“What Will We Do with So Much Gas?!”

For Venezuela, the announcement could not have come at a more relevant time. With many journalists openly asking whether Venezuela is entering a period of notable production decline, Venezuelan President Hugo Chávez revealed during a recent trip to Spain that a “vast” gas field has been found off the coast of his country.

In a joint interview with Spain’s El País newspaper, Chávez and Antonio Brufau – the chairman of Spain’s Repsol – spoke of how their joint-venture agreement with the Italian company Eni led to the recent discovery. The pair confirmed that while PDVSA holds a controlling interest of 35 percent of profits, both Eni and Repsol will claim profits of 32.5 percent – a share substantially greater than many foreign investors are currently claiming in their investments with PDVSA. Early estimates indicate that the gas field holds between 7 and 8 trillion cubic feet, which Brufau boasts is five times the amount of gas Spain uses during a calendar year and the largest gas discovery in Repsol’s history. In a candid moment shared between the two during the interview, Chávez reportedly asked Brufau, “What are we going to do with so much gas?”

During the interview, Chávez made a clear effort to announce that while Venezuela has proven itself as a leading oil producer with the largest confirmed oil reserves outside of the Middle East, the recent discovery will also make it one of the world’s top-five gas producers.

The discovery was made in Venezuela’s offshore waters, in a field named Cardon 4 that has been undergoing exploration for several years. Brufau indicated that further tests will be needed to confirm the volume of the discovery, but that he has no doubts of the “enormous” reserves.

Journalists in Spain and Venezuela claim that the discovery has begun to calm current investors in Venezuela. Furthermore, the announcement may attract possible investors who were hesitant to work with a country in the midst of a recession that refuses to make concessions in a nationalization program that could facilitate further foreign investment.

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Brazil and Venezuela Together Again

In recent years, they have been the best of friends and the worst of enemies. For now, Brazil and Venezuela are signing cooperative business agreements yet again. It may be that both nations, aiming to reach a new level of economic stability and oil-industry dominance, realize it is in their best interests to assist each other as much as possible.

During the first week of October, PDVSA and Petrobras finally signed an agreement to build a long-discussed refinery in Brazil that will be able to process approximately 230,000 barrels of oil a day. The two companies have held discussions regarding the plant for the better part of two years and have been announcing for months the intention to finally sign an agreement. The project was originally planned to cost no more than $4 billion; however, as cost estimates increased with every formal set of discussions, both PDVSA and Petrobras accused the other of refusing to follow through with their agreement. Industry insiders predicted the project would not come to fruition for a simple reason: Venezuela was simply running out of cash.

Days before the agreement was signed, Venezuelan Oil Minister Rafael Ramírez told journalists the signed agreement should indicate “everything has been resolved” between the two nations and their respective oil companies. In August, Petrobras indicated the project would require no less than $12 billion in investments. PDVSA recently agreed to initiate construction with an investment of $300 million. As part of his discussion with several Venezuelan journalists, Ramírez declared that the final cost of the refinery had not been properly determined.

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China Heads to Latin America

Chinese influence in Venezuela continues to grow. China is the second largest importer of oil in the world – behind only the United States – and is looking to become the biggest customer of Venezuelan crude after the United States. Already a customer, the Chinese seek to increase their investment in the little country. Venezuelan President Hugo Chávez announced in September a $16 billion deal with China for oil exploration in the Orinoco Belt in eastern Venezuela. This is the basin where both ConocoPhillips and ExxonMobil lost their assets to nationalization and have requested that PDVSA enter into arbitration. As the Venezuelan government continues to expand its control over its oil industry, new customers and partners become critical.

The agreement with China has a total investment of $16 billion to be spent over the next three years to produce up to 450,000 barrels of crude per day. Chávez did not identify the Chinese companies, but he did meet with CNPC during an April trip to China. According to China Daily, Venezuela sent an average of 385,000 tons of fuel oil each month to China in the first half of 2009, up from the previous record of 380,000 tons a month during the first six months of 2007.

