Monday, May 11, 2009

Hugo Chavez seizes foreign oil service companies, because he hasn’t paid them

Chavez is following his earlier takeover blunders (telephone, cement and oil conglomerates) and now plans to seize the oil service companies that have remained. Most haven’t been paid since last summer and they are beginning to close down operations. This follows the seizure of Conoco and Exxon Mobil two years ago after they rejected a partial takeover and far higher taxes.

When they announced they were seeking international arbitration to challenge the amount of compensation offered, Chavez threw a fit and threatened to cut off oil deliveries to the US if President Bush didn’t make them stop. Then he realized the US has the only refining facilities that can handle his gunky, high sulfur crude. It also hit him that any award to the two US companies wouldn’t be out of their reach, they could simply seize his US assets which include Citgo. Even worse, the US is his only market price customer. The remainder are his politically favored pals, who pay only 30% of market and the balance over 25 years.

The inept state oil company (PDVSA) management has made few or no capital improvements and done little maintenance. They are simply milking the system and running it into the ground. And it is beginning to show. Venezuela was pumping 3.2 mbd in 1998 (before Chavez) and is now down to 2.13 in April. It is likely production will drop below 2 million in the near future. The US has been buying 1.2 million. The Finacial Times (UK) explains the rationale: PDVSA which is under pressure to cut expenses by 60 per cent because of tumbling revenues, is estimated to owe as much as $12bn (€8.9bn, £7.9bn) to contractors since suspending payments to them last August, shortly after oil prices began their precipitous decline. It has demanded that companies accept a 40 per cent cut in their bills, arguing that the decline in oil prices means they are charging too much. Sort of sounds familiar.

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