Spain’s Repsol Seals Oil Field Deal as Brazil-Venezuela Refinery Costs Leap

Spanish oil company Repsol is to pay $207 million for the right to develop output capacity at an oil field in west Venezuela which currently produces 25,000 barrels a day (b/d) of oil and 34 million cubic feet a day of natural gas.

Repsol has a 40% interest in Petroquiriquire, a “mixed company” which operates the Barúa Motatán field, with state-owned Corporación Venezolana de Petróleo (CVP) holding a majority 60% stake.

The Energy and Oil Ministry in Caracas estimates that the project could increase oil output at the field to 40,000 b/d. The field covers an area of over 400 square kilometres stretched across the states of Zulia and Trujillo.

Announcing the agreement, Venezuelan National Assembly Deputy Angel Rodríguez, head of the energy and oil committee at the legislature, said $173.5 million of the payment could be made in the form of a credit extended by Repsol to CPV.

The government, said Rodríguez, had chosen “to concede this area to a company that is already well-established in order to strengthen economic viability and take advantage of the existing synergies” at the field. “Preliminary studies allow it to be determined that extracting combustible from this region is profitable,” he added.

Podemos, the social democratic party which once sided with Chávez but now forms one of the few voices of dissent at the National Assembly, argued against the agreement with Repsol. It demanded a full debate on the accord because national sovereignty was at issue, and also claimed that the deal had gone ahead “as if nothing had happened” even though Repsol had been in dispute with the government.

The agreement with Repsol was agreed in principle during a visit to Caracas in late July by Spanish Foreign Minister Miguel Angel Moratinos.

Venezuelan President Hugo Chávez is actively pursuing a policy of reducing his country’s oil ties with United States oil companies, which coincides with his aim of distancing Caracas from Washington.

At the same time, Chávez is pressing on with a policy, announced in 2007, in which the state holds minimum 60% controlling interests in oil and natural gas fields across the country. Private oil companies, both foreign and national, which formerly wielded control over oil fields have been obliged to surrender control and reduce their interests to 40%.

Some companies such as Repsol complied, but others declined to do so – and some of them are now in dispute with the government. The most notable amongst these is ExxonMobil, which once had a controlling interest in Cerro Negro, a $1.9 billion extra-heavy oil project in Venezuela. Under an association agreement with the government, the project was designed to develop, transport, upgrade and market extra-heavy crude from the Orinoco belt in southeastern Venezuela.

Prior to the project’s nationalization, the partners were Exxon Mobil (41.67%), PDVSA (41.67%) and BP (16.67%). In addition to upstream field facilities the project included two parallel pipelines and facilities to upgrade product at the Jose industrial complex on the Caribbean coast of Venezuela.

The government unilaterally took 100 percent of the field, and ExxonMobil – the biggest oil company in the world – responded with a slew of legal actions in demand of compensation for its share of the $1.9 billion that it invested from Petróleos de Venezuela (PDVSA).

A judge in London ruled that a case brought by ExxonMobil did not lie within British jurisdiction. But a court in The Hague has yet to rule in a parallel case, while a third action in New York has yet to be heard.

ConocoPhillips similarly dug in its heels in the face of a demand that it hand over a controlling interest in another field in the Faja. Negotiations with PDVSA continued for months, but reportedly to no avail and unconfirmed reports say ConocoPhillips is also pursuing legal action in international courts, as provided for in the original contracts.

Venezuela-Brazil Refinery in Huge Cost Overruns

In the meantime, Brazilian state-run oil company Petrobras issued a statement in Sao Paolo on Wednesday saying that the estimated cost of a planned joint oil refinery with Venezuela had risen threefold from an original $4.050 billion to $12 billion.

Petrobras said that the rise in the cost would not affect the timetable for the project in Pernambuco state, Brazil. The refinery is scheduled to enter operations in the first quarter of 2011.

The statement said that the project budget had originally been estimated on the basis of a figure of $20,000 per each barrel of capacity, which had initially been set at 200,000 barrels a day (b/d).

Once basic engineering plans had been completed, capacity was raised to 230,000 b/d and the cost estimate to $50,000 a barrel, Petrobras explained.

The estimate had been increased because of the increased cost of oil industry services and equipment since 2008, and the incorporation of new technology for sulphur treatment and reducing toxic emissions.

Petrobras released the statement after Opposition legislators alleged that the company was plagued by “irregularities” including over-pricing in contracts with companies building the refinery. It denied that the revision of the refinery cost estimate resulted from supposed wrongdoing.

The statement said that 85% of the earthworks for the project had been completed, and that construction of buildings had begun. While the refinery is formally designated as a joint project, Petrobras is at present footing the bill because Brazil and Venezuela have yet to sign an agreement on financing.

Both governments say that “delays” and problems have been “overcome” while officials say Presidents Luiz Inácio Lula da Silva of Brazil and Hugo Chávez of Venezuela will put their signatures to the agreement when they next meet.