Tuesday, April 04, 2006

Come back in ten years 

Of late Venezuela has been playing hardball with some international oil companies and that has been widely reported in the media:

CARACAS, Venezuela -- Venezuela has seized control of oil fields from France's Total SA and Italy's Eni SPA in a show of force against those resisting President Hugo Chavez's efforts to pry more profits from the industry at a time of high oil prices.

The move signals that Chavez's government is ready to send top oil companies packing unless they play by Caracas' new rules, but experts say the tactic could backfire by spooking partners Venezuela needs to develop potentially some of the world's largest untapped reserves.

Oil Minister Rafael Ramirez announced Monday that state oil company Petroleos de Venezuela SA, or PDVSA, had taken control of Total's Jusepin field and Eni's Dacion field, which together produced 115,000 barrels a day, after the two companies refused to turn operations over to state-controlled joint ventures.

In challenging the government, they join Exxon Mobil Corp., which earlier sold off its stake in the 15,000-barrel-a-day Quiamare-La Ceiba field rather than submit to tightened terms.

The three dissenters are among the world's six largest oil companies by market capitalization.

Ramirez was resolute Monday.

"We're not going to trample over anybody but we can't accept being trampled on either," he said. "Companies that don't adjust to our laws, we don't want them to continue in the country."

The seized properties were among 32 oil fields the government has reclaimed from private companies by voiding their oil-pumping contracts and replacing them with so-called "mixed companies" that give PDVSA a 60 percent to 80 percent stake and sharply raise royalties and taxes, among other measures.

As has been gone over before these "Service Agreements" with private oil firms were very disadvantageous for Venezuela. Besides having low royalty and tax rates they allowed the private oil firms to have full control over all operations and Venezuela was contractually required to reimburse them for whatever they claimed their expenses were.

The Venezuelan government finally said enough is enough and this year forced all these private firms to accept a new joint venture status with the Venezuelan government (through PDVSA) having majority ownership and operational control. To be sure, none of the firms were thrilled with this change, they were enjoying windfall profits which are now largely going to disappear. But most agreed to the new terms as their operations in Venezuela are still profitable and worth retaining.

However, several firms have held out and refused to come to terms with the Venezuelan government. This led to the above mentioned oil field siezures. This is obviously a drastic step on the part of the Venezuelan authorities. The question is, was it appropriate and will having done it prove beneficial or harmful?

In one sense it was clearly necessary. The Venezuelans had been insisting all along that the oil companies renegotiate their contracts or face confiscation of their fields. Having made that threat the Venezuelans could hardly let some companies refuse to negotiate and not take action. This would clearly have cost them credibility in all future negotiations. If you make an ultimatum you need to follow through or none of your future statements will be taken seriously.

However, the larger question is whether or not the Venezuelan government is going too far in trying to wring concessions from these companies and maximize its take from the oil sales. If the Venezuelans are not assertive enough they risk not getting as much as they might be able to and allowing the companies to get windfall profits at the expense of the Venezuelan treasury. On the other hand, if they are too aggressive and make it so that the oil companies are making too low of a return they risk scaring away investment by these same companies which Venezuela may want or need in the future.

So how are we to know if Rafael Ramirez overplayed his hand or underplayed it? The answer is we can't. There is no hard and fast rule to how to conduct these kinds of negotiations. You have to stake your position on your educated guesses and hunches as to what the other side’s position is and what they are willing to tolerate. Poker faces, bluffs, and public posturing will abound.

Rather predictably the Venezuelan opposition will claim that Chavez's government is running the oil companies out of Venezuela and scaring off future investment. Likewise government supporters will claim it has been a singular success in maximizing revenues for the government and ending abuses by foreign oil firms. But in reality the only way to know whether Ramirez played his cards well is to watch what happens over time. If the multinationals continue to operate and invest in Venezuela then Venezuela clearly didn’t push too hard and other countries that took a softer stance lost out on potential revenues. Conversely, if the foreign firms in large measure pull out or limit their future investments in Venezuela then Ramirez may indeed have pushed them a little too far. There is just no way to know right now which it is. So we'll have to ignore all the rhetoric for right now and revisit this post in ten years time to get our answer.


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