he said.
The United Nations has agreed to more than double the value of the food-for-oil plan which will allow Iraq to export several hundred thousand more barrels of oil onto world markets.
|
