Malaysia's Petronas exiting Venezuela crude project

(Adds India's ONGC, Oil India, unlikely to take stake)

By Marianna Parraga and Brian Ellsworth

HOUSTON/CARACAS, Sept 10 (Reuters) - Malaysian oil company Petronas said it is exiting one of the biggest petroleum projects in Venezuela's Orinoco belt, after what sources close to the venture and within the firm said were disagreements with Venezuelan authorities and state-run PDVSA.

The flagship project, called Petrocarabobo, has planned investments of about $20 billion over 25 years and calls for building a 200,000 barrel per day upgrader to convert heavy crude into light crude oil.

When the venture was formed in 2010, Venezuela touted it as a sign that oil companies were willing to put up with demanding fiscal conditions in exchange for access to the world's largest oil reserves.

Petroleos de Venezuela (PDVSA) has 60 percent of the project. Petronas belongs to a consortium that holds 40 percent. Its other partners are Spain's Repsol, India's ONGC and two smaller Indian firms, Oil India and Indian Oil Corp. Petronas holds an 11 percent stake.

Sources close to ONGC and Oil India said on Wednesday they were unlikely to buy the stake being shed by Petronas.

Petronas confirmed on Tuesday Reuters' report that it was withdrawing from the project, saying that the decision had been conveyed to Venezuela's government on Aug. 27. Petronas sources later told Reuters the move was part of its strategic review of global assets.

Venezuela's Petroleum Minister Rafael Ramirez declined to address the issue on Monday and urged reporters in Caracas to consult Petronas.

A Petronas company source in Kuala Lumpur said the withdrawal was due to unspecified problems in dealing with Venezuelan authorities and because the state giant preferred to "play it a bit more safe" by focusing on established markets such as Canada and Australia.

"This should not come as a surprise. We have not been excited about this project for the past two years because of the dealings with the government," said the source, who requested not to be identified as he was not authorised to speak to media.

"We have run in to quite a few roadblocks when it comes to South America."

Petronas entered Venezuela's oil sector in 2010, three years after an expanded nationalization in the oil industry under socialist leader Hugo Chavez, who died in March. The Petrocarabobo project started production in late 2012 and has a capacity to produce 400,000 barrels per day (bpd).

One source close to the project told Reuters that frequent changes in the fiscal framework, disagreements with the government of Chavez's successor - Nicolas Maduro - about the business terms, and long delays led to the decision to withdraw.

Petronas planned to feed a new $19 billion refinery and petrochemical complex in southern Malaysia with Venezuelan crude produced at its joint venture, but company sources said that project would not be further delayed by the withdrawal.

PETRONAS PRESSURED BY COSTS

Petronas had begun talks with its consortium partners, including Repsol and ONGC, to take over its stake, the first company source said. Under Venezuelan law, the government has to approve the departure and the new ownership structure of the venture.

A source close to ONGC, which also holds an 11 percent stake in the project, said it would study the option to buy the Petronas stake, but a second source said the company might not exercise the option because it was already raising debt to fund acquisitions in Mozambique.

Oil India, which has a 3.5 percent stake, was informed of Petronas's decision a week to 10 days ago, a source said, but "I don't think we will be taking". The sources at both Indian companies said they remained committed to the Venezuela project.

The consortium paid $1.05 billion to the Venezuelan government in May 2010 to become a partner in the project and it has to deliver an extra payment of $1 billion to finance PDVSA's stake, according to the terms of the deal.

Petronas was also exploring several natural gas projects in Venezuela, after being invited by the government to become its partner in some delayed developments for exploring and producing gas offshore. But it never formalised its participation.

Venezuela is struggling with a slow, long-term decline in oil and natural gas production and a recent refining crisis that is affecting its balance of payments.

The move by Petronas could raise more questions about Venezuela's ambitious plans to boost output that has been stagnant for years and the ability of the government to turn the promise of the Orinoco Belt into a reality.

Petronas chief executive Shamsul Azhar Abbas said last month that rising costs and weaker crude prices may prompt the company to review some strategic projects, without giving details.

Petronas has held off on the planned $850 million purchase of a 40 percent stake in a Brazilian oilfield, saying that troubled local oil producer OGX Petroleo Gas Participacoes SA must first complete a debt restructuring.

The firm also plans to sell down its stake in a $20 billion Canadian liquefied natural gas (LNG) export project in order to share the cost of bringing cheap energy to Asia. Petronas acquired Progress Energy for C$5.2 billion ($4.9 billion) last year in a deal that gave Malaysia's only Fortune 500 firm access to shale properties in northeastern British Columbia. (Reporting by Marianna Parraga in Houston and Brian Ellsworth and Deisy Buitrago in Caracas; Niluksi Koswanage and Yantoultra Ngui in Kuala Lumpur; Editing by Terry Wade, Stuart Grudgings and Alex Richardson)