But the deals do not stop in Venezuela. The Chinese are also looking at other countries, such as Argentina and Ecuador. In Argentina, two Chinese state-owned companies, CNPC and CNOOC, are in a joint bid to try and buy YPF. If the two firms are successful, the purchase will include all of the assets of the Argentinian oil company, including its holdings in Brazil. The Chinese have also signed an Ecuadorian deal to get 69 million barrels of oil over the next two years by providing a $1 billion advance payment. Ecuador also needs help in facing its liquidity crisis and China seems willing to provide much needed financial support in exchange for long-term crude supply agreements.

It seems obvious that as China makes moves around the world, it is not going to ignore Latin America as a major source of crude oil. China seems willing to make partnerships with just about anyone who has oil and needs money. For instance, the Brazilian state-owned Petrobras has suggested to the media that its Chinese counterparts have signed several important agreements regarding oil supply and oil exploration contracts.

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Russia is Heading for Latin America in a Group of Five

Russia’s five major oil companies are interested in setting up a consortium to boost operations in Latin America including Venezuela, Argentina, Peru and Bolivia. The firms that are considering this approach are Rosneft, LUKOIL, Gazprom Neft, Surgutneftegaz and TNK-BP. The group of five is reported to have paid US $1 billion to Venezuela to assure participation in exploiting the Dambo oil fields, according to Caribbean Update.

According to Deputy Prime Minister Igor Sechin: “The idea of creating a consortium comprising almost all the large Russian oil companies came from the companies themselves, which would like to work in Venezuela, and not only” in Russia. Sechin, who chairs the board of state-controlled Rosneft, Russia’s largest oil company, also said that Russia is increasing its cooperation with Latin American countries in several areas.

Additionally, while attending the 24th World Gas Conference in Buenos Aires, Alexander Medvedev, director general of Gazprom, reported that the company is interested in working with Spain’s Repsol YPF, according to Bolivia’s La Prensa.

The newspaper reported that among the negotiations being discussed is “a possible LNG alliance with Repsol in the North Atlantic Basin” as well.

Several Russian companies are already working in Venezuela. PDVSA signed a deal with Russian energy giant Gazprom this year to evaluate and certify the Ayacucho-3 oil fields in the Orinoco belt, and production on the Junin-6 block is expected to begin by 2012. Junin-6 is estimated to hold 53 billion barrels of heavy crude. In September, LUKOIL also signed a memorandum of understanding and an agreement with PDVSA on joint exploration in the Junin-3 area, also in the Orinoco belt.

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Brazil’s Gas Oversupply

Whether or not Bolivia is finally able to harness its vast supply of natural gas, South America should no longer experience the shortages that have plagued the continent every winter for the past few years. In fact, according to industry insiders, there should be no shortages of natural gas in South America this winter, next winter, or any winter through 2015.

In reaction to the widespread gas shortages that plagued Argentina, Chile and Brazil during recent winters, Brazil’s Petrobras invested in Brazil’s natural gas industry to develop new fields and increase its production rates. Simultaneously, Brazil’s domestic demand for natural gas fell dramatically. As a result, the country is experiencing a drastic oversupply that Petrobras officials believe will only increase when the company’s Mexilhão field becomes active in early 2010. Brazil, which aimed to become gas-independent following patterns of unreliable contract fulfillment with Bolivia, is currently poised to become a substantial exporter. Petrobras has announced that within weeks it will begin to auction off its gas surplus, and it expects to continue accepting bids to contain its current oversupply situation.

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Total Invests in Venezuela

Refusing to be scared away by Venezuela’s nationalization of its oil industry, France’s Total has revealed plans to make long-term investments in PDVSA. While ExxonMobil, ConocoPhillips and others have been driven out of doing business in Venezuela altogether, several companies have indicated they are interested in picking up where other companies have left off. Although several companies remain hopeful that international courts will provide them with restitution for changes PDVSA made to existing contracts, both Total and Spain’s Repsol have maintained their interests in operating in Venezuela – understanding their investments will grant them less control over Venezuelan operations than they would have had previously. While neither PDVSA nor Total were prepared to disclose the full details of the investment the French company will make, the news comes on the heels of an announcement that the two companies will invest $25 billion into the Junin oil field located in Venezuela’s Orinoco region.