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EMBARGO – Quietly, Chávez opens the door to Western oil firms

International Herald Tribune
By Simon Romero
Wednesday, January 14, 2009

CARACAS: It is a telling sign of how deeply the global economic crisis has cut: President Hugo Chávez, who initially reveled in describing the crash as proof of capitalism’s flaws, is now quietly courting Western oil companies once again.

Until recently, buoyed by the surging price of oil, Chávez had pushed foreign oil companies here into a corner by nationalizing their oil fields, raiding their offices with the tax authorities and imposing a series of royalty increases.

But faced with the plunge in oil prices and a decline in domestic production, senior officials here have quietly begun soliciting some of the largest Western oil companies in recent weeks, including Chevron, Royal Dutch Shell and Total, in the hope of getting them to invest in Venezuela again.

Their willingness even to consider investing in Venezuela, home to some of the largest petroleum reserves in the world, reflects the scarcity of projects open to foreign companies in other top oil nations, particularly in the Middle East.

But the shift also shows Chávez’s pragmatic side. At stake are no less than Venezuela’s economic stability and the sustainability of his rule. With oil prices so low, the longstanding problems plaguing Petróleos de Venezuela SA, the national oil company that is driving his socialist-inspired revolution, have become much harder to ignore. Embracing the Western companies may be the only way to shore up the company – and his personal ambitions.

“If re-engaging with foreign oil companies is necessary to his political survival, then Chávez will do it,” said Roger Tissot, an authority on the Venezuelan oil industry at Gas Energy, a Brazilian consulting firm focusing on Latin America. “He is a military man who understands losing a battle to win the war.”

While the new oil projects would not be completed for years, Chávez is already looking beyond the end of his current term in 2012 by putting forward a referendum, expected as early as next month, that would let him run for indefinite re-election.

In recent years, Chávez has preferred partnerships with national oil companies from countries like Iran, China and Belarus. But these ventures failed to reverse Venezuela’s declining oil output. State-controlled oil companies from other countries have also been invited to bid this time, but the large private companies are seen as having an advantage, given their expertise in building complex projects in Venezuela and elsewhere in years past.

The bidding process was first conceived last year when Petróleos de Venezuela’s production decline was getting impossible to overlook. But it was not until this month that Chávez’s government was to begin reviewing the bidding plans on new areas of the Orinoco Belt, an area in southern Venezuela with an estimated 235 billion barrels of recoverable oil, for exploration and production. Altogether, more than $20 billion in investment could be required to assemble devilishly complex projects capable of producing a combined 1.2 million barrels of oil a day.

Chávez’s olive branch to Western oil companies comes after he nationalized their oil fields in 2007. Two companies, Exxon Mobil and ConocoPhillips, left Venezuela and still wage legal battles over lost projects.

But Venezuela may have little choice but to re-engage with foreign oil companies. Nationalizations in other sectors, like agriculture and steel manufacturing, are fueling capital flight, leaving Venezuela reliant on oil for about 93 percent of its export revenue in 2008, up from 69 percent in 1998 when Chávez was first elected.

In the past year, with higher oil prices paving the way, Chávez has also vastly expanded Petróleos de Venezuela’s power, inextricably linking it to his political program. He has directed the oil company to build roads, import and distribute food, build docks and shipyards, and set up light-bulb factories. He has even expanded it into areas like milk production, soybean farming and the training of athletes after a weak performance at the Olympic Games.

One of the oil company’s ventures sells subsidized food and extols Chávez at its stores across Venezuela. At one frenzied store in eastern Caracas, posters hung from the ceiling Saturday showing Chávez arm in arm with children beneath the heading, “Fortifying Agrarian Socialism.”

Petróleos de Venezuela has also carried out nationalizations in other industries, absorbing companies like Electricidad de Caracas, the utility serving this city of five million people. Top executives like Eulogio del Pino, the Stanford-educated vice president of exploration and production, spent much of 2008 negotiating unfinished deals like the takeover of a cement company.

But all the while, Petróleos de Venezuela has faced its own difficulties. It claimed that it produced 3.3 million barrels a day throughout most of 2008. But other sources like OPEC, of which Venezuela is a member, place the figure closer to 2.3 million barrels and show a fall of about 100,000 barrels a day from a year earlier.

Rafael Ramírez, the energy minister and president of Petróleos de Venezuela, did not respond to requests for an interview. But energy executives here with contacts within Petróleos de Venezuela said Ramírez, a confidant of Chávez, has been waging a struggle within the company to refocus operations toward producing more oil.

After weathering the turmoil of recent years, Western oil companies here are loath to speak publicly about their plans. “We don’t elaborate on bidding processes beyond the fact that we evaluate every opportunity and our decisions will be based on economics and other factors,” said Scott Walker, a Chevron spokesman.

But energy executives here speak with restrained optimism. Nineteen companies paid $2 million each last month for data on areas open for exploration, twice what such data costs elsewhere.

Oil companies say they recognize the risk of investing in Venezuela, given the country’s abrupt shifts in the past. But they focus on the long-term potential of its petroleum reserves. Venezuela poses little risk in finding oil, since geologists have known for years where it lies in the Orinoco Belt.

Venezuela also differs from top oil nations like Saudi Arabia and Mexico, where national oil companies have monopolies. Petróleos de Venezuela let private companies remain as minority partners after the nationalizations, despite Chávez’s often aggressive anti-capitalist stance.

Moreover, foreign oil services companies like Halliburton, which has done business in Venezuela for 70 years, have even expanded their activities in the country as Petróleos de Venezuela grew more dependent on contractors to help extract oil from aging wells.

Still, doubts persist over the chances that the new bids, which are set to conclude in June, will ultimately result in finished oil projects. Risks of operating here were underscored again last week when Venezuela ordered new production cuts along with other OPEC members, impacting ventures with private partners.

Under the current bidding rules, the onus for financing the new projects lies with the foreign companies, even though Petróleos de Venezuela would maintain control. Banks might balk at such a prospect. Distrust also lingers in dealing with Petróleos de Venezuela.

“An agreement on a piece of paper means nothing in Venezuela because of the way Chávez abruptly changes the rules of the game,” said a Venezuelan oil executive who has had dealings with oil companies from China, Russia and other countries.

“In 10 years, not one major oil project has been built in Venezuela,” said the oilman, who asked not to be identified for fear of retribution. “Chávez has left his so-called strategic partners out to dry, like the Chinese, who have been given the same treatment as Exxon.”

But the severity of the drop in oil prices may ultimately dictate the terms on which Venezuela re-engages with foreign oil companies.

“Chávez is celebrating the demise of capitalism as this international crisis unfolds,” said Pedro Mario Burelli, a former board member of Petróleos de Venezuela.

“But the irony is that capitalism actually fed his system in times of plenty,” he said. “That is something Chávez will discover the hard way.”

María Eugenia Díaz and Thom Walker contributed reporting.


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