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Business Week: Big Oil’s Victory in Venezuela

February 7, 2008, 10:30PM EST

ExxonMobil has won a court battle to freeze $12 billion in assets of Petroleos de Venezuela as compensation for nationalization of projects

By Peter Wilson

Venezuelan President Hugo Chávez has repeatedly seized assets of international oil companies operating in the country as part of his socialist revolution. Now, Big Oil is striking back.

ExxonMobil (XOM) said on Feb. 7 that courts in Britain and the U.S. had granted its requests to freeze more than $12 billion in assets of Venezuela’s state oil company, Petroleos de Venezuela (PDVSA). ExxonMobil is seeking compensation for the nationalization of two oil projects in the country that are together worth several billion dollars.

“The freezing order prohibits PDVSA from disposing of its assets worldwide up to a value of $12 billion,” ExxonMobil spokeswoman Margaret Ross said in a prepared statement. The company “has also obtained attachment orders from courts in the Netherlands and Netherlands Antilles against PDVSA assets in each of these jurisdictions up to $12 billion.” All court orders are subject to appeal, she said.

Bad Timing for PDVSA

A Petroleos de Venezuela spokeswoman confirmed the company had been informed of ExxonMobil’s actions, but she declined further comment. Western oil executives in Venezuela said the orders would make it difficult for PDVSA to transfer assets as pending arbitration battles heat up.

ExxonMobil and ConocoPhillips (COP) have said they invested more than $3.5 billion in their Venezuelan heavy-crude oil ventures. Both ExxonMobil and ConocoPhillips filed arbitration requests last year with the International Center for Settlement of Investment Disputes. Arbitration is still in its preliminary phases, and a final decision could be years away. “What Exxon did makes perfect sense. They want to make sure that there is something they can get,” says James Williams, who heads the London (Ark.)-based WTRG oil consultancy firm. “They are trying to make sure that Chávez doesn’t do an end run, that he doesn’t seek to circumvent the process by selling assets.”

ExxonMobil’s actions couldn’t have come at a worse time for PDVSA, which is struggling to raise money as part of its $77 billion investment program to more than double the country’s oil production to 5.8 million barrels a day by 2012. Venezuela is hoping international oil companies will provide about a third of the funds.

Seizing Stakes from Six Oil Giants

Venezuela’s move to assume majority control of the projects was the latest example of emerging oil producers placing greater demands on global oil giants, many of which struck exploration and production deals years ago when oil prices were much lower. Russia has pushed BP (BP) and Royal Dutch Shell (RDSA) to agree to less favorable terms on large projects in Siberia and the Far East.

The Orinoco Belt, a basin near the Orinoco River, is believed to hold up to 235 billion barrels of crude. Global oil companies were awarded contracts in the 1990s to take extra-heavy crude, which has the consistency of tar, and refine it to higher, more profitable blends for export. Venezuela began changing its royalty agreements with the oil companies in October, 2004. At that time, companies were paying 1% of the value of oil extracted from the ground. That was unilaterally raised to 16.67%, and then to 30%.

Last July, Venezuela forced six oil giants, including ExxonMobil and ConocoPhillips, to hand over equity stakes of 60% or more in four important ventures to PDVSA. Four of the companies, including Chevron (CVX), BP, France’s Total (TOT), and Norway’s Statoil (STO), agreed to the handover. The seizures included ExxonMobil’s Cerro Negro affiliate and its profit-sharing venture to develop the La Ceiba oil field.

While ConocoPhillips retained a minority interest in a venture developing an offshore natural gas field, Exxon sold its 49 branded gas stations in Venezuela last June and has no other operations in the country.

PDVSA’s Financial Position

Venezuela is counting on developing its heavy oil reserves to boost its overall oil output. Oil production has declined 25% since Chávez took office in 1999, in large part because he fired more than 20,000 experienced PDVSA engineers and executives after they joined a 2002-03 walkout seeking Chávez’s removal from office.

Although PDVSA is benefiting from high oil prices, it is also being asked by Chávez to funnel many of its revenues to government-run social development programs. In 2006, the oil company spent $13.3 billion on such programs, up from $6.9 billion in 2005. That figure is more than double what the company invested in oil and natural gas projects. (No figures are available for 2007.)

Questions about PDVSA’s financial health were raised on Feb. 7 by the newspaper El Universal, which reported that the company took on $13.1 billion in new debt last year. The company’s overall debt now stands at $16 billion, the newspaper said, citing PDVSA documents. The government-owned company has to make payments of $2.9 billion this year.

Fallout for Citgo?

It is unclear what impact, if any, the freeze will have on PDVSA’s major U.S. investment, oil refiner and distributor Citgo. The state oil company bought a 50% share in Citgo in 1986 and acquired the remaining half in January, 1990. As a wholly-owned subsidiary of PDVSA, Citgo is privately held and does not reveal earnings or profits. However, PDVSA currently supplies around 10.5% of U.S. oil imports. When asked if the freeze on PDVSA’s assets in the U.S. would affect Citgo’s operations, Fernando Garay, the company’s spokesperson, said: “We have no immediate comment.”

PDVSA’s physical assets in the U.S. include three crude-oil refineries owned by Citgo and 43 petroleum product terminals it owns or operates throughout the country. Citgo’s refineries, located in Lake Charles, La.; Lemont, Ill.; and Corpus Christi, Tex., are capable of refining a total of 749,000 barrels of crude daily and typically process around 300,000 barrels a day of Venezuelan crude oil. In 2006, Citgo sold nearly 12.4 billion gallons of gasoline through approximately 8,000 Citgo-branded retail service stations operated by independent owners.

Over the past two years, Chávez has periodically threatened to cut off oil supplies to the U.S. and has criticized President George W. Bush, calling him the “devil.” However, Chávez, who has curried favor throughout Latin America and the Caribbean by selling oil to friendly nations at a steep discount, for the past three years has ordered Citgo to donate millions of gallons of heating oil to poor Americans, calling it “humanitarian aid.”

Since November, 2005, Citgo, in a program promoted as “From the Venezuelan Heart to the U.S. Hearths,” has donated more than 60 million gallons of heating oil to be distributed free to needy Americans in 18 states and Washington, D.C., through Citizens Energy, a nonprofit group run by Joseph Kennedy II. This year, the program will donate another 45 million gallons to a quarter-million households in 23 states. Citgo is also the largest corporate sponsor of the Muscular Dystrophy Assn.

Wilson is a special correspondent based in Caracas, Venezuela.
With Geri Smith in Mexico City.

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