Russian oil companies drill wells in the new world

Dec 20, 2004 01:00 AM

by Ivan Rubanov

In late November, a party of Venezuelan officials and businessmen headed by President Hugo Chavez and Energy Minister Rafael Ramirez landed in Moscow. For once, foreigners came to Russia seeking Russian capital, not oil.
What makes Russian business so attractive to the Venezuelans and to what extent are Russian investments in this Latin American country feasible?

In search of allies
Venezuela's economy and welfare, like the countries of the Persian Gulf, are based on oil that provides 70 % of budget revenues and 90 % of export revenues. The United States have been demonstrating interest in this small country for a long time as it is home to almost half of the proven hydrocarbon reserves of the New World. Moreover, probable reserves of heavy crude in the Orinoco River basin are so huge that they are commensurable with the proven oil reserves of the Persian Gulf.
As Alexei Naumov, Assistant Professor at Moscow State University's Geography Department notes, oilties Venezuela's economy very tightly to the US. Almost 80 % of the country's oil, in some form or another, winds up in the States. Most local deposits are developed with the assistance of US multinationals, and the major part of the oil elite that exerts significant influence on the country's political and economical environment have studied in the US.

This semi-feudal dependence on the US did not provoke any antagonism within Venezuela until Hugo Chavez came to power. Chavez, sometimes referred to as Fidel Castro's disciple, didn't want to be guided by the US interests in his domestic and foreign policies. He not only became the most active champion of high oil prices within OPEC but also threatened more than once to redirect exports to China, the EU, or Brazil.
From the very outset, Chavez pursued a policy of curtailing the profits of foreign oil companies operating in Venezuela by imposing an oil sales tax of 30 %. Subsequently, the pressure became even stronger. In 2002, a law was passed requiringthe state-owned PdVSA to have a 51-% stake in any new private oil production project. Quite recently, American oilmen were hit hard as the rate of royalties on oil production increased from 1 % to 16 %.

In 2002, the Americans attempted to overthrow Chavez by organizing a military coup in Venezuela. The putsch was suppressed, and since then the Venezuelan president has called the US the "devil himself".
However, a complete break with the US could not help but affect the economy. The flow of direct investments into the country has slowed. For example, ExxonMobil postponed construction of the world's largest petrochemical complex near the town of Jose. The leading US insurer of investment risks abroad has stated that it will not support any project in Venezuela. Coupled with strikes, this reduced investment has meant a decline in oil production, a downturn in the economy as a whole, and rising unemployment. The search for new investors in the US has failed to produce a result, and the current inflow of foreign investments is exponential less than what Venezuela needs to implement its plans to double oil and gas production.

It is vital for Chavez's regime to find new allies and investors to fix the situation and hold on to power. The list of potential investors is long, since Hugo Chavez has visited about forty countries, becoming the most active president in Venezuela's entire history.
Russia is at the top of the list of potential investors, since it has experience in oil production and transportation, investment companies able to make large investments, and above all the potential to become an important geopolitical partner for Chavez.

Seize the day
Both Russia and Venezuela possesses huge oil and gas reserves and they are the biggest exporters of these commodities in their regions. They could be rivals (especially as Venezuela is an OPEC member) but they aren't. As a matter of fact, Russia and Venezuela have common interests.
Three fourths of oil output in Venezuela is made up of heavy and super-heavy grades, and production and processing of these kinds of oil involves substantial difficulties. Russia has been producing oil of this grade for a long time, and it has the technology and equipment Venezuela needs. According to Andrei Kuzyaev, President of LUKoil Overseas, companies from both countries could jointly seek a reduction in the discount for respective oil grades (the current discount exceeds additional processing costs considerably).

Since gas-rich Venezuela plans to significantly increase production of the blue fuel and encourage gas use, it may want to cooperate both with Gazprom and pipe producers. Given the current record oil prices, Venezuela's huge oil and gas fields, their comparatively valuation and relatively favourable geological conditions, as well as proximity to the US market, make Venezuela a tasty titbit for any oil company in the world, including Russian ones.
Russian oil producers have long been anxious to expand abroad. However, they have not been all that successful and cannot hold a candle to multinational leaders in their financial and lobbying capabilities. Yet, from time to time, they are fortunate enough to have rare opportunities thanks to politics. Such was the case in Iraq.

Venezuela may hold similar promise. In the lobby of the Russian-Venezuelan oil seminar recently held in Moscow, many participants mentioned Hugo Chavez's favourable attitude towards Russia as the only opportunity for Russian companies to enter the New World market. The path is wide open. Chavez has already stated, "We want to give Russian companies the best opportunity to participate in oil production in Venezuela."
LUKoil has been showing the keenest interest in Venezuelan petroleum, and the company has been in talks with local officials and businessmen for quite some time. According to Andrei Kuzyaev, should circumstances develop favourably, the total investment in the US could reach a billion dollars.

In addition to oil production, LUKoil may engage in projects related to distribution, processing and petrochemicals. This would enable the company to make its wishes come true: LUKoil could enter the American market and build a vertical production chain ending in the gas station chain LUKoil acquired on the US East Coast.
LUKoil management will not disclose specific projects but these will most likely involve offshore oil production in western Venezuela. The company has already held talks to organize a joint venture with PdVSA near Maracaibo Lake and may try to apply its extensive experience in offshore platforms in Venezuela.

No risk, no oil
However, as history proves, a political leader's love for Russia may not be enough to guarantee successful investment. Despite its exceptional attractiveness, foreign capital is in no hurry to launch new projects. One Russian expert very familiar with Venezuela explains that Russian companies will have to face Latin America's age-old problems: nepotism, bribery, blackmail, and a constantly changing business climate.
Such difficulties are nothing new to Russian businessmen, though. What is worse is that Hugo Chavez's position in Venezuela is quite shaky. During a referendum on a vote of no confidence last March, more than 40 % of the country's population voted for his immediate resignation. There is also great discontent among local businessmen and oil producers, and most of the mass media are under opposition control.

The forthcoming elections (parliament elections will be held in 2005 and presidential elections in 2006) don't make things any more stable, either. It cannot be ruled out that relations with Russian companies and their property will become the subject of political bargaining, as was the case in Iraq after the overthrow of Saddam Hussein.
A project's profitability could fluctuate as the business climate changes. However, as Naumov notes, should events develop unfavourably, it's still highly unlikely that private property, even if acquired under Chavez, would be seized.

Source: Gateway To Russia
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