Petrozuata heavy oil project announces additional cost overruns

The Petrozuata heavy oil project in Venezuela has announced additional cost overruns. Petrozuata has announced additional cost increases of $ 228 mm, which bring total overruns to $ 553 mm, or 21 % of the initial budget.
Approximately 85 % of these additional costs are attributable to a continued disparity between local inflation and the bolivar exchange rate along with a revised labour construction agreement. These cost figures are subject to change based on the future value of the bolivar.
The primary assumption in these revised cost figures assumes purchasing power parity (devaluation equals inflation) from the current position in which the bolivar is 40 to 50 % overvalued. Thus, a worsening of the overvaluation will further increase costs until the project's scheduled completion in mid-2000, and a devaluation of the bolivar would result in lower costs.

Additionally, Petrozuata has elected to advance some expenditures for infrastructure and drilling into 2000 to assure capacity in advance of the upgrader start-up in mid-2000. The total size of the project has now increased from $ 2.67 bn to $ 3.22 bn. As of June 30, 1999, Petrozuata is approximately 78 % complete overall, which is in line with original expectations.
These additional cost overruns do not have an immediate credit impact on the project, as these costs are borne by the sponsors. In excess of initial equity estimates, Conoco and PDVSA must now contribute an additional $ 276 mm each to finish the project. This amount could be reduced with higher-than-anticipated revenues coming from early production, however.
A portion of the total cost increase is expected to result in higher operating expenses after the project is completed next year.
The benchmark Maya price needed to breakeven on debt service was previously estimated at $ 9.60, which will likely increase somewhat due to the additional cost increases. The breakeven price level will be influenced by, among other things, Petrozuata's ongoing drilling program, the future bolivar relationship and operating expense levels.
Current prices have rebounded nicely from cyclical lows experienced last year and are now substantially above Petrozuata's operational breakeven.

Petrozuata is owned 50.1 % by a Conoco Inc. subsidiary and 49.9 % by a subsidiary of PDVSA. The project is involved in developing Venezuela's extra heavy crude oil reserves.