CE Week #18: “Chávez Lets West Make Oil Bids as Prices Plunge”
CARACAS, Venezuela — President Hugo Chávez, buffeted by falling oil prices that threaten to damage his efforts to establish a Socialist-inspired state, is quietly courting Western oil companies once again.
Until recently, Mr. Chávez had pushed foreign oil companies here into a corner by nationalizing their oil fields, raiding their offices with tax authorities and imposing a series of royalties increases.
But faced with the plunge in prices and a decline in domestic production, senior officials have begun soliciting bids from some of the largest Western oil companies in recent weeks — including Chevron, Royal Dutch/Shell and Total of France — promising them access to some of the world’s largest petroleum reserves, according to energy executives and industry consultants here.
Their willingness to even consider investing in Venezuela reflects the scarcity of projects open to foreign companies in other top oil nations, particularly in the Middle East.
But the shift also shows how the global financial crisis is hampering Mr. Chávez’s ideological agenda and demanding his pragmatic side. At stake are no less than Venezuela’s economic stability and the sustainability of his rule. With oil prices so low, the longstanding problems plaguing Petróleos de Venezuela, the national oil company that helps keep the country afloat, have become much harder to ignore.
Embracing the Western companies may be the only way to shore up Petróleos de Venezuela and the raft of social welfare programs, like health care and higher education for the poor, that have been made possible by oil proceeds and have helped bolster his popular support.
“If re-engaging with foreign oil companies is necessary to his political survival, then Chávez will do it,” said Roger Tissot, an authority on Venezuela’s oil industry at Gas Energy, a Brazilian consulting company focusing on Latin America. “He is a military man who understands losing a battle to win the war.”
While the new oil projects would not be completed for years, Mr. Chávez is already looking beyond the end of his current term in 2012 by putting forward a referendum, expected as early as next month, that would let him run for indefinite re-election.
In recent years, Mr. Chávez has preferred partnerships with national oil companies from countries like Iran, China and Belarus. But these ventures failed to reverse Venezuela’s declining oil output. State-controlled oil companies from other nations have also been invited to bid this time, but the large private companies are seen as having an advantage, given their expertise in building complex projects in Venezuela and elsewhere in years past.
The bidding process was first conceived last year when oil prices were higher but Petróleos de Venezuela’s production decline was getting impossible to overlook. Still, the process is moving into high gear only this month, with the authorities here expected to start reviewing the companies’ bidding plans on new areas of the Orinoco Belt, an area in southern Venezuela with an estimated 235 billion barrels of recoverable oil. Altogether, more than $20 billion in investment could be required to assemble devilishly complex projects capable of producing a combined 1.2 million barrels of oil a day.
Mr. Chávez’s olive branch to Western oil companies comes after he nationalized their oil fields in 2007. Two companies, Exxon Mobil and ConocoPhillips, left Venezuela and are still waging legal battles over lost projects.
But Venezuela may have little choice but to form new ventures with foreign oil companies. Nationalizations in other sectors, like agriculture and steel manufacturing, are fueling capital flight, leaving Venezuela reliant on oil for about 93 percent of its export revenue in 2008, up from 69 percent in 1998 when Mr. Chávez was first elected.
In the past year, with higher oil prices paving the way, Mr. Chávez also vastly expanded Petróleos de Venezuela’s power, inextricably linking it to his political program. He directed the oil company to build roads, import and distribute food, build docks and shipyards and set up a light-bulb factory. He even expanded it into areas like milk production, soybean farming and the training of athletes after a weak performance at the Beijing Olympics.
One of the oil company’s ventures sells subsidized food and extols Mr. Chávez’s leadership at its stores across Venezuela. At one frenzied store in eastern Caracas, posters hung from the ceiling last Saturday showing Mr. Chávez arm in arm with children beneath the heading, “fortifying agrarian socialism.”
Petróleos de Venezuela has also carried out nationalizations in other industries, absorbing companies like Electricidad de Caracas, the utility serving this city of five million. Top executives like Eulogio del Pino, the Stanford-educated vice president for exploration and production, spent much of 2008 negotiating unfinished deals like the takeover of a cement company.
But all the while, Petróleos de Venezuela has faced its own difficulties. It claimed it produced about 3.3 million barrels a day throughout most of 2008. But other sources, like OPEC, of which Venezuela is a member, place the figure closer to 2.3 million and show a fall of about 100,000 barrels a day from a year earlier. When Mr. Chávez rose to power a decade ago, Venezuela was producing about 3.4 million barrels a day.
