Wednesday, April 26, 2006

For Venezuela’s firebrand leader Hugo Chavez, oil is the indispensable crutch that props up his regime. Mr. Chavez’s recent moves to bring Venezuelan oil assets under control of the state oil company Petroleos de Venezuela (PDVSA), while not surprising, are another reason Washington should be concerned. The Chavez government has turned its attention to bringing more state control to the oil operations currently managed by foreign firms, including Exxon Mobil Corp., Chevron Corp. and ConocoPhillips, in the Orinoco River basin, considered to be one of the largest remaining oil reserves in the world.

By exploiting Venezuela’s oil resources and making money off oil exports, which rank fifth in the world, Mr. Chavez had generally broken from the more traditional model for Latin American populist dictators, who relied more heavily on foreign loans and captured foreign assets to support their regimes. Spurred on by record-high oil prices and increased profits of foreign oil companies, Mr. Chavez is furthering his pursuit of a larger percentage of the profits and leading Venezuela down a dangerous path toward a nationalized oil industry. But increasing taxes and royalties and forcing foreign oil companies to become “mixed companies,” in which PDVSA owns 51 percent, risks serious repercussions for the world oil supply.

The $16 billion that foreign companies have invested in the Venezuelan oil industry since the 1990s was critical to development and bringing the production capacity to its current levels. Ensuring that production from the very heavy oil deposits in the Orinoco River basin will continue to supply a quarter of Venezuela’s total oil production requires the technical expertise and management of international oil companies, and a PDVSA takeover would almost certainly result in a drop in production from America’s third-largest oil supplier. Movement toward nationalizing the oil industry will not only reduce production, but will scare off future foreign investment necessary to fully develop Orinoco’s heavy-oil reserves. Response from large oil companies has been noncommittal: ConocoPhillips will “continue to work with the government”; Exxon Mobil would not comment on “issues of a speculative nature,” and the company “continues to have a long-term perspective of its activities in Venezuela.”

Earlier this month, Venezuela grabbed oil fields from two European firms because the companies refused to surrender management of the projects to PDVSA. Outside of the Orinoco area, each of 32 other oil fields transferred 60 percent ownership to PDVSA, even though contracts were not set to expire for six more years. Exxon Mobil sold its stake in these fields rather than accept the “mixed company” agreement. For many foreign companies, however, the cost of doing business in Venezuela may be worth the long-term access to its oil reserves. One of the two European firms, Eni SpA of Italy, pledged to fight the takeover, calling it a violation of contractual rights. Eni should make good on its pledge to fight for the compensation it is due, even if legal redress will be difficult in a country that lacks an independent judiciary.

The Chavez government has set the stakes of its oil ambitions high. Energy Minister Rafael Ramirez was reported as asserting that “These two multinational companies resist adjusting to our law. Our sovereignty isn’t under negotiation.” U.S. firms need to be unyielding in their opposition to contract violations, Mr. Chavez must learn that nationalizations will discourage foreign investment in the future, which will damage the Venezuelan oil industry.

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