Petroleum News: Global trend reaches Canada High Arctic

Turmoil in South America and other regions sharpens focus on remote ‘discovered and secure’ northern frontier resources

Gary Park

For Petroleum News

The tsunami washing over some of the least predictable oil and gas regions on the planet has managed to lap at the shores of Canada’s Arctic Islands.

The unexpected hostile run Petro-Canada is taking at minnow Canada Southern Petroleum has been directly tied to the turmoil over how far countries such as Venezuela, Ecuador, Bolivia, Peru, Russia, Kazakhstan and various nations in Africa and the Middle East are prepared to go in nationalizing their resources or extracting greater economic “rent.”

The asset grab that seems to be gathering pace on a global scale may be at the root of Petro-Canada’s uninvited bid for Canada Southern.

Richard McGinity, chairman of the junior E&P company, said May 25 that widespread geopolitical instability that is endangering major oil and gas supplies is suddenly pushing North America’s frontiers to the forefront as potential sources of “significant, discovered and secure resources.”

Venezuela’s mercurial President Hugo Chavez is identified as the most troubling current bogeyman for the industry.

But others seem eager to operate in the dust storm he has created as they trash legal deals negotiated in good faith in their quest for a larger chunk of resource revenues.

Producers who have fought back against crippling increases in royalties and taxes have suddenly faced expropriation of their investments.
 
Here’s a sampling of the recent upheavals:

Venezuela

— In his assault on Big Oil, Chavez has set his sights on majority control of the Orinoco River basin’s four projects, developed at costs running into billions of dollars by Chevron, ExxonMobil, ConocoPhillips and Total and now pumping about 620,000 barrels per day of synthetic crude, second only to the comparable fields of northern Alberta.

He wants to hand 51 percent control of fields worth an estimated US$33 billion to state-run Petroleos de Venezuela, PDVSA, which currently has an average 40 percent stake, leaving the private operators as minority joint venture partners.

The Chavez government’s plan also includes a hike in royalties to 30 percent from 16.7 percent, while taxes would climb to 50 percent from 34 percent.

As if that’s not enough, PDVSA director Eulogio del Pino said May 25 that the government may even seek a 60 percent stake.

PDVSA has already taken over 32 smaller conventional oil production projects that had been run by private companies, including the seizure of two fields run by Total and Eni, without a hint of compensation.

Turning up the rhetoric, Chavez has threatened to divert crude now exported to the United States to China, Europe and other nations, suggesting that would boost oil prices to US$100 per barrel.

Analysts and a former PDVSA director Alberto Quiros are among those warning that the specter of nationalization will face major legal and economic challenges, not least the exposure of the Orinoco projects to Wall Street financing — issues Quiros said the government seems to have overlooked.

Bolivia

— President Evo Morales, a Chavez buddy, nationalized his oil and gas industry and has so far refused to compensate the companies.

The two leftist presidents held a joint rally May 26 in Bolivia and participated in a series of agreements between PDVSA and Bolivia’s YBFB to, in the words of Chavez, “unite in a strategic alliance to advance together in certifying natural gas fields, in exploring natural gas fields, oil fields and in petrochemicals.”

PDVSA is expected to commit major investments to Bolivia’s industry, helping to certify gas reserves that are the second largest in South America and, according to some speculation, contribute US$1.5 billion to joint ventures.

Meantime, PDVSA has announced it may borrow US$20 billion from international banks to promote its objective of doubling production to 5.8 million bpd by 2012.

Ecuador

— Under President Alfredo Placio, the government and state-owned Petroecuador have been at logger heads with the industry and the United States after scrapping an operating contract with Occidental Petroleum in a dispute over taxes, then targeting a 14.5 percent share of the consortium that operates a 450,000 bpd pipeline.

Petroecuador is already operating Occidental’s former fields that average output of 100,000 bpd on a trial basis.

The Occidental fields were seized when Ecuador ruled the company failed to notify the government when it sold a 40 percent stake in its production block to EnCana, which, in turn, unloaded the asset last year to a joint venture of Sinopec and China National Petroleum Corp. (both of them from China’s stable of government-owned enterprises) for US$1.42 billion.

Occidental countered with an arbitration claim against Ecuador, seeking more than US$1 billion in damages.

Ecuador insists it did not expropriate Occidental’s fields, but only claimed them after a judicial process ruled the U.S. company violated its production sharing.

The Chinese joint venture said it may now ask for a refund of up to US$284 million from EnCana — a claim the Canadian independent has not dismissed out of hand given the government seizure of Block 15.

In retaliation, China National Petroleum Corp. has now said it may opt out of developing two new discoveries totaling 100 million barrels on Block 11 because of the harsh new tax/royalty regime imposed on foreign companies by the Ecuadorian government.

The spill over could also affect other Asia companies that are major investors in Ecuador, including Japan’s Teikoku Oil.

In another development PDVSA has agreed to refine crude from Ecuador — 250,000 bpd of which is currently exported to the U.S. — to tighten links between the two countries.

Peru

— A June 4 second-round presidential run-off is expected to see a change in the energy investment rules, regardless of who wins between radical nationalist Oilanta Humala and former president Alan Garcia, described as a center-leftist.

The industry had its first taste of change in 1990 when most assets of state-owned Petroperu were sold off, including Peru’s largest gas project, Camisea.

The parties behind both Garcia and Humala have pledged to renegotiate the four Camisea contracts, key among the issues behind the yardstick used to determine gas and condensate prices.

There has also been talk of imposing an extraordinary tax on companies when international prices rise above a set level.

Both candidates are also resolved to renegotiate the transport terms, unhappy with five pipeline breaks since the line started operations in August 2004.

Trend not all one way

But the trend sweeping South America is not all in one direction.

In fact, Bolivia’s nationalization move has angered Brazil’s President Luiz Inacio Lula da Silva, aggravated by Morales’s claims that Brazil’s Petrobras, which has invested US$1.5 billion in two refineries and controls 45 percent of its gas fields, has been operating illegally in his country.

Marching to his own drum-beat is Colombia’s President Alvario Uribe, who has taken an active role in signing an array of new exploration contracts with foreign companies he hopes will reverse a rapid decline in oil output from 830,000 bpd in 1999 to 530,000 bpd.

Colombia’s upstream regulator is aiming to rebuild volumes to 700,000 bpd by 2010, which requires the participation of companies such as Amerada, Anadarko and BG.

More than government interference, the concerns of foreign companies are likely to be concentrated on the interminable battles with insurgent groups and anti-government forces, who have kidnapped many workers, and on the difficult terrain.

Russia

— In a climate of rising tensions with the United States, the Russian administration of Vladimir Putin is talking about taking control of massive energy undertakings in the Far East and dismantling the partnership for the giant Shtokman gas field (see Shtokman story on page 1 of this issue).

A report by the Resources Ministry said development of ExxonMobil’s Sakhalin-1, Shell’s Sakhalin-2 and Total’s Kharyaga production-sharing agreements are behind schedule, over budget and lacking Russian involvement.

The ministry said Russia’s Academy of Natural Science urged Russian companies in the projects should have a 51 percent presence to solve the problems.

Meanwhile, Putin is reportedly demanding changes to resources law to categorize all oil and gas fields as “strategic” and thus off-limits to foreigners.

With Moscow-Washington relations increasingly strained there has been a mounting threat to dump ConocoPhillips and Chevron from the partnership assembled to develop the 3.2 trillion cubic foot Shtokman field, along with Total, and Norway’s Norsk Hydro and Statoil.