MARIANNA PARRAGA
EL UNIVERSAL

Venezuelan state-run oil holding Pdvsa has four long-term orimulsion supply agreements expiring within the next three years at least, namely the accords the energy giant initialed with Canada, Japan, Lithuania and Singapore, with the latter maturing in 2014.

The Energy and Petroleum Ministry Tuesday published a communiqué announcing that orimulsion production in Venezuela would be halted next December 31st.

According to unofficial sources, for months Pdvsa has been engaged in negotiations with current customers to replace orimulsion shipments with fuel oil, an oil by-product cheaper than gasoline and diesel that is used -just like orimulsion- to fuel powerhouses.

However, such negotiations could find serious legal hindrances. Former managers with Bitúmenes Orinoco (Bitor), the Pdvsa affiliate that manufactures orimulsion, claimed that only long-standing agreements provide for replacement of orimulsion with an equivalent quantity of fuel oil, in case of emergency or force majeure.

Such article was removed from the contracts executed over since 2000, as this provision was originally intended to encourage use of orimulsion and protect customers because Pdvsa is the only manufacturer of orimulsion worldwide.

Under these circumstances, experts believe that Pdvsa will have to start negotiating with every particular customer. The Venezuelan oil giant will have to find a solution to the halt of orimulsion production that does not result in damages for buyers, with a view to avoid suits similar to the USD 2 million suit the Canadian New Brunswick Power filed against Pdvsa in 2004.

From the technical standpoint, the replacement of orimulsion with high-sulfur fuel oil does not involve any drawbacks because all of the powerhouses fitted for orimulsion are dual powerhouses. However, such a change does entail financial disadvantages. Pdvsa would have to determine whether it is to afford the difference in price (fuel oil is much more expensive than orimulsion) or negotiate new prices with customers. Since 2004, Pdvsa has vowed to honor orimulsion agreements.

The major stumbling block for renegotiation of prices under the current agreements is the fact that, unlike orimulsion, fuel oil prices fluctuate and are pegged to crude oil price -which is currently over USD 60 per barrel.

Phase-out
Orimulsion manufacturing Module One -which halted production several months ago- produced 6.3 million tons a year at maximum capacity.

When campaigning for the Venezuelan Presidency, Hugo Chávez vowed to expand orimulsion manufacture to five modules in order to produce 22 million tons per year. However, in 2003 -five years into Chávez' administration-, Pdvsa announced it would phase-out Bitor operations and production.

Since then, Pdvsa has not renewed any of the orimulsion supply agreements that have expired, as it is the case for Italian Eni -the firm engaged in the largest orimulsion supply agreement (2.75 million tons a year). 

China's is a peculiar case. Following expiration of a 1.18 million tons/year agreement, China initialed a similar agreement last year. China was waiting for completion of orimulsion Module Two -operated by Chinese firms. However, after the premises were completed, Pdvsa announced that the module is to be used to produce crude oil mixtures as of 2007.
 
Translated by Maryflor Suárez R.