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Tuesday, March 24, 2009

Gazprom, Lukoil, TNK and Rosneft to operate in controversial zone

March 23, 2009 - Gerson Lehrman Group by Michael Lynch - Nancy Agin (Dow Jones) reported in the Rigzone Newsletter of March 17 that Venezuela’s President Hugo Chavez has confirmed a deal with a Russian consortium to exploit the Junin 6 Block in the Orinoco Tar Belt. The project will have a capacity of 200,000 bbl/day. The consortium will include Lukoil, TNK, Rosneft and Gazprom. The group will operate in cooperation with Petroleos de Venezuela (PDVSA). Also, the consortium will participate in the next licensing round to secure positions in future development projects. Chavez said that the agreement was signed in Vienna. The Venezuelan Oil Minister, Rafael Ramiriez noted the accord is an amendment to an existing cooperation agreement which allows the Russian companies to participate in above-water activities with PDVSA. The Junin 6 project calls for a capital expenditure of $6 billion.Hugo Chavez seized the assets of Exxon Mobil and ConocoPhillips in the Orinoco Tar Belt in 2007 and these companies have taken their disputes with PDVSA to arbitration, a lengthy process that can take years. The Russians, mindful of this situation, must have put strong language in the agreement to avoid such an outcome in their projects. In 2006, PDVSA signed exploitation agreements with several government-sponsored oil companies outside of the western sphere. China National Petroleum Company, Petropars (Iran), ONGC (India) are among them. As far back as 1998, the life of a given project was thought to be 35 years (which is about how long it will take for the casing strings to corrode out and surface facilities to rust away). Reserves estimates vary widely depending on the gravity and depth of the four zones that stretch across the 300 mile + long, narrow trend parallel to the Orinoco River which covers 55,314 square kilometers. The depth of the production zone can be as shallow as 750 feet and as deep as 4,500 feet. In March of 2006, the International Energy Agency reclassified Orinoco crude oil from non conventional to “OPEC crude.” When the field was first exploited in the early 1990s, the vertical wells were beam-pumped at a rate of about 100 bbl/day. Today, a typical horizontal/multilateral well fitted with an electrical submersible pump will produce from 2,000 to 3,500 bbl/day. In 2004, production costs were $0.95/bbl. Today they will not be more than $1.50, maybe less. Capital costs depend upon the expected recovery. In 1998, Norsk Hydro (now part of StatoilHydro) estimated that production plus lifting costs were $5.00/bbl in the Sincor area (Total operated). Today with combined capital costs plus operating costs well under $10/bbl, Orinoco Tar Belt oil is clearly competitive even when sold at a substantial discount to Brent or WTI. Assuming a 15% discount, profit on this stream can easily be $25/bbl. Junin 6 with an investment of $6 billion ($5.50/bbl) and $1.50/bbl operating cost has all the earmarks of a great success. Chavez will be tempted to do his thing. But if he annoys Vladimir Putin, Monroe Doctrine or not, he could be in big trouble.

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