Venezuelan Faja Surprise: USA’s Harvest sells not to China but Indonesia

Petrodelta,SA rig in the south of Monagas state, Venezuela (PDVSA 2011 Annual Rept)

In March, U.S.-based Harvest Natural Resources (HNR) had disclosed to shareholders it was in exclusive confidential negotiations with a national oil company (NOC) to sell its 32% stake in Petrodelta SA–a lucrative, mature, medium-heavy Faja oil field in the south of Monagas state, in which PDVSA holds a 60% share.  Thursday evening, Harvest surprised observers by announcing they had signed an agreement with the Indonesian National Oil company, Pertamina.

The big question immediately being asked was: “Indonesia?  Why not China?”  I was quoted at length Friday morning on this question by Bloomberg’s Nathan Crooks in Caracas (See:

Harvest Natural to Sell Venezuelan Stake to Pertamina, 21Jun12).  In this post, I want to further examine what this sale reveals about a) Chinese NOCs’ business attitudes in Bolivarian Venezuela and b) what it shows about Bolivarian energy policies.

Everyone realizes that China’s geopolitical energy-supply interests dovetail with the Bolivarian leadership’s stated geopolitical goals of escaping the nation’s decade-long energy-and-economic dependence  on the United States market.  However, once one goes below this simple first-order big picture, things are not so simple.

But, first, an aside: Harvest and its investors have done really very well in this deal.  It sold for a price on the high side of expectations, $725 million in cash.  To fully appreciate Harvest’s long-term, sober business tactics, working and negotiating rather successfully over the years with the new-PDVSA, read Zachary Prensky’s long blog (he iswith Little Bear Investment, NYC).  Details of the deal are at DailyMarkets.com, which broke the story, and in Pertamina’s press release.

Petrodeltana, SA fields in Southern Monagas state.

However, returning to the China issue, consider the following: Harvest’s share of Petrodelta’s proven reserves (aka its “P1”)  is about 50 billion barrels, while its probable reserves (aka its “P2”) are about 103.6 billion bbl–very significant holdings. And, on the production front, Petrodelta is a healthy anomaly for the Bolivarian-PDVSA era in that its production has been constantly expanding thanks to Harvest’s unusual resourcefulness in working with PDVSA (ibid., Prensky).  Production has increased from 13,000 barrels/day in 2007, to somewhere over 24,000 barrels/day over a year ago, due largely to a persistent drilling program self-financed from income on the field (see Harvestnr.com).

However, not unlike other foreign private firms, Harvest got hit by the new 2009 tax regime and has been unable to get paid cash it is owed from PDVSA.  So, they decided to sell, but not to have a “fire sale” as Petrodelta is unusually valuable property for present-day Venezuela–not only because of the large reserves and simple geology one finds in the Faja, but also because of Harvest’s  accomplishment in developing these assets.  Management vowed to shareholders that they’d hold out for a good price for what should be a lucrative asset in the hands of some NOC more favored by PDVSA and the Bolivarian leadership.

Well, the point is that to most observers, this sounded like a perfect opportunity for a Chinese NOC.

After Beijing has invested well over $32 billion in Venezuela under the Chavez presidency precisely to facilitate its NOCs acquiring Faja oil reserves, why in the world did Chinese NOCs not seize on this opportunity to buy Harvest’s stake?

Initially, when Harvest disclosed to shareholders it was in “exclusive” discussions, and that, by mutual agreement, the other firm’s name was to be undisclosed during talks, speculation was that it was either a Russian or Chinese NOC, which quickly narrowed to CNPC and Sinopec, the two Chinese NOCs  in Venezuela for the long haul.  This assumption initially made perfect sense.  Everyone realizes that China’s energy-supply interests dovetail with the Bolivarian leadership’s stated goal of escaping the decade-long energy-and-economic dependence  of Venezuela on the U.S. market.  However, once one goes below this simple big picture, complications arise.

The fact that CNPC and Sinopec have both not increased their reserve holdings in Venezuela as they have hoped to is a continuing sore point in their relationship with Caracas, especially considering Beijing’s huge state-sponsored investments.  In fact, Sinopec has no actual holdings in-hand whatsoever in Venezuela after several years of efforts and agreements. (see my discussion of Sinopec in MEES, May 2012).

Meanwhile, CNPC also looked to have very good reason to go for the Harvest stake in Petrodelta, as it has said it intends to significantly push production up in the country, from about 200,000 at present to 800,000 by 2017 (Shanghai Daily, 14Jun12) and it has also begun building a 400,000 bbl/day heavy-oil refinery in Guangdong Province to receive Venezuelan imports (Reuters, 23 Apr 12).

For completeness, it should be noted that CNPC and other Chinese companies face other difficulties in getting more entrenched in the Faja, which however cannot be blamed on PDVSA.  For example, Chinese companies that supply equipment to PDVSA there have recently had problems.  Contacts who know the Orinoco Faja fields first-hand tell me that PDVSA’s Faja-venture partners have strongly complained about Chinese-supplied pumpjacks of a type not having the familiar counterweight, which PDVSA, as the operator of these joint ventures,  has forced its partners to accept and pay for in spite of significant technical problems with the pumps.

In any case, why did the Chinese “lose out on” this Harvest field to the Indonesians, as some see the situation?  This too might be a problem largely of the Chinese companies’ own making.  Contacts in Caracas, with longtime knowledge of Chinese NOCs’ business attitudes, stress that, once it was clear to them that Harvest’s pledge of “no fire sale” was serious, for them this de facto eliminated the Chinese firms as buyers.  Why?  As one immediately stressed, without hesitation: “The Chinese never want to pay a good price … [they] want to get things cheap dealing directly with PDVSA, not from a private firm that insists on a good price.” Put simply, the Chinese in Venezuela have preferred to influence and deal with the State and the State’s company, PDVSA, to acquire the large reserves they seek.

(By the way, I am told that it had become clear to some observers that Harvest was serious that it would seek “no fire sale” of their assets when there had been an attempt by an independent broker to bring Harvest together with another, non-Chinese national oil company, and that that NOC had walked away, saying that “Harvest wanted way too much money.”)

Of course, PDVSA will have to approve this sale.  President and energy Minister Ramirez has stressed that PDVSA has first option to buy the field.  However, this is a sale to a national oil company, so it likely will have no difficulty being approved by PDVSA.

So, lastly, why is it that PDVSA and the state will likely have no problem with this field being sold to a national company?  Just to make it explicit, a geopolitical reason is that Indonesia has a vote at the U.N.  President Chavez has always wanted to include the maximum number of national oil companies in any oil deal so as to maximize the leverage he might have to avoid any future U.S. opposition to his Bolivarian administration in international organizations.  With the recent example of Ghadafi in Lybia, and Mubarak in Egypt, and now Assad in Syria, and the sanctions regime against Iran, he is even more interested to follow this policy of establishing economic and energy ties to as many national oil companies as possible in preference to private firms.  Furthermore, dealing with national oil companies also raises more possibilities of state-to-state barter-like deals for oil and in making payments to PDVSA’s joint-venture partners in a manner which avoids the use of U.S. dollars (which Venezuela is often in short supply of).  This is, all in all, quite attractive to Chavismo in trying to “escape the global markets of El imperio.”

Related articles

• Harvest Natural Resources sells Venezuelan assets (bizjournals.com)
• Harvest Natural Resources Announces Share Purchase Agreement to Sell Interests in Venezuela (prnewswire.com)
• Venezuela expands China oil-for-loan deal to $8 billion (chinadailymail.com)