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The Economist: Venezuela: It’s our oil

Jun 28th 2007 | CARACAS
From The Economist print edition

Exeunt Exxon and Conoco

WHEN Venezuela’s government announced this week that two American oil giants, Exxon Mobil and ConocoPhilips, would walk away from their large investment in the Orinoco heavy-oil belt rather than accept tough new contract terms, officials presented it as the recovery of sovereignty over another slice of the country’s all-important oil industry.

Some other Venezuelans saw a government blunder that could accelerate the decline of the state oil company, Petróleos de Venezuela (PDVSA). Either way, the impact of the walkout may not be immediate.

The companies were among those attracted to Venezuela in the 1990s, under the terms of an oil “opening” that the leftist government of President Hugo Chávez has now pronounced shut. In common with other big oil producers, Venezuela has substantially raised its tax take from private oil producers as its bargaining power has risen along with the oil price. Now it has also completed the process of obliging all foreign companies to accept minority shares in joint ventures with PDVSA.

Seven of the 11 companies operating in the Orinoco belt, including Chevron of the United States, Britain’s BP and France’s Total, agreed to the new terms. Along with Exxon and Conoco, Petro-Canada and Opic, a Taiwanese company, did not. Venezuela will pay compensation, possibly running into billions of dollars. Conoco said it had “preserved all legal rights including international arbitration”.

“For us, there is no cost,” insisted Rafael Ramírez, the oil minister who also acts as chairman of PDVSA. “There is an important gain: national sovereignty.”

Venezuelan officials claim that the Orinoco belt contains some 250 billion barrels of oil—an amount similar to Saudi Arabia’s reserves. But extracting it is expensive and complicated. Private companies were originally invited in, on favourable terms, because PDVSA had neither the technology nor the capital to turn what was once considered bitumen into synthetic crude. Some 500,000 barrels per day now come from the Orinoco.

Oil industry sources say that Venezuela’s total output has fallen to 2.3m b/d (though the government claims it is 3.2m b/d). That is mainly because of the shortcomings of PDVSA, which sacked most of its qualified staff after a two-month strike in 2002-03 and whose investment budget has been used as a cash-cow for social programmes by Mr Chávez.

Will Exxon and Conoco’s departure cause a further fall in output? Some industry analysts reckon it will. Others are not so sure. Such is the hunger of oil companies for access to reserves that others may step in on the government’s terms. Even if they do not, PDVSA can buy the necessary expertise from specialist service companies, argues Mazar al-Shereidah, an economist at the Central University of Venezuela.

Nevertheless, some Venezuelans worry that their country’s oil industry is going the same way as that of Iran, whose government is one of Mr Chávez’s closest allies. This week, as Venezuela’s president was due to visit Tehran on a tour that also takes him to Russia and Belarus, Iran imposed petrol rationing. Admittedly, Iran faces sanctions, and Venezuela does not. But national sovereignty does not automatically fill the tank.

http://www.economist.com/displaystory.cfm?story_id=9410681&fsrc=nwl

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