Chavez's Big Oil Bluff

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Venezuela to Appeal Exxon Ruling

PDVSA is expected to appeal court rulings in the U.S., the Netherlands, and Britain that put the freeze in place. The Venezuelan company could probably get the rulings overturned if it were to open its books to the courts, something it is loath to do, as it would reveal how much it is sending Chavez to pay for his social programs, say analysts. Opening the books would also reveal the company's true rate of oil production—a closely guarded secret.

Chavez says Venezuelan oil output is now 3.2 million barrels a day, a number rejected by OPEC as well as most analysts who put output at least a quarter lower. Oil output has fallen 25% since Chavez took office in 1999, partially due to the firing of more than 20,000 PDVSA employees in 2002-03 during an abortive strike to force Chavez from office.

If an agreement with Exxon isn't reached quickly, Brazil and Mexico may profit over the long haul, says Pitts. Although Venezuela has the region's largest reserves, international companies could turn to Brazil and Mexico, especially if the latter moves to open its energy industry to private investment. Brazil also is revving up its energy industry and has found significant offshore reserves. Exploiting those reserves, however, will take years.

Demanding a Share of the Wealth

Venezuela's seizure last year of several heavy oil projects, including Exxon's, is the latest example of emerging oil producers placing greater demands on global oil giants. The heavy oil projects are based in Venezuela's Orinoco Belt, a basin near the Orinoco River, which is believed to hold up to 235 billion barrels of recoverable crude. Global oil companies were awarded contracts in the 1990s to take the extra-heavy crude, which has the consistency of tar, and refine it to higher, more profitable blends for export. Venezuela began changing its royalty agreements with the oil companies in October, 2004. At that time, companies were paying 1% of the value of oil extracted from the ground. That was unilaterally raised to 16.67%, and then to 30%. Last July, Venezuela forced six oil giants to hand over equity stakes of 60% or more in four important ventures to PDVSA. Four of the companies agreed to the handover, but Exxon balked—and went to court to seek what it considered just compensation.

Will Chavez's threat soon be revealed as an empty bluff? Probably, but there is always a slim chance he might try something. "Chavez is losing his No. 1 enemy, Mr. Bush, and he likes to interfere in elections," says Williams. "I think there is a chance he could do this, but before November."

Wilson is a special correspondent based in Caracas. With Moira Herbst in New York.