[Marxism] Venezuela tightens oil grip

Louis Proyect lnp3 at panix.com
Fri Apr 14 07:21:24 MDT 2006


from the April 14, 2006 edition - 
http://www.csmonitor.com/2006/0414/p06s01-woam.html

Venezuela tightens oil grip
The government last week seized the fields of two multinational oil giants.

By Jens Gould | Contributor to The Christian Science Monitor

CARACAS, VENEZUELA - Powering ahead with stringent nationalist reforms, 
Hugo Chávez's Venezuela is showing multinational oil firms little mercy.

Tense relations between private firms and Mr. Chávez's government escalated 
last week when the government seized fields operated by two European oil 
giants - France's Total and Italy's ENI - after the two companies snubbed 
government demands to convert their contracts to joint ventures with the 
state by April 1.

"This country does not allow itself to be blackmailed," says energy 
minister Rafael Ramirez. "These two multinational companies resist 
adjusting to our law. Our sovereignty isn't under negotiation."

Sixteen companies - including Chevron and Shell - did agree to new terms 
giving state oil company PDVSA at least a 60 percent state stake, a success 
which analysts say could embolden Venezuela to demand a majority stake in 
more valuable projects in the country's Orinoco heavy-oil belt. Heavy oil's 
viscosity makes it more expensive to drill and refine than regular oil. 
However, high oil prices have attracted top companies to Venezuela's heavy 
oil, which could boost the country's reserves count to the largest in the 
world - ahead of Saudi Arabia.

"Chávez is in the driver's seat because he has what everybody wants," says 
Roger Tissot, energy analyst at PFC Energy consulting firm, about 
Venezuela's heavy oil. "It's not any kind of oil. It's the oil of the future."

But more forced contract changes could further increase investor fear and 
make it more difficult for US oil companies to access one of the largest 
long-term sources of oil left on the planet.
Setting a regional example?

While it is not uncommon for governments to change contract terms when high 
oil prices boost their bargaining power, analysts say Chávez is inspiring 
other leftist leaders in the region to further their own nationalist energy 
reform.

"Chávez has been settling the precedent," said Pavel Molchanov, energy 
analyst at Raymond James, a financial planning services provider.

Bolivian President Evo Morales came to power in January on a platform to 
nationalize the nation's natural gas industry, while presidential candidate 
Ollanta Humala won the first round of elections in Peru on Sunday on a 
nationalist platform that includes renegotiating contracts with 
multinational companies. And Ecuador's Congress passed a bill to boost the 
state's share of windfall oil profits earlier this month.

"Nationalism is in the air in Quito [Ecuador's capital] and this certainly 
could be a path [Ecuadorians] take as they move closer to the [October] 
elections," says Riordan Roett, director of Latin American studies at Johns 
Hopkins University.
Chávez's nationalization moves

Last April, Venezuela's energy ministry gave private firms one year to 
eliminate 32 operating service agreements that governed mostly marginal 
fields accounting for about one-fifth of the country's production. None of 
the contracts were due to expire until 2012, at the earliest.

The Chávez government argues that the agreements, signed under previous 
governments, were oil-producing concessions disguised as service contracts 
and therefore violated a Venezuelan law prohibiting majority private 
participation. With oil prices skyrocketing, the state said it was 
suffering losses because the contracts ordered PDVSA to pay private firms 
generous operating fees based on the price of oil.

Now analysts consider it likely that PDVSA will soon demanda majority stake 
in the four highly profitable heavy-oil projects that already exist, which 
produce around 550,000 barrels per day and are operated by oil giants like 
ConocoPhilips, ExxonMobil, and Total. The projects are worth an estimated 
$20 billion in equity value, according to Deutsche Bank, almost double the 
value of the 32 operating service agreements.

The government has not confirmed such plans, saying that it is waiting on a 
National Assembly report due later this month to decide how it will apply 
its reform to the heavy-oil belt.
Rising prices and investor fears

Venezuela's tightened grip on oil companies will have little impact on oil 
prices in the short term, but it will add to pressure for prices to remain 
high in the long term because foreign investment will likely be weaker than 
under a free-enterprise policy, Mr. Tissot says.

James Williams, energy analyst at US-based WTRG Economics, warns that 
Venezuela's track record of changing contracts before they expire could put 
future production at risk by making companies reluctant to invest in 
multi-billion-dollar heavy oil projects.

Mr. Molchanov says recent takeovers of private and corporate property 
encouraged by the Chávez government have heightened oil company fears. "If 
companies have to choose, they might pick another country," he says.

And with increased risk in Venezuela, some investors are turning to the tar 
sands of Alberta, Canada, where free- enterprise policy and political calm 
has sparked an investment bonanza in the Western Hemisphere's other great 
long-term oil supply.

"Even though the cost of development is very high, even compared with 
Venezuela, [companies in Canada] are confident that they are going to 
recuperate their investments in the long term," Tissot said. "In Venezuela, 
I sense that they're not sure that's going to be the case."

Companies may be sticking it out in Venezuela because the country 
represents a significant portion of their global investments, and they may 
hope for softened terms if there is a change of government, says Williams.

And those that do will have to deal with Venezuela's sovereign right to 
govern its reserves as it pleases, says Rafael Quiros, former PDVSA director.

"The problem is that those multi- national companies like ENI have the 
culture and tradition to do whatever they feel like in all the producing 
and exporting countries," he says.

"But in the case of Venezuela, they made a mistake."

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