Rafael Ramírez, the energy minister and president of Petróleos de Venezuela, did not respond to requests for an interview. But energy executives here with contacts within Petróleos de Venezuela said Mr. Ramírez, a confidant of Mr. Chávez, has been waging a struggle within the company to refocus operations toward producing more oil.
After weathering the turmoil of recent years, Western oil companies here are loath to speak publicly about their plans. “We don’t elaborate on bidding processes beyond the fact that we evaluate every opportunity and our decisions will be based on economics and other factors,” said Scott Walker, a spokesman for Chevron.
But energy executives here speak with restrained optimism. Nineteen companies paid $2 million each last month for data on areas open for exploration, twice what such data costs elsewhere.
Oil companies say they recognize the risk of investing in Venezuela, given the country’s abrupt shifts in the past. But they focus on the long-term potential of its petroleum reserves. Venezuela poses little risk in the search for oil since geologists have known for years where it lies in the Orinoco Belt.
Venezuela also differs from top oil nations like Saudi Arabia and Mexico, where national oil companies have monopolies. Petróleos de Venezuela let private companies remain as minority partners after the nationalizations, despite Mr. Chávez’s often aggressive anticapitalist stance.
Moreover, foreign oil services companies like Halliburton, which has done business in Venezuela for 70 years, have even expanded their activities in the country as Petróleos de Venezuela grew more dependent on contractors to help extract oil from aging wells.
Still, doubts persist over the chances that the new bids, which are set to conclude in June, will ultimately result in finished oil projects. Risks of operating here were underscored again last week when Venezuela ordered new production cuts along with other OPEC members, impacting ventures with private partners.
Under the current bidding rules, the onus for financing the new projects lies with the foreign companies, even though Petróleos de Venezuela would maintain control. Banks might balk at such a prospect. Distrust also lingers in dealing with Petróleos de Venezuela.
“An agreement on a piece of paper means nothing in Venezuela because of the way Chávez abruptly changes the rules of the game,” said a Venezuelan oil executive who has had dealings with oil companies from China, Russia and other countries.
“In 10 years, not one major oil project has been built in Venezuela,” said the oilman, who asked not to be identified for fear of retribution. “Chávez has left his so-called strategic partners out to dry, like the Chinese, who have been given the same treatment as Exxon.”
But the severity of the drop in oil prices may ultimately dictate the terms on which Venezuela re-engages with foreign oil companies.
“Chávez is celebrating the demise of capitalism as this international crisis unfolds,” said Pedro Mario Burelli, a former board member of Petróleos de Venezuela. “But the irony is that capitalism actually fed his system in times of plenty,” he said. “That is something Chávez will discover the hard way.”
María Eugenia Díaz and Thom Walker contributed reporting
María Eugenia Díaz and Thom Walker contributed reporting.
This article is very interesting to me, but confusing at the same time. So this Chavez guy supports the bid the tap into oil reserves in Venezuela because it would make him look good if the bid was successful thus increasing his reelection chances. That seems like a very selfish thing to do. I’m not really sure how I feel about oil drilling in the first place. On one hand the oil is there so why not use it, plus it could benefit the world market. The other part of me says oil drilling is bad for the environment and what if they drill in Venezuela and there is a rich supply and we use it all up in a short amount of time. We need to be smart with oil and make it last. So the choice is save the economy or save the environment and of course we are going to try and save the world market because without it we would go back to the stone ages (okay that may be a little melodramatic). The amount of money surrounding oil also is absolutely amazing to me. 3.4 million barrels a day, think of how much U.S. money that is worth. Gosh this article brings out the environmentalist in me and it is so frustrating that all countries seem to want is more oil. I guess it is a necessity, but what price will be pay in the future to counter that usage?
Connection: This article can be linked to in a way to imperial presidency. Obviously it is not the U.S. presidency, but it is still a very powerful man using his power to benefit himself. What if tapping into Venezuelan oil reserves is a bad idea and he only supports it because it could get him reelected. That seems like an abuse of power, but I guess not every country is like the U.S. where the President has advisors to tell him he is making a bad decision.
