Global Policy Forum

Oil Showdown Looms with Venezuela's Chavez


By Simon Romero and Clifford Krauss

International Herald Tribune
April 10, 2007

With President Hugo Chávez setting a May 1 deadline for an ambitious plan to wrest control of several major oil projects from American and European companies, a showdown is looming here over access to some of the most coveted energy resources outside the Middle East. Moving beyond empty threats to cut off all oil exports to the United States, Venezuelan officials have recently stepped up the pressure on the oil companies operating here, warning that they might sell American refineries meant to process Venezuelan crude oil even as they seek new outlets in China and elsewhere around the world.

"Chávez is playing a game of chicken with the largest oil companies in the world," said Pietro Pitts, an oil analyst who publishes LatinPetroleum, an industry magazine based here. "And for the moment he is winning." But this confrontation could easily end up with everyone losing. The biggest energy companies could be squeezed out of the most promising oil patch in the Western Hemisphere. But Venezuela risks undermining the engine behind Chávez's socialist-inspired revolution by hampering its ability to transform its newly valuable heavy oil into riches for years to come.

As Chávez asserts much greater control over Venezuela's oil industry, his national oil company, Petróleos de Venezuela, is showing signs of stress. Management has become increasingly politicized, and money for maintenance and development is being diverted to pay for a surge in public spending. During the last several decades, control of global oil reserves has steadily passed from private companies to national oil companies like Petróleos de Venezuela. According to a new Rice University study, 77 percent of the world's 1.148 trillion barrels of proven reserves is in the hands of the national companies; 14 of the top 20 oil-producing companies are state-controlled.

The implications are potentially stark for the United States, which imports 60 percent of its oil. State companies tend to be far less efficient and innovative, and far more politicized. No place captures the shift in power to nationalist governments like Venezuela. "We are on a collision course with Chávez over oil," said Michael Economides, an oil consultant in Houston who wrote an influential essay comparing Chávez's populist appeal in Latin America with the pan-Arabism of Muammar el-Qaddafi of Libya two decades ago. "Chávez poses a much bigger threat to America's energy security than Saddam Hussein ever did."

Consider the quandary facing Exxon Mobil after its chairman, Rex Tillerson, recently suggested that Exxon might be forced to abandon a major Venezuelan oil project because of its growing troubles with Chávez. The energy world took notice. So did Chávez's government. Only a day later, Venezuelan agents raided Exxon's offices here. The government said the raid was part of a tax investigation, but energy analysts said the exchange of threat and counterthreat was all too clear.

Politics and ideology are driving the confrontation here as Chávez seeks to limit U.S. influence around the world, starting in Venezuela's oil fields. Chávez views the Bush administration as a threat, in part because it indirectly supported a coup that briefly removed him from power five years ago. Yet the United States remains Venezuela's largest customer.

Chávez recently decreed that Venezuela would take control of heavy oil fields in the Orinoco Belt, a region southeast of Caracas with so much potential that some experts say it could give the country more reserves than Saudi Arabia. The U.S. Geological Survey describes the area as the "largest single hydrocarbon accumulation in the world," making it highly coveted despite Chávez's erratic policies. By setting a May 1 deadline for what some foreign oil executives consider an expropriation, the Venezuelan leader risks losing Exxon, ConocoPhillips and other companies, which are loath to put their employees and billions of dollars in assets under Venezuelan management.

A departure of expertise and investment could weaken an oil industry already unsettled by being transformed into Chávez's most crucial tool for carrying out his reconfiguration of Venezuelan society. Chávez has raised taxes on foreign oil companies and forced other oil ventures to come under his government's control. And he has purged more than 17,000 employees from Petróleos de Venezuela after a debilitating strike about four years ago.

The talks have bogged down over how much the oil companies' stakes in four big Orinoco projects are worth, whether Venezuela's cash-short oil company would pay for the assets in oil instead of cash and, most important, who would manage the reduced operations of the foreign oil companies. Still prevented from producing oil in places like Saudi Arabia and Mexico, the companies desperately want to hold on to their Venezuelan reserves. Companies like Exxon, whose Venezuelan assets were nationalized in the 1970s and returned to it in the 1990s, know the pitfalls of operating here but figure that Chávez will not be around forever.

With oil prices at high levels, oil-rich countries as varied as Angola, Norway and Russia are also waiting to see how the talks unfold. Governments in Kazakhstan and Nigeria are trying to negotiate better terms with foreign oil companies as well. But none are doing so with Chávez's revolutionary flourish. "It is a defining moment," said Christopher Ruppel, a geopolitical risk analyst at John S. Herold, the energy consulting firm.

Last week, Rafael Ramí­rez, Venezuela's energy minister, sent a chilling signal to the oil companies, saying Venezuela might sell refineries in Texas and Louisiana that process crude from Exxon's Venezuelan oil fields. Analysts say Venezuela could be setting the stage to produce much less oil in ventures with American oil companies for export to the United States.

The oil companies decline to talk publicly about the negotiations, but people in the industry say Exxon and ConocoPhillips, two of the largest American companies in Venezuela, are digging in their heels. The companies, however, lack a united front: Chevron is expected to accept Chávez's terms, since it is also negotiating access to a large natural gas project in Venezuela. "If the majors want to negotiate a settlement, they have to be able to let Chávez save face and look like he has won this with his people," said Michael Goldberg, head of the international dispute resolution group at Baker Botts, a law firm in Houston that represents many of the major oil companies around the world.

For decades, Venezuela has been a leading supplier of oil to American refineries, a resilient economic relationship that remains intact despite deteriorating political ties. Venezuela is the fourth-largest supplier of oil to the United States, accounting for more than 10 percent of American oil imports. Once Venezuela's heavy oil is counted, its reserves may surpass those of Saudi Arabia or Canada, though the oil will be worthless without ventures to extract it. American oil producers are drawn here by Venezuela's 80 billion barrels of proven oil reserves, among the largest outside the Middle East.

But Chávez is chipping away at those ties by forming ventures with state oil companies from China, Iran, India and Brazil. Venezuelan exports of oil and refined products to the United States fell 8.2 percent to a 12-year low in 2006 of about 1.3 million barrels a day, according to the Energy Information Administration. No one sees an immediate crisis at Petróleos de Venezuela. But its windfall of high oil prices masks the complexity and rising costs of producing heavy oil. Meanwhile, the company acknowledged last month that spending on "social development" almost doubled in 2006, to $13.3 billion, while its spending on exploration badly trailed its global peers. And Petróleos de Venezuela's work force has soared 29 percent since 2001, even as production declined.

Independent analysts are alarmed by an increase in explosions and refining accidents during the last two years, which authorities brush off as sabotage. Ramí­rez, the energy minister, declined repeated requests for an interview. With heavily subsidized domestic oil consumption surging, the government spends an estimated $9 billion to keep gasoline prices under 20 cents a gallon. Moreover, Chávez uses Petróleos de Venezuela to finance other nationalizations, like a $739 million purchase of an electric utility in Caracas.

Petróleos de Venezuela's cash is said to be running short as Chávez uses its revenue to cement political alliances with Bolivia, Cuba and Nicaragua. The company has borrowed more than $11 billion since the start of the year. "The Venezuelan government's worst enemy couldn't find a better way to destroy Venezuela's oil industry," said a foreign oil analyst here, who insisted he not be named out of fear of retaliation. "It seems like they are going to strangle themselves with their own rope."

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