Chávez seizures fuel Venezuela oil fears
By Benedict Mander in Caracas
Published: May 10 2009 12:41 Last updated: May 10 2009 18:27
Financial Times
A fresh round of expropriations in Venezuela has raised fears that the Opec producer’s already declining oil output could sink to its lowest level in the past 20 years.
Troops were mobilised over the weekend to assist Venezuela’s state-owned oil company, PDVSA, in seizing the assets of some 60 oil service companies, after a law was approved last week that paves the way for the state to take increasing control over its all-important oil industry.
“To God what is God’s, and to Caesar what is Caesar’s,” said Venezuela’s President Hugo Chávez, as he presided over the expropriation of at least a dozen rigs, more than 30 oil terminals and some 300 boats.
“Today we also say: to the people what is the people’s,” the socialist leader said to roars of approval from red-clad supporters on the shores of Lake Maracaibo, the heartland of the nation’s oil production.
This move forms part of a broader assault against the private sector, which Mr Chávez has increasingly blamed as Venezuela slides into recession. Simultaneously he is engaging in what opposition leaders say is a campaign of persecution of his political foes.
Manuel Rosales, a former presidential candidate, has been granted asylum in Peru to escape arrest over corruption charges, while congress has removed almost all the spending powers of Antonio Ledezma, the anti-Chávez mayor of Caracas. Other opponents have been jailed or gone into hiding.
PDVSA, which is suffering from a sharp fall in export income, made the surprise move against the oil service companies in response to their threat that they would suspend operations until it paid a backlog of invoices. Some, including Helmerich & Payne and Ensco International, abandoned rigs this year.
PDVSA, which is under pressure to cut expenses by 60 per cent because of tumbling revenues, is estimated to owe as much as $12bn (€8.9bn, £7.9bn) to contractors since suspending payments to them last August, shortly after oil prices began their precipitous decline.
It has demanded that companies accept a 40 per cent cut in their bills, arguing that the decline in oil prices means they are charging too much.
The new law will also enable PDVSA to pay debts with bonds rather than cash, and compensate assets at book value.
The move is the latest sign of the deepening cashflow crisis that has bedeviled the state oil company for at least two years as it has become overburdened with responsibilities far removed from its core business – in particular funding and running the massive social programmes that have become the bedrock of Mr Chávez’s support.
But analysts say that by shifting its problems onto its suppliers, PDVSA is storing up even bigger problems for the future. Not only does it lack the ability to operate as efficiently as the service providers, but it sends a grim signal to companies considering investing in Venezuela. Consequently, future oil production is under threat.
Perhaps most worrying is the impact this could have on foreign companies’ interest in a major auction currently underway to develop the Carabobo block in the oil-rich Orinoco Belt, which is the first oil investment opportunity in Venezuela in the last decade, and represents the oil dependent country’s biggest hope for reviving sagging production. According to the IEA, production fell to 2.36m bpd in 2008, compared to 3.18m bpd in 1997, although PDVSA claims it actually increased to 3.27m bpd in 2008.
Some 19 companies – including BP, Chevron, Shell, StatoilHydro, and Total – have expressed interest in bidding for the Carabobo projects that could collectively produce over 800,000 bpd, and require investments of $25-30bn.
But adding to worries about the lack of legal security in Venezuela, intensified by recent developments, international oil companies are also concerned by prohibitively high start-up and financing costs as well as tight profit margins due to fiscal terms that were drawn up before oil prices began their precipitous decline last year.
David Voght, a director at IPD Latin America, which advises several international oil companies operating in Venezuela, said: “Venezuela’s aggressive fiscal terms and the country’s persistent trend toward nationalisation of oil industry activities will make it more and more difficult to attract foreign investment and competitive bids from qualified operators.”
Taxes and royalties have been hiked four times since 2004, with an 85 per cent windfall tax introduced last year, while companies were ordered to give up operational control over four multibillion-dollar projects in the Orinoco two years ago, prompting Exxon Mobil and ConocoPhillips to exit the country and opt for international arbitration.
Although most companies are keen to have a stake in Venezuela, which now claims to have 172bn barrels of proven oil reserves making them the second largest in the world after Saudi Arabia, the government’s unpredictability and inflexibility are a serious deterrent.
“It’s a great paradox. There are companies that want to invest in Venezuela and to remain on a long-term basis, bringing capital, technology and know-how, but they may not do so because the government is refusing to recognize that the outlook for oil prices has changed,” said an industry source in Caracas, who requested anonymity. “They have to face up to reality.”
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