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The Business: Oil companies remain supine as Chavez grabs control of two fields

By Richard Orange
09 April 2006
VENEZUELA’S populist president Hugo Chavez loves nothing more than to rank himself alongside South America’s historical revolutionaries.
Last week, we were back in the 1970s. Chavez seized two oil fields from France’s Total and Italy’s Eni, the first time Venezuela, even under Chavez, has gone to such extremes since it renationalised its oil industry in 1976.
The national oil company, PdVSA, last weekend sent officials to the two fields, which produce a total of 85,000 barrels of oil a day (bpd), and took control.
More striking even than the seizures, though, has been the international oil companies’ spinelessness. Of the 22 oil companies whose deals Chavez announced he was rewriting in April 2005, only four – Exxon Mobil, Statoil, Total and Eni – have stood firm.
Exxon and Statoil sold their fields rather than capitulate to his demand that they turn
the agreements into joint ventures. The deadline was April this year. Total and Eni have ignored his demands.
Exxon has few worries. Venezuela accounts for 1.7% of its production, the loss of the field is less damaging than the potential loss of face internationally.
The question is how Total and Eni will react to the seizures. Patrick Esteruelas at Eurasia Group in New York argues that Total will throw in last-minute concessions and win back its Jusepin field. It has already yielded to some of Chavez’s terms, paying $19.4m (E15.7m, £11.0m) in plainly unjustified back taxes. And it has far more significant investments in Venezuela than Eni, with a large stake in the Sincor heavy oil field. Total has more incentives to capitulate – it doesn’t want to lose the chance to make more of Sincor. And Chavez needs Total more.
The 60,000 bpd Dacion field is Eni’s only real investment, and it has shown little willingness to yield to Chavez’s demands. Expect it to walk away, leaving a barrage of ugly lawsuits.
Chavez’s move in April 2005 part reversed the Apertura, or opening, of the mid-1990s, when Venezuela signed 32 agreements which gave international oil companies control of conventional oil fields for the first time since the 1970s. These fields produce 500,000 bpd.
In one regard, the oil companies’ willingness to let him get away with it justifies his move.Venezuela’s large oil reserves are obviously still attractive and Chavez has already increased royalties and hiked taxes on the companies from 34% to 50%.
But from another point of view the oil companies could bargain more agressively.
For all his rhetoric, Chavez cannot afford to repeat the renationalisation of the 1970s. Credit Suisse estimates that total foreign investment in Venezuela in 2005 dropped by almost three-quarters to $536m from $1.9bn in 2004. And output from the 32 fields run by foreign companies has fallen to around 460,000 bpd from roughly 500,000 bpd at the start of 2005.
And while Venezuela claims its output is 3.1m bpd, experts argue the reality is closer to 2.2m bpd, a big drop.
Chavez has been courting Chinese, Russian and Indian companies, but when it comes to developing Venezuela’s reserves of heavy oil, western companies like Total, Chevron and Royal Dutch Shell have the skills.
At today’s prices, Chavez can afford to take risks. Oil revenues surged 51% in 2005 to more than $48bn, leaving Venezuela with a current account surplus of $24.4bn. But if the price falls, Chavez may find himself forced to treat international oil companies a little more politely.

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