Venezuela's Weak Economy May Advance Long-Delayed Oil Auction

CARACAS (Dow Jones)--Venezuela's economy is tumbling just as the rest of the world begins to recover, which may create the perfect combination needed for the country's long-delayed oil drilling auction to finally get under way.

Industry sources say a contracting local economy alongside stronger global growth, which has pushed up worldwide oil prices, is providing incentive for both sides--the Hugo Chavez-led government and foreign oil firms--to make concessions and find common ground on the terms of the so-called Carabobo oil tender.

Observers still hesitate to assert the Carabobo auction, the most important drilling project in oil-rich Venezuela in more than a decade, will take place by January as scheduled. There is still more tweaking of contract terms to be done, and both parties want to get it right since the deals would last for decades. What is important, though, is the two sides seem to be getting closer to a deal, not farther away.

Private-sector sources confirmed Friday that oil companies are still waiting for the government to deliver the revised contract terms for the auction. Once received, the firms would have until late January to make official bids. The auction is for a handful of heavy and extra-heavy oil blocks in the eastern Orinoco region that together could produce a total 1.2 million barrels of crude a day, and would require investments of around $30 billion.

More than a dozen companies are interested, and at least five consortiums are being set up, whereby companies partner to reduce costs and share benefits.

Observers say higher global oil prices have made the petroleum companies, including heavyweights such as Chevron (CVX), Chinese state oil firm CNPC (0135.HK) and BP PLC (BP, BP.LN), more willing to accommodate some of the government's demands, which could include a down payment of up to $1 billion from winning bidders. Global crude oil prices pierced $80 a barrel recently, putting more cash in oil companies' hands.

At the same time, Venezuela's government also seems ready to make concessions. The South American country's economic cycle has lagged the rest of the world, only recently falling into recession, and that's forcing the socialist government to reluctantly seek foreign investment.

Oil accounts for more than one-third of gross domestic product, over half of government revenue and about nine-tenths of exports.

"There's a political will on the part of the Chavez government that hasn't been seen before," said one person in the industry who is familiar with the Carabobo process. "The government is realizing consumption-driven growth won't last forever, and they see that private-sector investment is essential."

Such an environment, this person said, is making the government more flexible to some companies' efforts to ensure they have decision-making power once drilling begins, even though they would be minority stakeholders. The current plans call for Venezuela's state oil company, Petroleos de Venezuela, or PdVSA, to have a 60% stake in all the projects, while the other companies or consortiums would have the other 40%.

The Chavez government provided for similar flexibility on decision-making roles in renegotiated contracts with oil companies a few years ago.

The government's apparent willingness to negotiate comes after Venezuela's central bank announced last week economic growth contracted 4.5% in the third quarter. Not only was that a shock to analysts, who on average forecast a 1% to 2% contraction, but it also surprised Venezuela Finance Minister Ali Rodriguez. A week earlier he had said he thought the quarter would see an improvement from the second quarter's 2.4% contraction.

Among the sectors with the sharpest decline was retail sales, down 11.5%.

The data might also help sway the government into providing tax relief to companies related to a levy on consumption, which the government initially indicated winning bidders would have to pay.

-By Dan Molinski, Dow Jones Newswires; 58-212-284-5651; dan.molinski@dowjones.com

Source; wsj.com/