Trying to be a foreign oil producer in Venezuela can be a dicey proposition these days. However, where some companies see untenable political risk, others see the possibility of stunning rewards. Canadian firm PetroFalcon is one that holds the latter opinion, says Clancy Cottman, chief financial officer. The flight of some foreign competitors from the region has given the junior a plateful of opportunities that it believes are unrivaled for a company its size.

PetroFalcon started its operations as a private company in 2000, and went public in June 2003. Management owns approximately 30%, and the World Bank, through its private investing arm IFC, owns about 6%. At present, PetroFalcon controls some 838,000 acres and ranks as the largest foreign acreage-holder in Venezuela.

The company recently signed a new 20-year contract with Petroleos de Venezuela, which gives PDVSA 60% and PetroFalcon 40% interests in Petrocumarebo, the entity that holds the West Falcon and East Falcon licenses in northwestern Venezuela.

"We're purely in Venezuela, and for the last year and a half, we have survived during contractual and political uncertainties," says Cottman. "With the signing of the new contract, those risks are behind us now."

PetroFalcon has accepted the Organic Hydrocarbon Law that was passed in 2001, says Juan Francisco Clerico, chairman and chief executive officer. "All of the oil companies have to be under that law."

Under the controversial legislation, PDVSA is the majority partner in all concessions. Oil is sold at market value, gas is sold at a negotiated price (expected to be $1.50 per thousand cubic feet for Petrocumarebo), the royalty rate is 33% and tax rate is 50%. There are no reversions and each owner shares the risks.

PetroFalcon's stock peaked in early 2005, but deflated rapidly after Venezuela announced the mandatory contract conversions. Going forward, the company now offers an established interest, approved budget and partner that will shoulder its share of costs. "We have traded geologic risk, over which we can't have any control, for political risk, which can be navigated," says Cottman.

During the coming four years, Petrocumarebo plans to spend $160 million to increase production to 24,000 barrels of oil equivalent per day. In 2006, it will develop its La Vela and Cumarebo fields, on its East Falcon concession.

La Vela already produces gas into PDVSA's new east-west ICO pipeline, and last year PetroFalcon discovered a shallow light-oil field above the deeper gas pay. It plans six direct offsets to the oil discovery. "We've booked 5 million barrels, but we think it could be much larger than that."

Cumarebo Field also offers development potential. As of early August, the field supplied some 10 million cubic feet of gas and 285 barrels of oil per day into the ICO pipeline. A gas- and an oil-development well will each be drilled at Cumarebo this year.

In keeping with Venezuela's world-class petroleum basins, the company offers mouth-watering exploration potential. "During the last year and a half of negotiations with the government, we shot seismic and refined our prospects," says Cottman. Eight low-risk wildcat prospects are waiting to be drilled.

Additionally, PetroFalcon is negotiating on a 400,000-acre gas license on the onshore Agua Salada Block, east of East Falcon. It was also high bidder on the 247,000-acre Castilletes Block, in shallow water off the Paraguana Peninsula. That block is currently involved in a border dispute between Venezuela and its western neighbor. Nonetheless, the company hopes for a resolution by 2007. The block has potential for a gas accumulation as large as 18 trillion cubic feet.

At present, Petrocumarebo makes 12 million cubic feet of gas and 1,200 barrels of oil per day. At the end of this year, if drilling goes according to plans, PetroFalcon expects its Venezuelan joint venture to be producing 25 million cubic feet of gas and 3,000 barrels of oil per day.

One favorable result of all the turmoil in Venezuela's oil industry is that services and supplies are not as scarce as in other regions. Rigs are available-even stacked-and plenty of experienced oilfield workers are ready for hire.

"We are going to build value through development drilling, exploration and acquisitions. Venezuela can be a very difficult place to operate, and our deep relationships there give us a competitive advantage."

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