Hugo Chavez is taking over (HT Conservative Culture):
CARACAS, Venezuela â€” President Hugo Chavez said Thursday that soldiers will accompany government officials when they take over oil projects in the Orinoco River basin next month.
Chavez has decreed that Petroleos de Venezuela SA, or PDVSA, will take a minimum 60 percent stake in four heavy-oil projects in the Orinoco River region and invited the six private companies operating there to stay on as minority partners.
“On May 1 we are going to take control of the oil fields,” Chavez said. “I’m sure no transnational company is going to draw a shotgun, but we will go with the armed forces and the people.”
The projects â€” run by BP PLC, Exxon Mobil Corp., Chevron Corp., ConocoPhillips, France’s Total SA and Norway’s Statoil ASA â€” upgrade heavy, tarlike crude into more marketable oils and are considered Venezuela’s most promising. As older fields elsewhere go into decline, development of the Orinoco is seen as key to Venezuela’s future production.
Negotiations over the takeover have yet to yield an agreement and are expected to be difficult as the companies seek a deal that takes into account more than $17 billion in investments and loans related to the projects.
Unless you really believe that Chavez will fairly compensate the oil companies, it appears that whatever values these assets have on their books are about to evaporate.
I would suggest that the companies all simply walk away and let Hugo & Co. try to run the projects with whatever likely-limited expertise remains. Even if the remaining expertise is high, political considerations will more likely than not put a monkey wrench into any hopes of efficient operations. But given that the French are there, they will probably, as they have elsewhere, be all too glad to do a tyrant’s bidding. So a painful, financially disastrous dance with the dictator ensues.
UPDATE: A subscription-only op-ed by Marie Anastasia O’Grady in yesterday’s Wall Street Journal provides much useful background, and suggests that walking away may not be such a bad idea –
Mr. ChÃ¡vez has been brimming with bravado as he has shredded these oil contracts and told foreigners to step aside because he’s in charge now. But he’d better relish the thrill while it lasts. The move is not good for Venezuela and it will probably end up hitting the commandante of the revolution in the pocketbook. Corruption, incompetence and mismanagement have already taken a big bite out of PdVSA’s productivity since Mr. ChÃ¡vez began politicizing the company in 2001 (PdVSA is the state-owned oil company Petroleos de Venezuela. — Ed.). High oil prices have mitigated the damage to his balance sheet up to now but they won’t protect him forever…..
The ChÃ¡vez government says that it doesn’t anticipate any production problems stemming from the change in operatorship or ownership. From a strictly technical point of view, that forecast may be defensible. It is certainly true that both oil extraction and the upgrading processes could be run by any oil company. Still, given the performance of PdVSA under Mr. ChÃ¡vez, it is highly unlikely that productivity, investment and income won’t suffer.
One problem already looming is labor. Last month Dow Jones Newswires’ Peter Millard reported that, though PdVSA has said that it will retain the 4,000 employees who staff the strategic associations for the foreign companies, union leaders are warning that many of the chemical engineers and processing managers are unhappy about proposed pay cuts and are launching job searches.
A shortage of human capital is already pinching PdVSA. In 2002 Mr. ChÃ¡vez fired 20,000 workers — many of them skilled — because he didn’t like their politics. Those employees were replaced with politically compliant candidates and production never recovered. OPEC says that Venezuela now produces 2.5 million barrels a day, one million barrels less than in the pre-ChÃ¡vez era. According to Mr. Millard, this year Nigeria replaced Venezuela as the fourth-largest oil supplier to the U.S.
….. The expropriation also threatens to destroy a business model that provides more than the pumping, processing and refining of oil. The marketing divisions of these companies play a crucial role in placing product and keeping transaction costs low. The loss of these networks will also harm Venezuelan competitiveness.
Finally, and perhaps most important, there is the damage to Venezuela’s investment profile. PdVSA is already hurting for cash because profits that would otherwise be plowed back into exploration and development are being siphoned off by the government to advance political and social causes. In a robust investment climate, this misallocation of capital might be compensated for by the private sector. But so far investors have had a predictably bad reaction to their loss of property at the hands of Mr. ChÃ¡vez.
….. Exxon Mobil CEO Rex Tillerson said last month that if the terms of compensation offered by Venezuela are not acceptable to the company, it would leave Cerro Negro entirely. That would mean eating a loss, but with Mr. ChÃ¡vez pulling stunts like he did in January, when he slashed production quotas for the foreign companies so that he could meet OPEC cuts without hampering PdVSA sales, the risks of walking away may be lower than perceived. In the end, an Exxon exit would probably end up costing Venezuela even more.