Venezuela May Rival Canada Oil Sands as Chavez Seeks Investors

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April 27 (Bloomberg) -- Venezuela's heavy oil deposits may rival Canada's tar sands as a source of crude to meet rising global demand should President Hugo Chavez convince foreign companies that their investments are secure in the country.

Venezuela needs $200 billion to develop the heavy oil reserves in the Faja region, Ali Moshiri, head of Chevron Corp.'s Latin American exploration and production unit, said at a conference in Caracas last night. Heavy oil production could jump fivefold to as much as 3 million barrels a day, Moshiri said.

Chavez, 51, risks scaring away investment needed to help boost production, according to industry officials and analysts. BP Plc Chief Executive Officer John Browne this week said higher royalties and taxes levied on oil producers and the instability of government rules may force investments out of Venezuela, the biggest oil producer in South America.

``The energy resources are there,'' said James Williams, an analyst with WTRG Energy Economics in London, Arkansas. ``If competitive rules aren't in place, they won't be able to develop the heavy oil -- unless Chavez does it himself,'' he said. ``Foreign investors won't be there.''

Heavy oil deposits such as the Faja and Canada's tar-sands have grown more desirable as conventional fields have become harder to find and crude prices surged to all-time highs. Crude oil touched a record $75.35 a barrel this week in New York.

About $53 billion is likely to be spent through 2010 by companies such as Exxon Mobil Corp., Canadian Natural Resources Ltd. and Husky Energy Inc. to expand oil sands output, according to the Canadian Association of Petroleum Producers. Shares of Canadian Natural and Suncor Energy Inc., another oil sands operator, have more than doubled in the past year.

Rewriting the Rules

About 600,000 barrels of oil a day comes from the Faja. Four joint ventures controlled by international oil companies such as ConocoPhillips, Exxon Mobil and Chevron produce the oil. The ventures were set up and approved by Venezuela's legislature before Chavez came to power in 1999, and they are among the most profitable operations in Venezuela for foreign oil companies.

The ventures produce about 23 percent of Venezuela's oil. The rest is conventional oil from fields in the eastern section, including Lake Maracaibo, where Venezuela's oil industry began early in the 20th century.

``Ninety percent of Venezuela's oil production is going to come from this area in the coming years,'' Moshiri said, referring to the Faja, in the eastern part of the country near the Orinoco River.

Venezuela is South America's biggest oil producer. It was the fourth-largest supplier to the U.S. last year.

Chavez says the Faja may hold up to 235 billion barrels of oil. Canada's oil sands likely have 175 billion barrels of recoverable oil, according to the Canadian producers' group.

Browne, Chavez

In his comments yesterday, Moshiri sought to distance himself from Browne and BP, which has a 17 percent stake in one of the heavy-oil ventures. ``The name of our company is Chevron, and our Chairman is David O'Reilly,'' he said. ``We have a different view on Venezuela.''

Browne, in an April 25 interview in London, said that ``one has to question whether Venezuela wishes foreign oil companies really to be there in any big way.''

A plan by Chavez's government to restructure the four heavy- oil joint ventures this year promise to heighten tensions between the government and the oil companies. The government may boost royalties and taxes and give majority control to the state oil company, Petroleos de Venezuela SA.

Chavez has already raised the royalties and taxes and rewritten the rules for foreign oil companies pumping oil from conventional fields. The companies are being forced into joint ventures that are controlled by Petroleos de Venezuela. They previously managed the fields and were paid a fee.

Italy's Eni SpA and France's Total SA had their operations seized after they refused to go along with the changes.

ConocoPhillips

The National Assembly's energy commission yesterday approved 21 of the joint ventures. The ventures will serve as a model for changes in the existing heavy oil joint ventures, Deputy Oil Minister Bernard Mommer said today in a statement on the National Assembly's Web site.

ConocoPhillips Chairman James Mulva will meet in the next two weeks to meet with the country's oil minister, Rafael Ramirez. Houston-based ConocoPhillips, the third-largest U.S. oil company, gets about 8 percent of its output from Venezuela and is the largest foreign investor in the Faja ventures.

``We'll be talking about our investments and, hopefully, our ability to expand our investments,'' Mulva said on a conference call with investors yesterday after the company released its quarterly earnings report. ``We have good relationships,'' with officials in Venezuela, he said. ``We are talking.''

To contact the reporter on this story:
Peter Wilson in Caracas at pewilson@bloomberg.net.

Last Updated: April 27, 2006 16:14 EDT