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Venezuela Seen Paying Price for Chavez Expropriation of Oil Contractors
In the wake of the seizure of foreign and domestic oil service companies and assets by armed troops following the orders of Venezuelan President Hugo Chavez, experts began to count the cost to Venezuela -- which holds the Western Hemisphere's largest oil reserves -- in lost oil production, lost jobs, lost foreign investment and lost foreign expertise.

By Jeremy Morgan
Latin American Herald Tribune staff

CARACAS -- Venezuela could end up paying a high price for President Hugo Chavez's abrupt takeover of over 60 domestic and foreign oil field service companies, according to the initial reaction in Venezuela this weekend.

National Assembly Deputy Luis Díaz, a former external consultant to the state oil corporation, Petróleos de Venezuela (PDVSA), which now supposedly owns around 60 expropriated companies, pointed out that the company would have to absorb as many as 30,000 people who work for it in one capacity or another.

Just where this figure came from wasn't clear. Up to now, reports have suggested that around 8,000 people are employed by the oil field service companies in question. However, Díaz's estimate could take in sub-contractors and other people indirectly dependent on the oil field services industry for making their livings.

Labor unions have warned that at least some of those employees could find themselves out of a job. However, mass sackings would obviously be highly unpopular, undermining Chávez' claims to have expropriated the companies in the interests of the people.

Whether the president would be willing to take that risk remains to be seen. In Díaz' view, much the same could be said about PDVSA's capacity to take on so many new staff. The current payroll at PDVSA is put at around 80,000, although exact figures aren't available.

Díaz said that PDVSA stood to earn an additional $500 million to $600 million by taking over oil field services. Chávez claimed Friday that the corporation would save $700 million by doing the work itself.

However, Díaz also saw problems ahead. He pointed out that the companies whose assets were being expropriated held patents to technology and also owned the machinery and equipment used for gas injection, well drilling and other techniques used in the oil field services sector.

Díaz also pointed to a mounting pile of unresolved compensation disputes from this and earlier takeovers. He noted that it was as yet still unclear as to whether the companies would actually be willing to sell their assets in the wake of Friday's high profile assets grab at Lake Maracaibo.

Compensation disputes of all sorts now involve a total of around $15 billion in unsettled claims, according to Díaz' estimate. In the oil sector, these disputes include two particularly bruising spats: one with ExxonMobil (the biggest oil outfit on the planet) and the other with ConocoPhillips (the third largest US oil producer and second largest refiner), both over the loss of their erstwhile controlling interests in heavy oil fields in the Orinoco Basin.

ExxonMobil is pursuing legal action at courts in The Netherlands and the United States, amid reports suggesting that its reckoning is that PDVSA could owe it billions of dollars. ConocoPhillips, like ExxonMobil based in the United States, is digging in its heels in negotiations that are said to be going nowhere very slowly.

In the meantime, there’s speculation about what sort of impact this latest takeover could have on the oil industry as a whole. The Bloomberg news agency carried a report warning that the seizure of 60 oilfield services companies could reduce Venezuelan oil production because it was thought PDVSA didn’t have the capacity to run the companies that had been taken over.

One estimate had it that Venezuelan oil output could drop below two million barrels a day for the first time in two decades.

The takeover could also affect a bid round scheduled for later this year for blocks in the Carabobo field, Venezuela’s biggest offshore oil reserve. It was suggested that PDVSA didn’t have the capacity, nor the funds to undertake more exploration and production work on its own, and that the future of Venezuelan oil finds would “probably lie fallow for some time.”

In Maracaibo on Saturday, Zulia State Governor Pablo Pérez of the Opposition claimed that the takeover had been motivated by a "cover-up" of PDVSA's mounting pile of unpaid bills it owes under oil field services contracts. Pérez claimed these debts had now reached $13 billion. A recent report at the National Assembly said these debts totalled $13.8 billion as of the end of last year.

Some oil field services companies had already suspended operations or pulled out of Venezuela before the takeover hit the headlines, and several are said to be in the process of following suit. In the process, some appear to have realized they simply weren’t going to get their money, or at least not without getting tough.

Williams Company of Tulsa, for instance, decided it had to write off $241 million in unpaid PDVSA bills. The company is talking about going to arbitration. But Chávez has already ruled out arbitration, claiming any such tribunal would be on the companies’ side from start to finish.

Pérez' point was that not only would the government or PDVSA have to compensate the companies for their assets, but also for the unpaid bills. Energy and Oil Minister Rafael Ramírez has accused the companies of over-charging when world oil prices were high, and demanded that they "adjust" those bills in line with the new circumstances of the global oil market.

The expropriation could also have an impact on the local economy, Pérez warned. In particular, he said the takeover would severely affect the municipality of Lagunilla, a shore base for the oil field services industry at Lake Maracaibo.

Despite Ramírez’ tough talk, it appears that the government harbors hope of enticing some oil field services companies into staying on as minority partners after the takeover. “There’s going to have to be some sweet pillow talk to get some of these companies to stay,” Russell Dallen, head of Caracas capital markets at BBO Financial Services, was quoted as having said.

Argument continued over whether or not Chávez had jumped the gun on Friday, by taking action before a new law extending his expropriation rights to the oil field services sector before the legislation had been published in the Gazeta Official.

The law was published in the Gazeta on Friday. But Chávez claimed that “84 percent” of the industry had been nationalized by six o’clock in the morning, at which time the Gazeta was most unlikely to have been on sale.

The new law was rushed through the National Assembly at a velocity that was surprising even by the standards set by the government-packed legislature in recent times. Chávez signed and promulgated the law within hours, and then embarked on the takeover.

The National Assembly is all but entirely dominated by Chávez’ ruling United Socialist Party of Venezuela (PSUV) and its minor allies. In the absence of the mainstream opposition after it shot itself in the foot by withdrawing from the last parliamentary elections in 2005, the sole dissenting voices to be heard are those of Podemos, the social democratic party that once backed Chávez, and a handful of other discontented souls.

VenEconomy: Digging a Grave for Venezuela's PDVSA


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