Industry in Focus

By Lisa Sanders

A Tug-of-War in the Oil Patch

Big oil could face pressure if Bolivia, Venezuela, and others take more control of their fields, but S&P is still positive on most stocks

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Major oil companies, facing declining output from mature fields, have been finding it difficult to increase oil and natural-gas production for some time. That task could become even trickier as countries such as Nigeria, Venezuela, Bolivia, and Russia aim to take more control over their own production.

According to news reports, Evo Morales, the president of Bolivia, told foreign oil companies on Monday they have six months to either renegotiate their contracts or leave the country. He reportedly informed the companies of this, as he ordered them to remit all natural gas and oil sales to a state-owned company. Spain's Repsol (REP) is a major player in Bolivia.

Bolivia's move follows Venezuela's, where President Hugo Chavez threatened to nationalize the Orinoco River Basin, which holds an estimated 235 billion barrels of oil. Companies that do business there include BP (BP), Chevron (CVX), ConocoPhillips (COP), ExxonMobil (XOM), and Total (TOT).

BACK TAXES.  Chevron addressed the nationalization threat in its first-quarter earnings call. Venezuela, the world's fifth-largest oil exporter, has proposed a tax rate increase to 50% from 34% on all the extra heavy oil crude projects in the Orinoco Belt. Chevron warned that it's too early to predict the eventual outcome of the proposal. According to Chevron, the Orinoco Belt contains the largest known hydrocarbon deposit in the world.

Chavez, who has railed against U.S. capitalism, claims that Chevron and 21 other oil companies operating there owe the country billions in back taxes and royalties. "With respect to the criteria to be used for investments -- whether it be in Venezuela, or Canada, or the U.K., United States, or anywhere -- we take a look at all of the components, which very much include the fiscal terms, in making our assessment as to making an investment. And the same pertain to Venezuela as well," Chevron CFO Steve Crowe said in the company's earnings conference call.

According to the Energy Information Administration (EIA), there are four major projects in the Orinoco Belt. In conjunction with the national oil company Petroleos de Venezuela, or PdVSA, ConocoPhillips is a partner in two projects, Chevron in one, ExxonMobil in one, and Total and Statoil (STO) are partners in one.

PASSING LAWS.  Crowe also told Dow Jones that Chevron, which produces about 120,000 barrels of oil a day in Venezuela, expects output there will be reduced when a new production agreement that gives PdVSA more control of the projects, is finalized. The company may also be forced to cut its oil reserves in the country, Crowe said in the report.

According to the EIA, Venezuela passed a new hydrocarbons law, which increased royalties paid by private companies to between 20% and 30% from between 1% and 17%, and guaranteed that the PdVSA own a majority interest in any new projects. The law also changed the structure of future foreign investment to joint ventures from strategic associations.

Peru's nationalist party leader Ollanta Humala has been reported as saying he intends to nationalize the country's oil and gas industry if he wins a runoff election. According to Statfor, a global intelligence firm, Ecuador is moving to emulate Venezuela's oil policies. In Nigeria, a militant group is seeking to reap more money from oil and gas projects in the West African country and has kidnapped oil workers and shut down operations in pursuit of that goal. There are 18 foreign oil companies operating there.

STILL POSITIVE.  Meanwhile, Russia, which is the world's largest exporter of natural gas, decided last year to limit foreign investment in oil projects. BP, ConocoPhillips, ExxonMobil, and Shell (RDS.A) have projects in that country.

Despite the turbulence abroad, S&P is still positive about the outlook for several major oil companies, which operate in dozens of countries. S&P oil industry analyst Tina Vital reiterated her buy ranking on BP's American depositary receipts last week because she expects its oil and gas production to grow 3% in 2006. S&P kept a strong buy ranking on Chevron after the company reported a 9.7% increase in hydrocarbon production. S&P expects hydrocarbon production growth in 2006 to average 11%.

As for ConocoPhillips, which Vital downgraded to buy from strong buy on Apr. 27, S&P predicts production will expand by more than 30% in 2006 with contributions from Burlington Resources, which the company acquired in March.

NEW PRODUCTION.  ExxonMobil, which is ranked strong buy, reported production growth of 5.1% in the first quarter, above Vital's estimate. ExxonMobil does business in almost 40 countries. International projects should boost output growth by 13% in 2006, according to S&P estimates.

Total, ranked strong buy by S&P, is likely to have production growth of about 4% a year through 2010 with help from large international projects, particularly in Africa. Significant new production from the Dalia project in Angola is slated to come online in the fourth quarter of 2006.

HURRICANE DAMAGE.  Repsol, for which S&P has a hold ranking, had to reduce its 2004 proved reserves in January by 25% overall and by 52% in Bolivia and 41% in Argentina. S&P cut its production forecast for 2006 through 2009 for Repsol because of the importance of Argentina, Bolivia, and Brazil. S&P expects less than 1% output growth in 2006 for the company, but sees the Caribbean and North Africa adding to the mix by 2009.

S&P also has a hold ranking on Royal Dutch Shell. S&P expects production growth of about 3% in 2006 and 2007. The company was hit particularly hard by the damage from hurricanes Katrina and Rita.

For Statoil, which S&P ranks as hold, flat production looks likely in 2006. However new field developments should lead to 14% growth in 2007.

Sanders is a reporter for Standard & Poor's Global Editorial Operations

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