Venezuela: Oil seizures
FROM THE ECONOMIST INTELLIGENCE UNIT
The Venezuelan government’s takeover of 32 privately operated oilfields at the start of the new year fulfils the pledge of the president, Hugo Chávez, to force oil companies into new joint-venture contracts with the state–or else. However, the companies that lost their operations are apparently small players in the industry, whereas practically all the foreign oil majors in the country have signed new deals with the government and intend to remain. While expected, the move nonetheless increases concerns about the Chávez administration’s respect for contract and property rights.
December 31st was the deadline for all private companies to sign new operating contracts that would give majority control to the state oil company, Petróleos de Venezuela (PDVSA), in accordance with provisions of the new 2001 Hydrocarbons Law. Private and foreign oil companies had been allowed into Venezuela in the 1990s, and to have full or majority control, when PDVSA sought capital to develop and operate low-priority or inactive oilfields.
Those contracts provided generous terms to oil companies to entice them to invest at a time when international oil prices were below US$10 per barrel and PDVSA was short of resources. With prices, and profits, having skyrocketed in the last few years, the Chávez government has sought to get a bigger share of the revenues and more control of oil reserves. This is in line with the administration’s policies of expanding state participation in all vital industries and using revenues from oil to finance expanded social programmes.
The 2001 Hydrocarbons Law made agreements that gave majority control to private local or foreign firms illegal, but it is only in the last year that the government has pushed hard for new contracts. Large oil companies such as Chevron (US), BP (UK), Royal Dutch Shell (UK/Netherlands) and Petrobrás (Brazil) all signed new “transitional” joint-venture agreements last year. ExxonMobil (US) opted to sell its stake in a Venezuelan field to Repsol (Spain/Argentina), which has also just signed a new accord with the government. ExxonMobil was the only foreign company that rejected the contract changes.
Still good business
In total, 22 private firms have entered into new joint-venture accords. These companies clearly figure that operating in Venezuela is still a profitable and attractive business despite the contract changes. The other firms evidently calculated that they could not continue to operate with reduced profits and control. The 32 oilfields returned to state control account for around 530,000 barrels a day of production, out of Venezuela’s declared total of 3.2m b/d.
There are unlikely to be major negative repercussions for Venezuela resulting from the takeover of the fields, at least in the short term. Venezuela, the fifth-largest oil exporter, is a key player in the world oil market. Most major international companies will probably stay indefinitely rather than walk away from billions of dollars of investment, and certainly will remain as long as oil prices are high. However, they will probably not make any new capital outlays in the country until the “transitional” contracts with PDVSA are converted into thoroughly defined permanent ones.
Reluctance to invest before terms of the new joint ventures become clear has already been felt in recent months, with production under operating service agreements down by several thousand barrels per day. Whereas PDVSA states that the contractors are producing some 530,000 b/d, private estimates now put current production at those oilfields at 461,000 b/d.
“Socialist revolution”
Nonetheless, the seizures raise concerns about the heavy handedness of the Chávez administration and its apparent lack of regard for contract rights. Rather than analysing the merits of each individual operating contract and their respective expiration dates, the government has rescinded the contracts across the board.
The takeovers will also heighten worries about other policies that threaten private property under Mr Chávez’s “21st century socialist revolution”. In the last year the administration has become increasingly radical, and this trend is likely to accelerate following the win by “chavistas” of near-total control of the National Assembly in December legislative elections. The administration is poised, for example, to renegotiate contracts with foreign investors in other key sectors, such as mining, heavy industry and steel, to increase the state’s role in those industries.
Mr Chávez also may use his control of the legislature to codify some of his policies via constitutional amendments, such as the attempt to redefine private property rights in general. The government has already initiated measures to expropriate landholdings and other property, including manufacturing facilities, which it deems is not being used productively or for the public good.
With his expanded powers the president will be able to push through other laws that tighten his grip on the economy and specific sectors. The National Assembly last year approved laws that increase government control of the media (the Radio and Television Social Responsibility Law, which regulates the content of broadcasts) and other measures that the opposition says increase Mr Chávez’s authoritarian powers.
Foreign investors, creditors and governments, besides the weakened domestic political opposition, have been justifiably wary of Mr Chávez’s radicalised policies for some time. But with the court system stacked with Chávez loyalists, there is little chance that any of these laws can be legally overturned. Moreover, with the president’s prospects for re-election to another six-year in December 2006 now appearing very high, the likelihood of a reversal of course in policy is virtually nil.