Personally I think that gas prices are just fine were they are now. I do not mind paying a buck fifty and letting Chavez to go hang. The way that country is going I can not see him remaining in power much longer without some serious help. I would place an embargo on Venezuala until Chavez stepped down. The corruption that is rampant in that country and the business dealings that have happened there make me wary to deal with him at all. The amount of oil that is in Venezuala is staggering, but it is not worth propping up this dictator for it. If the deals will go far in keeping him in power, although he would still win every “election”. I cannot see Chavez actually allowing these business transactions to go forth anyway. The companies in this article owned the land that they are now bidding for, what is to stop him from simply doing it again? Will Obama be willing to step up and start a war over it? With that much oil on the line and oil costs lower than they have been in a long time, but still higher could a war be justified? I do not trust him, and it is a sign of desperation that these companies are willing to deal with him.
Connection: Power to declare war
With all the lobbyists that work for the major oil companies how many congressmen would be willing to fight to start a war with Chavez? Or will Obama take the power of the Presidency further and not wait for Congressional support? With this much oil on the line and such an unbalanced dictator in charge of it what are the stakes and who is willing to pay them?
I did not know that Venezuela produced its own oil products. It seems strange that they would cut off connections with other oil companies in the past few years, even with the economy going really good. I guess it doesn’t really matter though because no matter what Venezuela did to other companies, it still has the natural resources that all of the companies need to survive, which is also probably why they are paying close to double the normal price to even investigate investing in Venezuela. I don’t really get what the article was saying when it said that Chavez was “nationalizing” the other major gas companies that had sites in the country. I also don’t really understand what the oil industry has to do with Chavez trying to maintain a socialist rule in Venezuela. I think it is interesting that even though it seems like many countries and their leaders dislike Chavez, they have to put up with him and, in some ways, do what he says, especially in the oil industry, because right now he is the one with all of the power. I wonder how long the oil prices will stay low, and if these new oil sites in Venezuela will affect the prices anytime soon in the United States.
Connection: When Obama gets into office, will the gas prices change? I have heard theories that as soon as he is in office the prices will go back up, but gas and oil are international affairs, not just ones contained in the USA, so I do not see how that could happen.
I really didn’t know much about Chavez before reading this article besides the fact that he is the current president of Venezuela. I enjoy reading articles about gas prices and such because frankly I really don’t know that much about petroleum reserves/availability for that matter. “In recent years, Mr. Chávez has preferred partnerships with national oil companies from countries like Iran, China and Belarus. But these ventures failed to reverse Venezuela’s declining oil output” (Simon Romero). Does this mean that Chavez is willing to consider allowing the United States to invest in Petróleos de Venezuela? Are the United States and Venezuela on good terms right now? If anybody knows the answers to any of these questions, please let me know. I wonder exactly how much access Chavez would allow the U.S. to have to this great reserve. It seems like when things start going his way, he will once again assume control over production and exportation. Darn that Chavez! But even if Chavez finds a solution to his problems, it seems unlikely that he would be re-elected in 2012. In class we were talking about whether or not Obama would engage the U.S. in any countries not currently occupied by American troops. I guess Venezuela could possibly get on the engaged list if Chavez continues to let things get crazy out of hand…
Connection: Imperial v. Imperiled Presidency. At this point, I think Chavez has turned his position into an imperial presidency. When I hear news story about him, it seems like they literally always focus on HIM, not on the things he is accomplishing for his country or his people. “He is a military man who understands losing a battle to win the war” (Simon Romero). This quote makes it seem like Chavez is only working to save his own skin; perhaps he is, but perhaps there’s more to the story that we average citizens just aren’t aware of yet.
In response to Erik Layton:
I think it is incredibly foolish to underestimate the powerful in Central and South America. Some of the most evil regimes existed there for decades, and the economy was not much of a factor in breaking them. Chavez is not going to give up power. Here in the States we have this idea that if the economy goes sour, we can blame our leader and chuck him out of office. This is not the case elsewhere. Take Egypt: Hosni Mubarak is an epitome of evil. He imprisons people who try to run against him. Either that or they disappear into the night and are never seen or heard from again. He’s been president of Egypt for 27 years. Through good times and evil times, he has clung to his throne. Chavez will not give up power. He is a dictator. And an embargo? That’s a terrible idea. A national embargo has nothing to do with private companies’ oil bids in Venezuela. There is nothing American about this article. That is not the point of this article. The point of this article is whether or not foreign oil companies are going to be greedy enough to go into Venezuela to get more oil even though Chavez will kick them out in a year when prices go back up. No doubt about it: prices will go back up, and Chavez will not need those companies anymore. They will be run out of the country. It is a huge risk that will fall through, and any oil company who takes the risk is moronic and deserves to lose a huge investment.