Two Oil Giants Exit Venezuela

In response to Chávez' demands for equity, ExxonMobil and ConocoPhillips opt to walk away from what may be the world's largest potential oil reserves

by Peter Wilson and Geri Smith

Venezuelan President Hugo Chávez got what he wanted on June 26—he forced six global oil giants to hand equity stakes of 60% or more in four key heavy-oil ventures to state oil company Petróleos de Venezuela (PDVSA). Four companies, Chevron (CVX), BP (BP), France's Total, and Norway's Statoil (STO), signed agreements with Energy & Oil Minister Rafael Ramírez in a televised ceremony.

"This is an act of sovereignty for our country, for our people," Ramírez declared, standing under a poster of Chávez emblazoned with the motto "Fatherland, Socialism or Death." But two big players, ExxonMobil (XOM) and ConocoPhillips (COP), decided they have had enough and are retreating from the South American country—a move likely to hit Venezuela's oil output.

Boomerang Potential

Chávez' face-off with Big Oil is the latest example of a trend that has been growing stronger with every month of high oil prices. Around the globe, emerging oil producers are demanding more from global oil giants, many of which struck their exploration and production deals years ago at a time of low-priced crude.

Russia has pushed BP and Royal Dutch Shell (RDSB) to accept less favorable terms on mega-projects in Siberia and the Far East, and is also leaning on ExxonMobil. Much of the Persian Gulf region, which has the world's largest troves of oil, is off limits to outside investment in exploration and production. While companies are pouring money into Angola and Libya, which only recently began opening up after decades of isolation, the oil giants' efforts are stymied in many other markets. That's why there is real concern that the industry is not finding enough new investment opportunities to create the supply needed to compensate for natural declines in aging fields.

Venezuela's assault on the oil companies could boomerang. ExxonMobil's and ConocoPhillip's departure from the country comes as Caracas is hoping to attract more than $21 billion in investment from foreign oil companies. The goal: to boost daily oil output to 5.2 million barrels per day by 2012, up from its current 2.4 million. Venezuela, currently OPEC's fourth-largest producer, plans to spend $77 billion overall in the next five years. But with the shakeup in the industry, many analysts doubt Chávez will achieve his goals. "Doubling production now isn't doable for Chávez," says James Williams, who oversees Arkansas-based oil consultancy WTRG Economics. "Oil companies will be thinking twice about investing."

Orinoco Oil Flow

Other analysts agree. "Oil companies know that Venezuela has the resources in the ground, and they also know that they face limited opportunities elsewhere," says Pietro Pitts, an analyst with Caracas-based oil publication Latin Petroleum. "Still, they are leaving, as they have no certainty as to what is going to happen to their operations. This sends a really bad signal."

For now, that's not worrying Venezuela's Oil Minister. Ramírez says PDVSA and the remaining global oil companies will continue to develop the four heavy-oil ventures in the resource-rich Orinoco Basin. The projects take extra-heavy crude, which has the consistency of tar, and refine it to higher, more profitable blends for export. The government estimates that the basin, near the Orinoco River, is believed to hold up to 235 billion barrels of crude.