Lagniappe

 

The Economist:
Venezuela politics: Sabre-rattling

 

A dispute between the government of President Hugo Chávez and global oil company ExxonMobil has heated up in the last week, with Mr Chávez threatening to halt crude supplies to the US in retaliation for Exxon's legal actions abroad. Whether or not the Venezuelan president follows suit—which is unlikely—the conflict highlights the growing incidence of tensions between foreign oil producers and increasingly powerful national energy companies, both in Venezuela and elsewhere in Latin America.

As part of Mr Chávez's energy nationalisation agenda, last year Petróleos de Venezuela (PDVSA), the state oil company, forced the renegotiation of contracts for four huge projects—worth, by some estimates, US$30bn—in the country's heavy oil-producing Orinoco region. PDVSA took control of all the projects, doubling its average stake over the four to 78%. In the Cerro Negro venture, which produces about 110,000 barrels per day (bpd) of marketable crude, PDVSA raised its stake to above 83%, leaving BP (UK) with just shy of 17%. The Texas-based Exxon had been the project operator with nearly 42% but never reached mutually acceptable terms with PDVSA and pulled out the project altogether.

Conoco Phillips (US) also couldn't reach an acceptable deal and was an even bigger loser. At the 190,000 bpd Ameriven, or Hamaca, joint-venture, Conoco lost its 40% share, leaving PDVSA with a controlling 70% and Chevron (US) with the rest. Conoco also lost a 50.1% stake in the 104,000 bpd Petrozuata project, leaving PDVSA in complete control. In the Sincor project, which produces 180,000 barrels a day, PDVSA took a 60% stake, while France's Total agreed to reduce its stake from 47% to 30.3% and Norway's Statoil dropped its interest from 15% to 9.7%.

The legal route

Exxon, meanwhile, has sought compensation for its losses via the courts. Courts in the US, UK, the Netherlands and the Netherlands Antilles have frozen up to US$12bn in assets belonging to PDVSA in response to the legal suits brought by Exxon. In a UK court filing, the company said that it sought the court orders on concerns that PDVSA would shift assets to other jurisdictions, including China, in order to put them out of reach of an international arbitration panel.

Exxon filed for arbitration against Venezuela with the International Chamber of Commerce after the government seized control of the Cerro Negro venture. The recent court rulings prevent PDVSA from selling assets such as refineries and from withdrawing some US$300m from a US bank account. The decisions could also harm PDVSA's ability to raise funds from international sources.

Energy assertiveness

Venezuela's nationalisation actions last year are part of a broad move back towards resource nationalism, where governments such as those of Bolivia and Ecuador in Latin America, and Russia, Indonesia and Nigeria elsewhere, have implemented or threatened to implement tougher ownership and tax rules, even taking projects over outright, 1970s-style.

Such assertiveness has gathered force as oil prices have nearly tripled in the last three years. Not only has legislation increasingly restricted the developments available to international oil companies, but governments have sought to roll back previously negotiated terms of projects that already had billions of dollars sunk into them. Outright nationalisation can be costly, not only because of required compensation and loss of status as an investment site, but also in lost production. So most recent moves have been of the "coercive renegotiation" variety, such as that pursued by PDVSA in the Orinoco.

Similar actions were taken by Bolivia when the Evo Morales government initiated nationalisation of its natural-gas industry in 2006. Most recently, Ecuador's President Rafael Correa has also threatened to take measures against foreign oil companies, which produce around half the country's oil, if they fail to increase investments while simultaneously renegotiating contracts with the government. Mr Correa has given Spain's Repsol, China's Andes Petroleum, Brazil's Petrobras, France's Perenco and the US's City Oriente until March 8th to agree to changes to their concession contracts. These include a choice between being paid a fee for extracting oil, or continuing with existing contract terms but agreeing to pay the government a 99% windfall profits tax on oil sales above a fixed price.

Global reach

In most cases, foreign companies have fairly limited chances of preventing such nationalist moves or getting compensation. Legal instruments in place internationally have failed to prevent widespread breaches of contracts in economic emergency cases, when governments claim the constitutional right to take over natural-resources industries or when there are no applicable bilateral investment treaties or trade agreements. Even if there is a judicial decision in favour of Exxon, Venezuela could refuse to make good on any awarded compensation.

To gain leverage in its fight with PDVSA, Exxon is looking to another recent trend among oil-rich governments. As their national oil wealth has grown, governments have invested more heavily abroad, especially through their national oil companies seeking to secure markets for their products. Even PDVSA, which under Mr Chávez has spent lavishly on domestic social programmes and on extending generous deals to similarly left-oriented Latin American governments, has a considerable international portfolio of assets that it built up under the more free market-minded management of the 1990s. Chief among these is the Houston, Texas-headquartered Citgo refining and marketing network. Citgo has refining capacity of more than a million barrels a day and had revenue approaching US$50b a year, according to its most recent Securities and Exchange Commission filings in 2005.

Bluffing?

Although Exxon's court actions have not yet touched Citgo, the other freezes have triggered Mr Chávez's threats against the US. Yet PDVSA is extremely dependent on the US market as well as Citgo's network to refine its heavy crudes. The US remains the top destination of Venezuelan oil exports, and Citgo's refineries were especially upgraded in the 1990s to handle Venezuelan oil. This renders Mr Chávez's threat of halting exports to the US somewhat impotent. Certainly, if his regime were to follow through and divert crude oil sales to, say, Europe or Asia, it would not only result in the loss of several dollars a barrel in shipping costs, it would also harm its own network in the US. This would be especially damaging in the context of PDVSA's declining oil production, the result of insufficient investment since Mr Chávez took office ten years ago.

It would be premature to suggest that Exxon has the upper hand in this contest, which is sure to be years away from an end game. But the company has made some clever tactical moves in the course of seeking redress via international arbitration.

Mr Chávez, for his part, is probably also seeking domestic political gain in ramping up the rhetoric against Exxon and the US. He has repeatedly exploited nationalist sentiment to rally support for his government, and may be utilising this tool again at a time when his domestic backing seems to be ebbing. The president suffered a major defeat in a referendum last December that sought to amend the constitution and lift presidential term limits. Moreover, there is evidence of increasing social discontent with food shortages—the result of economic policy mismanagement—and persistently high levels of crime. In response, Mr Chávez has shifted his domestic approach tactically, making modest policy adjustments and reshuffling his cabinet, for example.

Yet he seems to still relish playing the victim card where multinational companies and foreign governments are concerned. His threats and animosity toward the US did unsettle global oil markets, pushing up oil prices in recent days. However, they are losing their potency to influence Venezuelan public opinion. That may help explain why he has already begun to tone down his latest outbursts, at least for now.

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Petroleumworld News 02/19/08

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