Other oil companies may be leaving Venezuela, but PetroFalcon, with the largest private acreage position in the country, is staying put. In fact, as PetroFalcon’s vice chairman Clarence (Clancy) Cottman sees it, there are far more reasons to stay in Venezuela than to leave.

Cottman, with a B.A. from the Rochester Institute of Technology and an M.B.A. from the University of Rhode Island, has more than 25 years of experience in the oil and gas business. He began his career at Sun Company and was later an executive officer of Benton Oil and Gas Company. He has worked in several foreign countries and has been in Venezuela since 1992. As its CFO he helped start PetroFalcon in 2000, taking it public on the Toronto Stock Exchange in 2003and becoming vice chairman in December 2006. He exchanged e-mails with Robert Bryce in mid-October.

ET: ExxonMobil and other countries are pulling out of Venezuela. But PetroFalcon is expanding. How was PetroFalcon able to amass such a large onshore concession (1.6 million acres, which is second only to PDVSA) in Venezuela?

CC: Our strategy has always been to trade geological risk for perceived political risk. By that, I mean we know Venezuela has the reserves, and we know that building an acreage position there can be very valuable. We have been able to expand over and over by negotiating agreements effectively with the government and purchasing reserves and production at a discount to international metrics.

For example, we negotiated the first operating service agreement in Venezuela in the 1990s with the Benton-Vinccler joint venture, which is now owned by Harvest Natural Resources. We took production from zero to 50,000 barrels of oil per day very quickly. My partner Bill Gumma and I sold out, and convinced our Venezuelan partner, Juan Francisco Clerico, to purchase another operating service agreement for the East Falcon Block in 2000. We subsequently purchased the West Falcon Block from Samson International in 2006 and then, earlier this year, farmed in to Chevron’s Cardon III offshore natural gas exploration license in the nearby Gulf of Venezuela. Just recently, we announced the acquisition of Lundin Petroleum’s interest in the Colon Block.

We are the only company that has received ministry approval to complete a [merger and acquisition] transaction in Venezuela over the last couple of years, and we believe we can continue to consolidate assets in the region at a discount because we are 100 percent focused on Venezuela.

ET: What are PetroFalcon’s proved and probable reserves in Venezuela?

CC: PetroFalcon has existing proven and probable reserves before royalties of 36 million barrels of oil equivalent as of January 1, 2007. This is entirely from our joint venture with PDVSA, PetroCumarebo, and does not include the recently announced acquisition of Lundin’s equity interest in another PDVSA joint venture, Baripetrol.

ET: At the Pacesetters conference sponsored by John S. Herold and held in Greenwich, Connecticut in September, you said that operating in Venezuela is a “marathon, not a sprint.” Are other companies not looking far enough into the future?

CC: You have the full spectrum in Venezuela. Some companies are unable to adapt to the new circumstances or have non-core assets in Venezuela, and are therefore leaving the country. But you also have companies, like our partner Chevron, that are adapting very well and making long-term commitments to the country. We are a small local company with 100 percent of our business here and so we have to be more flexible than most of the oil and gas companies doing business in Venezuela.

ET: What about the risk of expropriation? Doesn’t that worry you?

ET: You also said that compared to other countries, the tax and royalty regime in Venezuela ¬– even with the recent increases imposed by the Chávez regime – are still competitive. Can you give an example of how the total financial picture in Venezuela stacks up versus, say, Louisiana, or a foreign country like Russia?

CC: There is a worldwide trend for governments to raise their share of rents and royalties. Russia and Canada have announced retroactive changes in their fiscal and contractual terms. However, when you look at the size of the reserves and production potential in these and other countries, including Venezuela, most companies have determined that they can still make money and will stay. Venezuela’s hydrocarbons law mandates a 33 percent royalty and a 50 percent income tax for all oil and associated gas projects in the country. I think this regime is competitive when you consider the reserve size.

ET: What is the biggest challenge you face in operating in Venezuela?

We are the largest acreage holder in Venezuela, one of only four local oil and gas companies in Venezuela, the only company able to execute M&A transactions in Venezuela, and one of only two publicly-traded pure-play Venezuelan oil and gas companies. When we close the Lundin transaction, we will have $30 million in cash, no long-term debt, and strong shareholders in Lundin Petroleum, PetroFalcon management, and the World Bank (IFC).

We see significant upside in our company, but our stock price suffers from the dramatic headlines regarding the perceived political risk in Venezuela.

ET: PetroFalcon is traded on the Toronto exchange. Does the fact that it is not an American company help in terms of dealing with the Venezuelan government?

CC: PetroFalcon has 100 percent of its business in Venezuela and operates under the local name, Vinccler Oil and Gas. Our chairman and CEO is Venezuelan, and most of our employees are Venezuelan. Our CEO’s family has operated a large construction business in Venezuela under the same name, Vinccler, for 50 years. We are listed on the TSX to access international capital, but we are really a Venezuelan oil and gas company—one of only four local E&P companies. I believe that allows us to be more flexible in the current political environment.

ET: What about the Chávez regime and the price controls? There are many reports about shortages of basic food commodities ¬– cheese, milk, meat – in Venezuela. Does that have an effect on PetroFalcon and morale?

CC: Like any emerging market with price controls and double-digit inflation, there are shortages of basic goods in Venezuela. But, as I said, most of our employees are Venezuelan, and this [had] been part of life in Venezuela, and Latin America in general, for a long time before Chávez.

ET: You’ve said that PetroFalcon has no trouble taking money out of the country and that you are getting a premium price (WTI) for your crude. Isn’t that unusual? By that I mean that you are producing light sweet crude at a time when the trend in Venezuela is toward the extra heavy crude production.

CC: Yes, our joint ventures are paid in U.S. dollars for their oil production, and we, as shareholders, are paid dividends in U.S. dollars. Our joint ventures are both located in the west of Venezuela and produce high gravity light sweet crude oil that sells at a premium to most of the oil produced in Venezuela. Most people know Venezuela for the large heavy oil reserves in the east of the country in the Orinoco belt.