Venezuela tightens oil grip

The government last week seized the fields of two multinational oil giants.

Powering ahead with stringent nationalist reforms, Hugo Chávez's Venezuela is showing multinational oil firms little mercy.

Tense relations between private firms and Mr. Chávez's government escalated last week when the government seized fields operated by two European oil giants - France's Total and Italy's ENI - after the two companies snubbed government demands to convert their contracts to joint ventures with the state by April 1.

"This country does not allow itself to be blackmailed," says energy minister Rafael Ramirez. "These two multinational companies resist adjusting to our law. Our sovereignty isn't under negotiation."

Sixteen companies - including Chevron and Shell - did agree to new terms giving state oil company PDVSA at least a 60 percent state stake, a success which analysts say could embolden Venezuela to demand a majority stake in more valuable projects in the country's Orinoco heavy-oil belt. Heavy oil's viscosity makes it more expensive to drill and refine than regular oil. However, high oil prices have attracted top companies to Venezuela's heavy oil, which could boost the country's reserves count to the largest in the world - ahead of Saudi Arabia.

"Chávez is in the driver's seat because he has what everybody wants," says Roger Tissot, energy analyst at PFC Energy consulting firm, about Venezuela's heavy oil. "It's not any kind of oil. It's the oil of the future."

But more forced contract changes could further increase investor fear and make it more difficult for US oil companies to access one of the largest long-term sources of oil left on the planet.

Setting a regional example?

While it is not uncommon for governments to change contract terms when high oil prices boost their bargaining power, analysts say Chávez is inspiring other leftist leaders in the region to further their own nationalist energy reform.

"Chávez has been settling the precedent," said Pavel Molchanov, energy analyst at Raymond James, a financial planning services provider.

Bolivian President Evo Morales came to power in January on a platform to nationalize the nation's natural gas industry, while presidential candidate Ollanta Humala won the first round of elections in Peru on Sunday on a nationalist platform that includes renegotiating contracts with multinational companies. And Ecuador's Congress passed a bill to boost the state's share of windfall oil profits earlier this month.

"Nationalism is in the air in Quito [Ecuador's capital] and this certainly could be a path [Ecuadorians] take as they move closer to the [October] elections," says Riordan Roett, director of Latin American studies at Johns Hopkins University.

Chávez's nationalization moves

Last April, Venezuela's energy ministry gave private firms one year to eliminate 32 operating service agreements that governed mostly marginal fields accounting for about one-fifth of the country's production. None of the contracts were due to expire until 2012, at the earliest.

The Chávez government argues that the agreements, signed under previous governments, were oil-producing concessions disguised as service contracts and therefore violated a Venezuelan law prohibiting majority private participation. With oil prices skyrocketing, the state said it was suffering losses because the contracts ordered PDVSA to pay private firms generous operating fees based on the price of oil.

Now analysts consider it likely that PDVSA will soon demanda majority stake in the four highly profitable heavy-oil projects that already exist, which produce around 550,000 barrels per day and are operated by oil giants like ConocoPhilips, ExxonMobil, and Total. The projects are worth an estimated $20 billion in equity value, according to Deutsche Bank, almost double the value of the 32 operating service agreements.

The government has not confirmed such plans, saying that it is waiting on a National Assembly report due later this month to decide how it will apply its reform to the heavy-oil belt.

Rising prices and investor fears

Venezuela's tightened grip on oil companies will have little impact on oil prices in the short term, but it will add to pressure for prices to remain high in the long term because foreign investment will likely be weaker than under a free-enterprise policy, Mr. Tissot says.

James Williams, energy analyst at US-based WTRG Economics, warns that Venezuela's track record of changing contracts before they expire could put future production at risk by making companies reluctant to invest in multi-billion-dollar heavy oil projects.

Mr. Molchanov says recent takeovers of private and corporate property encouraged by the Chávez government have heightened oil company fears. "If companies have to choose, they might pick another country," he says.

And with increased risk in Venezuela, some investors are turning to the tar sands of Alberta, Canada, where free- enterprise policy and political calm has sparked an investment bonanza in the Western Hemisphere's other great long-term oil supply.

"Even though the cost of development is very high, even compared with Venezuela, [companies in Canada] are confident that they are going to recuperate their investments in the long term," Tissot said. "In Venezuela, I sense that they're not sure that's going to be the case."

Companies may be sticking it out in Venezuela because the country represents a significant portion of their global investments, and they may hope for softened terms if there is a change of government, says Williams.

And those that do will have to deal with Venezuela's sovereign right to govern its reserves as it pleases, says Rafael Quiros, former PDVSA director.

"The problem is that those multi- national companies like ENI have the culture and tradition to do whatever they feel like in all the producing and exporting countries," he says.

"But in the case of Venezuela, they made a mistake."

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