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THE WALL STREET JOURNAL: Asset Freeze Points to Woes At Venezuela’s PdVSA

State Oil Company
Faces Host of Issues
And Lower Output
February 12, 2008; Page A13B

CARACAS, Venezuela — A court-ordered freeze on $12 billion in assets of Venezuela’s state oil company likely signals larger problems ahead for Petroleos de Venezuela.

The freeze, sought by Exxon Mobil Corp., represents another challenge to the 33-year-old company, known as PdVSA, since President Hugo Chávez took power nine years ago. Under Mr. Chávez, PdVSA has lost thousands of qualified personnel, sacrificed investment for social spending and seen its meritocracy replaced by politicization of workers. Industry estimates put Venezuela’s oil production about 25% below the government’s figures.

Now, PdVSA’s high-profile face-off with the world’s largest publicly traded Western oil company is a signal to investors and potential PdVSA partners that the Andean country’s oil company has yet another nagging problem to deal with.

“For the market this means that the probability of Exxon winning an arbitration against PdVSA is high,” said Alberto Ramos, an analyst with Goldman Sachs in New York.

Exxon’s move drew an angry response from President Chávez over the weekend. “Exxon Mobil is an imperialist bandit,” Mr. Chávez said Sunday during his radio and television show. “If [Exxon] really freezes us…if you hurt us…We won’t send any oil to the United States.”

Mr. Chávez has threatened to shut off the oil flow to the U.S. in the past but has never taken action. Still, his words contributed to market unease that sent oil prices above $93 a barrel yesterday.

Few believe the president will cut off the Andean country’s main business partner, especially since most of the refineries outside Venezuela capable of processing its extra-heavy crude are on U.S. soil.

Exxon and ConocoPhillips, also of the U.S., have filed for arbitration against PdVSA, seeking compensation for the assets that Venezuela nationalized last year. Exxon recently secured court orders to freeze more than $12 billion in PdVSA assets as a preventive measure pending settlement of the arbitration. PdVSA has vowed to appeal the decision.

Last summer, PdVSA took majority stakes in four heavy-oil ventures in the Orinoco oil region, the crown jewel of Venezuela’s oil real estate. The state offered foreign partners the option of remaining as minority partners in the ventures, or walking away.

Exxon and Conoco refused the new terms, but France’s Total SA and Norway’s StatoilHydro ASA opted to stay. PdVSA has already agreed to pay Total and Statoil for their reduced stakes, though the compensation falls far below market value.

Meanwhile, Mr. Chávez is pushing PdVSA to expand into businesses far from its focus. He has asked PdVSA to establish an oil-services unit, a household gas-supply company and even a food-distribution arm responsible for solving Venezuela’s chronic food shortages.

For those who follow the company closely, this means PdVSA may devote more money to social programs than it will on oil investment. The company’s latest public figures show PdVSA spent $13.8 billion on social programs in 2006, more than twice the $5.8 billion set aside for capital expenditure. Analysts estimate that PdVSA needed roughly $6 billion to keep production stable.

Social spending has forced Venezuela to tap the international capital markets for needed investment capital. Last year, the company issued $7.5 billion in bonds and secured other loans, but many believe any future debt sales could become pricier for Venezuela if the spat with Exxon escalates.

“The Exxon freeze reminds people there are liabilities that will materialize down the road,” said Goldman’s Mr. Ramos. In his view, the market could charge a premium when PdVSA seeks additional funding.

More expensive financing and costlier oil services could further squeeze PdVSA’s ability to keep output stable. PdVSA says it produces 3.2 million barrels of crude a day, but the Organization of Petroleum Exporting Countries and other industry associations put its production closer to 2.4 million barrels a day.

PdVSA officials say the company is on track to raise production, but its latest moves appear to reflect concern about its production capacity.

In recent days PdVSA has struck new agreements with Total, Statoil and Royal Dutch Shell PLC in a bid to expand production in mature fields across the country. Still, PdVSA has problems with aging oil infrastructure, and continues to struggle to secure needed oil rigs.

Orinoco river belt production at the four oil ventures nationalized last year is nearing its 600,000 maximum capacity, meaning Venezuela has little room to maneuver if it wants to bring production to its targeted 5.8 million barrels a day by 2013.

Under the circumstances “PdVSA’s production goals are not realistic,” said Mazhar Al-Shereidah, an oil economics professor at the Universidad Central de Venezuela. “Reaching that goal is impossible.”

Write to Raul Gallegos at [email protected] and its also non-profit sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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