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Political implications of Russian-Venezuelan oil agreements

Posted by Kris Roman on July 24, 2008

RIA Novosti political commentator Oleg Mityayev

http://en.rian.ru

Many analysts expected Venezuelan President Hugo Chavez, who visited Moscow on July 22, to sign new agreements in military-technical cooperation, but this did not happen.

Instead, a number of Russian oil giants signed promising contracts with Venezuela. They would replace their American counterparts, previously ousted by Hugo Chavez.

Although the flamboyant Venezuelan president has visited Russia more than once since he was elected in 1999, bilateral cooperation was primarily limited to the sale of Russian weapons to Venezuela.

Last June, Prime Minister Vladimir Putin complained that mutual investment was inadequate and urged a broader partnership with Venezuela in the oil-and-gas industry as well as other spheres.

This desire became reality during Chavez’s recent trip to Moscow. Three Russian oil and gas companies, LUKoil, TNK-BP, and Gazprom agreed to work on perspective licensed areas in the Orinoco River oil belt in cooperation with the Venezuelan state-owned petroleum company PDVSA. The three Russian companies signed the relevant agreements with PDVSA on July 22 in the presence of the two presidents – Chavez and Dmitry Medvedev. Moreover, these projects will be carried out under their personal control.

“We have not only approved these agreements but have also decided to supervise their implementation,” Medvedev said after the signing ceremony. The Venezuelan president added that in the future the two countries may set up joint ventures on both oil production and oil refining.

The signed agreements make it clear that each of the three Russian companies has staked its own bloc in the Orinoco oil belt. Thus, LUKoil has received Junin-3 bloc. In effect, it has extended its three-year-long contract with PDSVA on the bloc’s evaluation and certification. The new two-year agreement provides for the bloc’s joint exploration and development. Once accomplished, the two companies plan to establish a joint venture to develop the deposit. This will require billions of dollars in investment. The oil from this project could then be sent to an oil refinery in Italy. LUKoil has just bought 49.9% of its shares.

TNK-BP and PDSVA signed an agreement on the joint study of the Ayacucho-2 block in the wake of a framework memo signed last October. As with the LUKoil agreement, it provides for a second phase – the sale of the produced oil abroad.

Gazprom agreed to the Ayacucho-3 bloc. It signed a memo on this bloc’s certification with PDSVA in 2005. Now both parties have decided to complete the evaluation of the bloc’s reserves, and prepare for a feasibility report before the end of this year.

There were many friendly handshakes during the signing of the Russian-Venezuelan oil agreements. “I look forward to seeing all of you in Venezuela,” Chavez said, shaking the hands of the heads of Gazprom, LUKoil, and TNK-BP.

It is rather difficult to predict how successful the Venezuelan projects will be for the Russian companies. Venezuela has abundant oil and gas reserves, but all projects signed under the current president, come with political implications. It is not clear what would happen with the agreements after a regime change. Nevertheless, Russian companies should develop their overseas expansion. If nothing else, Russia will gain useful technologies. All the blocs reserved by the Russian companies contain bitumen crude oil, and Russia contains huge reserves of this crude at home.

The signed agreements are also politically charged because the Russian companies are essentially replacing American oil giants – ExxonMobil and ConocoPhillips. Early last year, Chavez signed a decree on partial nationalization of deposits in the Orinoco oil belt, which compelled foreign companies to cede to PDVSA at least 60% of shares in oil projects. The two American companies did not accept these terms and refused to sign the new agreements on oil exploration and production with Venezuela. However, British BP, French Total, Norwegian Statoil, as well as U.S. Chevron agreed with the new terms because current prices still enable them to produce oil at a profit.

The Russian-Venezuelan agreements have one more political undertone. Oil imports from Venezuela play a major role in the U.S. oil balance. Out of 10 million barrels of oil imported by the United States every day, 1.2 million (12%) come from Venezuela.

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