Oil Wars

Anyone who has followed the Venezuelan situation closely knows that oil policy has been one of the primary areas of contention between president Chavez and those who oppose him. How much oil should the country produce, should it follow OPEC quotas, and how much should it open up to foreign investment have all been areas of dispute.

Another area of disagreement between the Chavez administration and the opposition has been how to interact with the foreign oil companies already present in Venezuela. The governments prior to Chavez not only opened up Venezuela to foreign oil producers but often did so on terms that were extremely advantageous to those companies. Royalties were kept as low as 1%, Venezuela itself only had minority ownership, and the government looked the other way when these oil operators didn’t pay their full taxes. Chavez has done a 180 degree turn on this. Royalties were raised to a minimum of 16%, contracts were re-written to give Venezuela majority ownership, and the government has worked very aggresively to collect back taxes, sometimes in the billions of dollars.

This rather predictably raised a hue and cry among the Venezuelan elite and opposition who never met a sweetheart deal they didn’t like. Their claim was that if royalties were raised or contracts renegotiated the oil companies would leave, or at least stop investing in Venezuela.

Of course, these were by and large the same people who when Venezuela worked with OPEC to implement a price band of $22 to $28 per barrel said it was too aggressive and would get consumer nations to cut back on oil and use alternative energy sources. Now that oil is over $60 per barrel that seems laughable but that is what they said. Given how wrong they were on that I had little concern about their objections to the royalty increases and more aggressive posture to maximizing revenue from the foreign oil operations. My view was Chavez was acting in Venezuela’s best interest in a very prudent way.

Well, low and behold we have some confirmation, straight from the oil companies themselves that this is indeed the case. Witness this report from the Wall Street Journal in an article entitled “Chavez plays it safe”:

To his critics, Venezuela President Hugo Chavez comes across as a messianic radical, cozying up to anti-American figures like Iran’s mullahs, blasting capitalism as the “road to hell” and threatening to stop shipping oil to the U.S. which relies on Venezuela for about 14% of its oil imports.

But when it comes to the country’s economic centerpiece, the oil industry, the fiery leader is more pragmatic than most realize. He has squeezed more royalties and taxes out of foreign oil companies at a time when they can afford it because of high oil prices. And he is using that money, along with a windfall in exports from state run oil giant Petroleos de VenezuelaSA, to help fund his leftist agenda at home and to cultivate friends in the region.
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The moves caused some analysts to fret about the future for Western oil companies in a country with the largest estimated reserves outside the Middle East – and at a time of tight supplies and already high prices.

“The companies who are there feel that although it’s not an optimum situation, they can manage it,” says Frank Verrasco, an energy analyst at the Washington-based Center for Strategic and International Studies.

Despite Mr. Chavez’s moves, no big oil firm has packed its bags and left the Andean nation. With the exception of ExxonMobil Corp., which is taking Venezuela to an international court over some of the rule changes, other major companies have quietly reached accommodation with Caracas, analysts say. The proof is that all the big Western oil firms are still bidding for Venezuelan oil projects, despite the tighter restrictions.

Two weeks ago, Shell’s regional production manager, Frank Glaviano, told Dow Jones Newswires that despite pressure from the government, Shell is optimistic about Venezuela. “Its not about being angry,” he said. “Its about conducting business.”

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Even Mr. Chavez’s occasional tirades about oil have a certain logic. His sporadic threats to cut all supplies of Venezuelan oil to the U.S., for instance, are made with the intent of talking up oil prices. “He says things that get oil traders’ attention,” says one former White House official. Mr. Chavez was at it again recently, saying that a Venezuelan study showed oil prices could reach $95 a barrel.

And if that weren’t enough here is yet more confirmation for the Toronto Globe and Mail:

"It is hard to turn away from the tremendous opportunities in Venezuela," Sean Rooney, the head of Shell's operations in Venezuela, bluntly conceded to Fortune Magazine recently. "The Venezuelans can and will be extracting higher rents, and we expect, and accept, that."

The actions of the Venezuelan government are "typical" of what is to be expected when the price of oil is far higher than anyone had expected, Christophe de Margerie, a Total executive vice-president, said in Calgary. "We are making, it's true, very big profits. Total is more than willing to re-discuss the sharing of those profits. The problem we have today is how to do it."

So there you have it. Despite all the nonsense from the opposition big oil is still in Venezuela. Why? Because “its about business”, they are making “very big profits”, and they “expect, and accept” higher royalties. Once again we have a clear example of how right Chavez was and how wrong the vendepatrias of eastern Caracas have consistently been.

Now they’ve moved on to bitching about empty grain silos or ketchup factories being taken over by the government or idle land being redistributed to small farmers. This they say will scare off foreign investment and hurt the economy. Fortunately Chavez is smart enough to just ignore them. He knows, as do many of us, that they will never learn and never stop selling their country short. And every time he has ignored these chicken littles and plowed ahead to do what is right Venezuela has reaped the rewards.
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