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THE WALL STREET JOURNAL: Oil Keeps Chavez Fighting

High Prices Arm Venezuela Boss
As He Battles Foreign Firms, U.S.
By DAVID LUHNOW and JOSE DE CORDOBA
April 6, 2006; Page A4

Venezuelan oil minister Rafael Ramirez turned up this past weekend at two oil fields run by France's Total SA and Italy's ENI SpA to reclaim them on behalf of the government and Hugo Chavez, the country's fiery leftist president. Hoisting a Venezuelan flag over the fields, Mr. Ramirez said the move symbolized the return to state control after a decade of stewardship by private firms.
The dramatic gesture was proof — if more was needed — that Mr. Chavez is carrying a big stick when it comes to doing business in oil-rich Venezuela. While few people expect the former paratrooper to resort to radical steps like outright nationalization of the oil industry or cutting off supplies to the U.S., he is expected to continue his running battle with foreign oil firms as long as prices remain high. That will keep private oil companies guessing as to his next move and roil international oil markets along the way. That, in turn, will enable Mr. Chavez to maintain his posture by keeping oil prices high.
“He's completely in the drivers' seat and knows where to get extra cash when he needs to,” says Michelle Billig, director of political risk at Pira Energy Group in New York.
In recent years, Mr. Chavez has become a prime example of how high crude prices have sparked a resurgence of oil nationalism in parts of the globe. He has squeezed more money out of companies by raising taxes and royalties, strengthened the hand of the Organization of Petroleum Exporting Countries by championing higher prices, and threatened Washington with shutting off the flow of oil.
Yet despite his belligerent stance toward the U.S. and name-calling of President Bush, Mr. Chavez has no choice at the moment but to rely on the world's biggest — and closest — energy market. Venezuela's state oil company owns Citgo Petroleum Corp., a huge Houston-based company with refineries geared to handle heavy Venezuelan crude and a network of thousands of independent gas stations. Indeed, top diplomats from Venezuela and the U.S. met in Washington Tuesday to tone down the rhetoric on both sides and work on matters such as stopping the flow of illegal drugs from South America to the U.S.
But Mr. Chavez's tough tactics have raised alarm bells in Washington at a time of high prices and tight supplies, especially when Iran is also threatening Washington with restricting oil supplies and Iraq's oil production remains crippled. Although the Middle East's volatile politics have dominated concern about oil for decades, the U.S. relies on its own hemisphere for half its oil imports. Venezuela alone provides about 14% of U.S. crude imports.
The Venezuelan leader's influence is also being felt across the Andean region. In Bolivia, newly inaugurated president Evo Morales, a close Chavez ally, has said he plans by July 12 to issue a law nationalizing the natural-gas industry in his country, which has South America's second-largest reserves after Venezuela. While he has been vague about what that would entail, Bolivians have already taken a hard stance. Last year, Bolivia's congress passed a law that raised taxes and royalties on gas production and recognized the state as the sole owner of hydrocarbon resources.
In Peru, Ollanta Humala, a Chavez ally who is the leading candidate in Peru's April 9 presidential contest, has pledged to renegotiate oil and gas contracts, place a windfall tax on mining profits and ensure the state has a significant stake in private companies operating in “strategic” areas such as energy, mining and ports.
Venezuela is also pivotal to future global oil production. As the world runs out of easy-to-reach oil, Venezuela boasts potentially huge deposits. Venezuela has reserves of about 80 billion barrels of conventional oil and perhaps as many as 270 billion barrels of extra-heavy oil that must be substantially upgraded before it can be refined. If Caracas's census of heavy-oil reserves is accurate, that would place Venezuela ahead of Saudi Arabia in reserves and could eventually shift the balance of power in the politically sensitive oil business.
Venezuela is becoming a less-reliable source of crude, due as much to poor management as political choices. Rather than respond to current high prices by boosting output, the country has reduced its oil output since Mr. Chavez took power in 1998 to about 2.6 million barrels a day from a peak of 3.1 million in the late 1990s. A strike at state-run firm Petróleos de Venezuela SA, or PdVSA, over Mr. Chavez's meddling in the oil giant caused the disruption, and he did little to help matters by firing some 18,000 high-ranking company workers.
Since that strike, Mr. Chavez has unilaterally rewritten the rules of the country's oil sector, which opened to outside investment in the 1990s. He has repeatedly raised taxes and royalties, and applied a more restrictive law retroactively to contracts signed in the 1990s — essentially changing them from fee-based deals to equity agreements whereby PdVSA has operating control instead of the companies. Mr. Chavez argues that those contracts, signed when oil prices were low, were too generous to oil companies.
Yesterday, Chevron Corp. said it would pay $75 million in back taxes, interest and fines to the Venezuelan government, as part of a drive by Caracas to raise the government's tax take by targeting oil companies.
Yet the size of Venezuela's oil deposits make it hard for foreign firms to pack up and leave. Of all the companies that operate there, only four — Exxon Mobil Corp., Total, Eni, and Norway's Statoil ASA — didn't sign on to Mr. Chavez's new terms. BP PLC and Royal Dutch Shell PLC, for instance, both agreed to alter their contracts. “Chavez knows that if you don't like the terms, the next guy will,” says Rob Cordry, an analyst at PFC Energy in Houston.
Exxon has pushed back against Mr. Chavez's moves harder than most, but even it is playing the situation carefully. Following Venezuela's move to take control of operating agreements signed in the 1990s, Exxon's Ampolex Inc. unit agreed late last year to sell its 25% interest in a project known as Quiamare La Ceiba to Repsol/YPF Venezuela SA. In addition, Exxon is considering whether to take Venezuela to international arbitration on another project, Cerro Negro. The company said in a statement that it “wishes to explore an amicable resolution” with the Venezuelan government.
Exxon's resistance has cost it dearly. In February, Venezuela removed the Irving, Texas-based giant from a $3 billion petrochemicals project in which Exxon had planned to team up with Pequiven, the petrochemicals division of PdVSA. The next steps by Mr. Chavez could come in the area of heavy oil. Any further tightening of conditions could freeze future investment in the area, especially because such projects require a large up-front investment by companies in industrial facilities to upgrade the crude before they pump any oil.
ConocoPhillips, which gets about 9% of its global production and 5% of revenue from Venezuela, is closely monitoring discussion about changing taxation on heavy-oil projects. The Houston-based company operates the Hamaca and Petrozuata heavy-oil projects, recent investments that currently produce 260,000 barrels a day from the Orinoco belt. Asked about potential changes in taxing in January, ConocoPhillips Chairman and Chief Executive James Mulva said there had been “It's one of those things that I need to be — and plan to be — in Venezuela talking about.”
–Jeffrey Ball, Russell Gold, Bhushan Bahree and Peter Millard contributed to this article.
Write to David Luhnow at [email protected]

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