Chávez' May Day Takeover of Oil Assets

The Venezuelan President is making good on his vow to regain state control over the country's oil riches

by Peter Wilson

Russian-made MiG fighter jets will swoop overhead and army troops will flank Venezuelan President Hugo Chávez when he takes over four heavy-oil projects from their foreign owners May 1. The staged theatrics by the fiery nationalist, including a rally by red-shirted supporters of Chávez's Bolivarian revolution, are aimed at driving home the message that Big Oil is no longer in charge in Venezuela.

Exxon Mobil (XOM), Chevron (CVX), ConocoPhillips (COP), BP (BP), France's Total, and Norway's Statoil (STO) had little choice but to turn majority control of their operations in Venezuela's oil-rich Orinoco River basin region to state-run oil company Petróleos de Venezuela (PDVSA). While most of the companies are expected to remain as minority partners, terms haven't been negotiated yet for compensation of the takeovers. Energy & Oil Minister Rafael Ramirez said last week that a final agreement might not come until late June. "I'm not sure that all the oil companies will stay," says Pietro Pitts, editor of Caracas-based Latin Petroleum magazine. "They are looking at the long-term and want some assurance that their contracts will be observed."

Chávez said on Apr. 29 that the takeovers represent the "last step" in his dogged efforts to regain state control over the country's oil riches. Venezuela, the world's fifth-largest oil producer, sells two-thirds of its production to the U.S., accounting for 14% of U.S. imports. "We are going to take over some oil fields that have continued to be in the hands of transnationals," Chavez said in a meeting of regional leaders.

Some Risks for PDVSA

Venezuela is yanking away the welcome mat it extended to foreign oil companies 16 years ago to help pump and upgrade the heavy, tar-like oil is found in the Orinoco River area. Oil companies were promised 35-year contracts and have invested more than $17 billion in Venezuela over the past decade. "They know they need the expertise and financing of the foreign oil companies but they want to be in control of the projects," says Carlos Rossi, an economist at the Caracas-based Venezuelan Hydrocarbons Assn., which represents foreign oil firms.

Analysts estimate that PDVSA, which now holds a 30% to 49.9% stake in each project, may have to pony up to $6 billion to increase its stake to 60%, unless it pays in oil. The company, which recently sold $7.5 billion worth of bonds to ease cash-flow problems, may also have to pay off jittery bondholders and banks that don't trust it to honor existing debt covenants, and that could cost billions more.

Just as important, PDVSA must also allay fears and encourage its foreign partners to stay and continue to invest in the projects, which produce about a fifth of the country's current output of 2.4 million barrels a day. With oil prices so high, most of the companies are expected to go along with the new deal, but they may be wary of pouring in more money now that the projects will be operated by PDVSA's thinly staffed management and engineering ranks.

Reluctant Agreement

Chávez's move toward greater control coincides with growing questions about PDVSA's financial situation. The company, which is wholly owned by the government, has boosted support to Chávez's social and educational programs at the expense of its own investments. "Petróleos de Venezuela owes a lot of money to people," says Alberto Quiroz, an oil analyst who formerly oversaw Shell's operations in the country. "The reason is that the company is funding more and more social programs."

PDVSA channeled $13.3 billion to the government for social-development programs last year—nearly triple what it invested in its own oil and natural gas operations and nearly double the $6.9 billion it handed over to the government in 2005. The hefty cash transfers are expected to continue apace this year, especially as Chávez seeks voter approval to change the constitution to strengthen state control over private property and allow him to run for reelection indefinitely. The former army colonel, who staged an unsuccessful coup d'état in 1992, was elected president in 1998.