SOURCE: ViewsWire Latin America
The Venezuelan government’s takeover of 32 privately operated oilfields at the start of the new year fulfils the pledge of the president, Hugo Chávez, to force oil companies into new joint-venture contracts with the state–or else. However, the companies that lost their operations are apparently small players in the industry, whereas practically all the foreign oil majors in the country have signed new deals with the government and intend to remain. While expected, the move nonetheless increases concerns about the Chávez administration’s respect for contract and property rights.
December 31st was the deadline for all private companies to sign new operating contracts that would give majority control to the state oil company, Petróleos de Venezuela (PDVSA), in accordance with provisions of the new 2001 Hydrocarbons Law. Private and foreign oil companies had been allowed into Venezuela in the 1990s, and to have full or majority control, when PDVSA sought capital to develop and operate low-priority or inactive oilfields.
Those contracts provided generous terms to oil companies to entice them to invest at a time when international oil prices were below US$10 per barrel and PDVSA was short of resources. With prices, and profits, having skyrocketed in the last few years, the Chávez government has sought to get a bigger share of the revenues and more control of oil reserves. This is in line with the administration’s policies of expanding state participation in all vital industries and using revenues from oil to finance expanded social programmes.
The 2001 Hydrocarbons Law made agreements that gave majority control to private local or foreign firms illegal, but it is only in the last year that the government has pushed hard for new contracts. Large oil companies such as Chevron (US), BP (UK), Royal Dutch Shell (UK/Netherlands) and Petrobrás (Brazil) all signed new “transitional” joint-venture agreements last year. ExxonMobil (US) opted to sell its stake in a Venezuelan field to Repsol (Spain/Argentina), which has also just signed a new accord with the government. ExxonMobil was the only foreign company that rejected the contract changes.
Still good business
In total, 22 private firms have entered into new joint-venture accords. These companies clearly figure that operating in Venezuela is still a profitable and attractive business despite the contract changes. The other firms evidently calculated that they could not continue to operate with reduced profits and control. The 32 oilfields returned to state control account for around 530,000 barrels a day of production, out of Venezuela’s declared total of 3.2m b/d.
There are unlikely to be major negative repercussions for Venezuela resulting from the takeover of the fields, at least in the short term. Venezuela, the fifth-largest oil exporter, is a key player in the world oil market. Most major international companies will probably stay indefinitely rather than walk away from billions of dollars of investment, and certainly will remain as long as oil prices are high. However, they will probably not make any new capital outlays in the country until the “transitional” contracts with PDVSA are converted into thoroughly defined permanent ones.
Reluctance to invest before terms of the new joint ventures become clear has already been felt in recent months, with production under operating service agreements down by several thousand barrels per day. Whereas PDVSA states that the contractors are producing some 530,000 b/d, private estimates now put current production at those oilfields at 461,000 b/d.
“Socialist revolution”
Nonetheless, the seizures raise concerns about the heavy handedness of the Chávez administration and its apparent lack of regard for contract rights. Rather than analysing the merits of each individual operating contract and their respective expiration dates, the government has rescinded the contracts across the board.
The takeovers will also heighten worries about other policies that threaten private property under Mr Chávez’s “21st century socialist revolution”. In the last year the administration has become increasingly radical, and this trend is likely to accelerate following the win by “chavistas” of near-total control of the National Assembly in December legislative elections. The administration is poised, for example, to renegotiate contracts with foreign investors in other key sectors, such as mining, heavy industry and steel, to increase the state’s role in those industries.
Mr Chávez also may use his control of the legislature to codify some of his policies via constitutional amendments, such as the attempt to redefine private property rights in general. The government has already initiated measures to expropriate landholdings and other property, including manufacturing facilities, which it deems is not being used productively or for the public good.
With his expanded powers the president will be able to push through other laws that tighten his grip on the economy and specific sectors. The National Assembly last year approved laws that increase government control of the media (the Radio and Television Social Responsibility Law, which regulates the content of broadcasts) and other measures that the opposition says increase Mr Chávez’s authoritarian powers.
Foreign investors, creditors and governments, besides the weakened domestic political opposition, have been justifiably wary of Mr Chávez’s radicalised policies for some time. But with the court system stacked with Chávez loyalists, there is little chance that any of these laws can be legally overturned. Moreover, with the president’s prospects for re-election to another six-year in December 2006 now appearing very high, the likelihood of a reversal of course in policy is virtually nil.
SOURCE: ViewsWire Latin America
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