Venezuela: New projects in the Orinoco heavy oil belt

Elisabeth Eljuri and Patricia Prato
Macleod Dixon
Caracas

The Orinoco Heavy Oil Belt is located in the southern part of the Eastern Venezuelan Basin. It is widely known for its large deposits of extra-heavy crude oil. The United States Geological Survey has estimated a mean volume of 513 billion barrels of technically recoverable heavy oil in the Orinoco Oil Belt Assessment Unit of the East Venezuelan Basin Province, which would make it one of the largest petroleum reserves in the world.

Today, all oil and gas projects in Venezuela are in control of the Bolivarian Republic of Venezuelan (Venezuela), through Petróleos de Venezuela, SA (PDVSA), the national oil company of Venezuela, and its affiliates, including, Corporación Venezolana del Petróleo (CVP). Moreover, since 2007, all new and existing oil and gas projects in Venezuela have been adapted to the current framework provided in the Organic Hydrocarbons Law (OHL). The OHL regulates private and foreign participation in the oil and gas business by requiring the incorporation of a mixed company as the only legal form for private investors to carry out primary activities in the hydrocarbons industry. Mixed companies are state-controlled incorporated joint-ventures in which the state holds more than 50 percent of the equity. There has been an interesting and positive evolution in the documentation governing the mixed companies over the past five years. Clearly, the negotiation dynamics differ when new money will be invested and CVP had to be more flexible to ensure the proper level of interests in those new projects.

Before incorporating a mixed company, there have typically been some preliminary steps. First, the investor works together with PDVSA for a period of time to certify the reserves of a particular area. After that, the following documents should be executed: National Assembly Accord approving the incorporation of the mixed company and the conditions of the performance of the primary activities by such mixed company; Decree selecting the private investor to participate in the primary activities (if directly awarded); Decree approving the creation of the mixed company; a Resolution issued by the People's Ministry of Energy and Petroleum (MENPET) defining the geographical area; the Joint Venture Agreement between the State and the investor for the incorporation of the mixed company; Articles of Incorporation/By-Laws of the mixed company; Decree transferring to the private party the right to perform the primary activities; and finally the Hydrocarbons Sale and Purchase Agreement (when applicable).

The most recent National Assembly Accords have contained, among others, the following provisions: payment of a bonus to Venezuela for the right to participate in the mixed company; duration of twenty-five years for the mixed company, which may be extended up to fifteen more years; reversion clauses; certain tax and royalty breaks and obligation to collaborate in endogenous projects, among others.

The newest and continuing projects in the Orinoco Heavy Oil Belt correspond to the Orinoco Magna Reserves Project, which was structured in four main areas: Boyacá, containing six blocks; Junín, containing twelve blocks; Ayacucho, containing eight blocks; and Carabobo, containing three blocks. As of today, only few blocks (specifically in Junin) have been granted by direct award, while several blocks of the Carabobo area were granted through a bidding process. Direct awards are allowed by the OHL as long as such granting is justified by the public interest or because of special circumstances, and with prior Presidential Decree and Ministerial Cabinet approval.

Since 2008, the Venezuelan government has implemented a policy of diversifying investment in the oil and gas business, which has attracted new investors to the country. In this sense, some blocks have been at this time allocated under the aegis of energy and cooperation treaties between Venezuela and other countries, such as: Boyacá l which was granted to the ALBA Latin American Alliance and Boyacá 2 to the PetroCaribe Caribbean Alliance; while others have been directly assigned to NOCs and private investors, such as Junín 1 to Belarusneft from Belorussia, and Junín 2 to Petrovietnam from Vietnam. None of these projects are yet formally approved by the National Assembly but they clearly are reserved to those investors, at least for now.

The only blocks that have been actually awarded through a bidding process correspond to Carabobo 1 which was awarded to the consortium formed by Repsol YPF, Petronas, ONGC, Oil Indian Ltd, and Indian Oil Corp; and Carabobo 3 to the consortium formed by Chevron, Inpex, Mitsubishi, and Suelopetrol. The aforementioned blocks, along with Junín 6, which was directly awarded to the Russian Oil Consortium formed by Lukoil, Gazpromrosneft, TNK-BP, Rosneft and Surgutneftegaz, have already signed the corresponding joint venture agreement for the incorporation of a mixed company.

Some blocks have been awarded subject to preliminary agreements, such as Junín 4, with China National Petroleum Corporation (CNPC), Junín 5, with the Italian company ENI, Junín 8 with the Chinese company Sinopec, Ayacucho 6 with the Argentinean company Enarsa and the Uruguayan company Ancap, and Ayacucho 7 with the Iranian company Petropars. Many others are still in negotiation.

In this sense, there is still a possibility for companies interested in investing in the Orinoco Heavy Oil Belt projects. Only time will tell which part of the world such investment will come from.