Analysis: Repsol hangs gas pearl on Venezuela

OREANDA-NEWS. February 18, 2015. The imminent start-up of a \\$5bn project led by Spain?s Repsol to produce natural gas offshore Venezuela for the first time coincides with a flare-up in tensions between Caracas and Madrid, exposing an awkward contrast between the countries? commercial and political relations.

The first 150mn ft?/d (4.2mn m?/d) train of the Cardon IV project that covers the Perla gas and liquids field will begin "soon," a person close to the project tells Argus.

The project, a joint venture between between Repsol and Italy?s Eni, will mark the first major industrial development in Venezuela in many years. Venezuelan state-owned PdV will take a 35pc stake in the project once it comes on stream.

Under a project schedule outlined by PdV in June 2014, Perla gas production will ramp up to 450mn ft?/d later this year, and rise to 800mn ft?/d of gas and 24,000 b/d of condensates from 14 wells in mid-2017. Peak output of 1.2bn ft?/d of gas and 28,000 b/d of condensates from 21-26 wells would be reached in 2020.

An offshore platform, pipelines and gas treatment facilities are completed or close to completion. Although the project has suffered delays, Perla has advanced at least in part because specialized local and foreign contractors are working for Repsol and Eni, rather than heavily indebted PdV, one contractor executive tells Argus.

At the same time, in contrast to PdV?s stalled heavy crude joint ventures in which the Venezuelan company has a mandated majority stake, Perla has been developed by foreign companies with operational and managerial control allowed under Venezuelan gas legislation. PdV?s oil partners would like to see that model replicated for their projects as well.

The Perla gas will be delivered into the domestic market, allowing PdV to displace some of the costly diesel and other liquid fuels often used to operate power stations, petrochemical plants and other facilities. The terms of the gas sales have not been disclosed. The condensates will be exported.

As volumes rise, the gas could also meet Venezuela?s long-unfulfilled pledge to neighboring Colombia to reverse a cross-border gas pipeline that has been used since 2007 to ship Colombian gas to western Venezuela. PdV is receiving a sparse 50mn ft?/d of gas from Colombia?s state-controlled Ecopetrol under the latest one-year contract extension that was signed in June 2014. If Cardon IV meets production expectations and Venezuela upgrades its transport infrastructure, Venezuela could eventually alleviate a looming gas deficit in Colombia.

The Cardon IV project will be launched at an uncomfortable time for Spanish executives in Venezuela. At a 12 February meeting in Caracas, Venezuelan vice president Jorge Arreaza told representatives of Repsol, airlines Iberia and Air Europa, telecommunications firm Telefonica and other Spanish companies that the government would expropriate their assets unless Spanish news outlets stop negative coverage of the Venezuelan government and Podemos, a Spanish political party with ties to Caracas.

Madrid has dismissed the threats. Freedom of opinion and the press are principles of democratic societies and the government has a duty to "defend Spanish companies against arbitrary decisions that counter the law," Spanish foreign minister Jose Manuel Margallo said in Madrid yesterday.

One European diplomat based in Caracas observed that Maduro has become increasingly "confrontational and unpredictable" over the past year as Venezuela's economic crisis has deepened and his popular support has plunged. The steep decline in oil prices since mid-2014 has accelerated the country?s economic malaise. GDP is expected to contract by 7pc in 2015.

Maduro said last week that the government had foiled a US-led military plot to overthrow him, an accusation roundly rejected by Washington.

Repsol appears to be particularly exposed to the political uncertainty. In addition to Perla, the company holds an 11pc stake in PdV's 400,000 b/d PetroCarabobo extra-heavy crude production joint venture in the Orinoco oil belt. PdV and Repsol are also 60:40 partners in the mature Mene Grande and Barua-Motatan crude oil fields in Zulia state, with a combined output of about 26,600 b/d. PetroQuiriquire, another PdV-Repsol joint venture, produces a combined 224mn ft?/d of gas from the Quiriquire and Quiriquire Deep fields in Monagas state.

Repsol has not addressed the pressure on Spanish interests in Venezuela. But the firm is not unaccustomed to political risk in Latin America. Argentina?s government expropriated a majority stake in oil firm YPF from Repsol in 2012, and the firm has withstood contract setbacks in Bolivia and Ecuador over the past decade.