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|  | APRIL 4, 2006
By Geri Smith Venezuela's Seizure Ups the AnteTaking greater control in the oil fields, President Hugo Chávez is seeking a bigger slice of the pie. Question is, do the oil giants have much choice?Making good on year-old threats to take more control over its oil production from international oil companies, Venezuela has seized an oil field from France's Total (TOT ) and cancelled another oil-field contract with Eni (E ) of Italy. "These two companies are refusing to abide by our laws," said Energy Minister Rafael Ramirez in a press conference in Caracas on Apr. 3. "They won't accept state control over our resources, and they won't accept the taxes and royalty rates." The move reflects the changing balance of power between governments and oil companies. With oil prices in the country soaring above $50 per barrel, Venezuela wants a better deal from oil companies, like other oil producers around the world are seeking. Since winning approval for a new hydrocarbons law in 2001, President Hugo Chávez has been angling to renegotiate contracts that Venezuela struck with global giants in the 1990s when oil prices were low and the government was desperate for investment. DEADLINE PASSES. In the last few years, the government has significantly increased royalties and cracked down on oil companies for alleged underpayment of income taxes. The series of moves is forcing companies to decide whether to play ball with Chávez and state-run oil producer Petróleos de Venezuela, or PDVSA -- or pick up stakes and leave the country. PDVSA had given foreign oil companies until Mar. 31 to accept new contracts for 32 oil fields that hand the state-run company majority control of the operations. Sixteen companies, including Royal Dutch Shell (RDS.B ), the Spanish-Argentine company Repsol YPF (REP ), Brazil's Petrobras (PZE ), and China National Petroleum agreed to the new contracts that will convert the operations from what had been service contracts to joint ventures in which PDVSA has at least a 60 percent stake. But Total and Eni balked at the new conditions, and ExxonMobil (XOM ), which has threatened to legally challenge changes in Venezuela's oil royalties and contracts, decided to sell its own oil field stake to Repsol. TAKE IT OR LEAVE IT. Over the past weekend, Ramirez triumphantly and symbolically raised the Venezuelan flag at Total's Jusepin oil field, which produces 30,000 barrels a day, and at Eni's Dacion oil field, which produces 50,000 barrels a day. Both companies, Ramirez said in the Apr. 3 press conference, would be compensated. But he gave no details on how the compensation would be determined. Ramirez, who is also president of PDVSA, said last week that if Exxon were displeased with changing conditions in Venezuela, the company was free to leave the country. But like Total and Eni, ExxonMobil has other operations it values in Venezuela, including a 50 percent stake in an exploration venture with Petro-Canada (PCZ ) called La Ceiba. It also has a 41.7 percent share in a joint-venture heavy-crude production project with BP (BP ) and PDVSA called Cerro Negro, in Venezuela's oil-rich Orinoco Belt. Exxon's tougher stance, however, may have contributed to the company being dropped from a big petrochemical project three months ago and eliminated from a major natural gas exportation project several years ago. Chávez' and PDVSA's moves are the latest signs of shifting fortunes for oil companies in Venezuela. The government expropriated the oil industry in 1976, but in the mid-1990s invited international oil companies to come back to help the country develop its huge reserves. ROUGH RIDE. Venezuela has proven reserves of around 80 billion barrels, about 34 billion of which are extra-heavy crude deposits in the Orinoco basin that must undergo special refining to make them marketable. But the country also sits on about 235 billion to 250 billion barrels more of extra-heavy crude, which if proven would give Venezuela the largest oil reserves in the world -- greater even than Saudi Arabia. However, Venezuela's oil industry has suffered much volatility over the seven years since Chávez, an ex-paratrooper who once staged a failed military coup, was elected president and took office in 1999. After surviving a short-lived coup attempt against him in 2002 and a two-month-long strike by oil workers that disrupted crude production, Chávez in 2003 fired most of PDVSA's top executives, many of whom had advocated his removal from office. In 1999, the country's production capacity was about 3.5 million barrels per day, of which 150,000 to 200,000 barrels were being produced by foreign oil companies. Today, although PDVSA claims it is producing 3.27 million barrels a day, most international oil analysts believe the real figure is closer to 2.6 million barrels, of which 1.1 million barrels are being pumped by the private companies. More than half of that private production, or around 600,000 barrels a day, comes from the 32 oil fields whose investment regimes were changed last week. NO CHECK ON POWER. Luis E. Giusti, the former CEO of PDVSA who opened the country to private investment in the mid-1990s and who is now an oil expert at the Center for Strategic and International Studies (CSIS) think tank in Washington, D.C., says the Venezuelan government's crackdown on foreign oil companies is a "circus." The entire national congress and Supreme Court are allied with Chávez. "This man is so powerful now that he can do almost anything he wants," says Giusti. In the mid-1990s, Giusti says, none of the oil companies was very interested in helping Venezuela exploit its heavy-crude deposits. "Nobody wanted to invest in these fields," he says. Venezuela had to offer lower taxes, offer an attractive investment environment, and arrange for a pipeline to ship the oil 300 miles to the shore. Foreign oil companies responded, investing more than $25 billion in Venezuela over the past decade. Today, with Venezuelan oil fetching $55.50 a barrel on international markets, the Chávez government is reaping the benefits of that investment, yet "now the government claims that none of those incentives were justified," Giusti says. (The Venezuelan government plans to try Giusti in absentia in connection with opening up the oil industry in the 1990s). CANT'T WALK AWAY? Not everyone views the rewritten contracts as a bad deal for the oil companies. Mazhar al-Shereidah, professor of international oil economics at the Central University of Venezuela in Caracas, says the new deal will benefit the companies by giving them 40% of the oil produced at their fields through 2018. Before, he says, they were merely operating the oil fields and delivering the oil to PDVSA for a set fee and reimbursement of investment expenses. Whether they agree or not, foreign companies investing in other oil projects in Venezuela, such as the extra-heavy crude deposits in the Orinoco Belt, can expect those contracts to be reviewed shortly, too. But, Giusti says, with world oil prices as high as they are, "companies are just going to have to swallow this" if they want to remain in Venezuela. It's all a question of supply and demand.  Smith is BusinessWeek's Mexico City bureau chief Edited by Rose Brady
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