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Friday, 05 December, 2008, 16:50 GMT | more >>

The dramatic pull-out of two key US players from Venezuela's Orinoco heavy oil project has pointed up the pitfalls of resource nationalism


Texans call the Chavez bluff



By Michael O'Neill 

There is a lot of snubbing going on in Caracas these days. After tough-talking Venezuelan President Hugo Chavez told foreign companies they can either take or leave his nation’s oil policies, well, two of them did just that. They bolted.

Rankled by the Chavez administration’s rough-hewn style of deal-making, heavy oil project leaders ExxonMobil and ConocoPhillips turned their noses up at the mixed company model Venezuela had mandated for them.

The companies — two of the world’s largest — instead decided to pack up and leave Venezuela’s on-going heavy oil development in the Orinoco River basin.

Venezuela may console itself with the fact that other foreign operators and stakeholders, including US supermajor Chevron among them, were prepared to yield control of the four projects to state-run PDVSA, which has increased its stake in the plays to an average of 78% from between 30% and 49.9% before the takeovers.

However, the ramifications for Venezuela of losing two of the world’s biggest and most successful oil companies cannot be ignored. Not only is there the potential for disputes as the Texas-based pair seek compensation for the loss of their assets, but Venezuela has lost the billions of dollars of investment, capital resources and technological know-how they have to offer.

Future competition for projects in Venezuela is likely to be reduced as the remaining players see that they have no need to fear jobs being grabbed by two of their biggest rivals.

Given how desperate major oil companies are to get access to oil and gas reserves, it is hard to over-estimate how unhappy ExxonMobil and ConocoPhillip be to be prepared to walk away from a country that has an abundance of them.

Despite their protestations that they are satisfied with the deals they have struck, should we really believe that those who have stuck it out, such as BP, Total and Chevron, are any happier? Will they be eager to press the button on major new investments?

Petro-Canada, with less of a position and hence less to lose in investment capital, has also decided to quit Venezuela, highlighting that dissatisfaction is not limited to US giants.

Chavez wants to use the Orinoco stage to convince the world — and his Opec partners — that the reserves there are anything but bottom-of-the-barrel oil.

He has also made the Orinoco the clarion of his policy-making to limit foreign companies’ ownership of strategic assets in Venezuela.

However, even Venezuela knows it needs foreign help. It may be pinning its hopes on those who have chosen to stay, plus the national oil companies.

But by no means has he shut the door on foreign participation in Orinoco, which Venezuela hopes will play a crucial role in plans to double output to 5.8 millionbarrels per day by 2012.

Production capacity from the four producing heavy oil projects is about 600,000 barrels per day, and PDVSA clearly needs them.

A crippling strike in 2002-2003 and years of under investment since then means PDVSA is continuing to struggle to boost production at many of its fields.

However lucrative the Orinoco assets are, the state-run company will have to learn how to run them and, of equal importance, if its aspirations are to be met, how to expand them.

No matter how great the ideological differences between the Chavez administation in Caracas and ExxonMobil and Conoco- Phillips in Irving and Houston respectively, securing a deal that they all could have lived with would have been of benefit to all sides. The US supermajors would have brought something significant band of value to the table for Venezuela.

Now, though, there is the thorny issue of compensation to be resolved, and a possible messy arbitration process could further erode already poor relations between Venezuela and the US.

So bluffs, if they were bluffs, have now been called. To use the terminology so beloved of oil company spin doctors, in the long run this is likely to turn out to be a lose-lose result for all concerned.

Friday, 29 June, 2007, 07:33 GMT  | last updated: Wednesday, 11 July, 2007, 06:44 GMT
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