Expropriations in Venezuela threaten oil supply

politics | May 10, 2009 | By Martin Barillas

A new round of expropriations by the Venezuelan government has touched not only oil producers, but the agriculture business as well. Troops were mobilized on May 9-10 to assist the state-owned petroleum company, PDVSA, to seize the assets of approximately 60 oil services companies. A law was past last week that allows the state to take control of the oil industry. This new move at expropriation has raised concerns that the OPEC member’s already declining oil output could sink to its lowest level in the past 20 years. While oil companies want a stake in Venezuela, which now claims to have 172bn barrels of proven oil reserves - making them the second largest in the world after Saudi Arabia - the government’s unpredictability and inflexibility are a serious deterrent.

Dissidents and critics of Chávez’s government are also facing difficulties: Manuel Rosales, a former presidential candidate, was granted asylum in Peru to escape arrest over corruption charges, while Congress removed almost all the spending powers of Antonio Ledezma, the anti-Chávez mayor of Caracas. Other opponents have been jailed or gone into hiding.

PDVSA, which is suffering from a sharp fall in export income, made the surprise move against the oil service companies in response to their threat that they would suspend operations until it paid a backlog of invoices. Some, including Helmerich & Payne and Ensco International, abandoned rigs this year. The state-run company is under pressure to cut expenses by 60 per cent because of revenue shortfalls. It is estimated to owe as much as $12 billion to contractors since suspending payments to them in August 2008, shortly after oil prices began their decline. PDVSA demands that companies accept a 40 per cent cut in their bills, arguing that the decline in oil prices means they are overcharging. The new law will also enable PDVSA to pay debts with discounted bonds rather than cash, and compensate assets at book value.

Analysts say PDVSA is storing up bigger problems for the future. It lacks the ability to operate as efficiently as the service providers, and sends a grim signal to companies considering investing in Venezuela. Future oil production may drop.

Also at issue is foreign companies’ interest in a major auction currently underway to develop the Carabobo block in the oil-rich Orinoco Belt: the first oil investment opportunity in Venezuela in the last decade that offers hope for reviving production. According to the IEA, production fell to 2.36m bpd in 2008, compared to 3.18m bpd in 1997, although PDVSA claims it actually increased to 3.27m bpd in 2008. BP, Chevron, Shell, StatoilHydro, Total, and more than a dozen more companies have expressed interest in bidding for the Carabobo projects that could collectively produce over 800,000 bpd, and require investments of $25-30bn.

The lack of legal security in Venezuela worries oil companies that are also concerned by prohibitively high start-up and financing costs as well as tight profit margins due to terms that were drawn up before oil prices began their precipitous decline in 2008. The persistent trend toward nationalization, coupled with tax and royalty hikes and an 85 percent windfall tax have prompted Exxon Mobil and ConocoPhillips to leave Venezuela and seek international arbitration.

Adding to fears for other capitalists, President Chávez has ordered another expropriation of farmland arguing that “land is not private but is the property of the nation” and criticized those who nurture small plots of land as weekend getaways. Twelve farms that cover together some 10,000 hectares in the state of Barinas – Chávez birthplace – were seized. In ten years, Chávez’s government has seized some 2.5 million hectares that had been in private hands. Large landholdings are called latifundios in Latin America, and their owners are called latifundistas.

On his “Hello, President” TV program, Chávez affirmed that the presumed owners of the expropriated properties were not actually using them or could not produce documents certifying their ownership. “He who truly loves the land must work it,” said Chávez, who added “What do the latifundistas say? that this is robbery. It’s the same thing that a thief says when arrested ‘I’m innocent.’”

Chávez also opined “if the property titles of those who consider themselves owners of the land are closely examined, one will come to the conclusion that there is no private land.” He also said “almost all the lands are the product of theft and violence perpetrated by the powerful against peasants, the indigenous peoples, the poor. So along came the revolution, to set things right. There is no private property, that’s what I say.”

Analysts say that agricultural production has declined in Venezuela, which had produced 70 percent of its agricultural needs. According to the Association of Venezuelan Cattlemen, Venezuela now produces only 30 percent of its needs. A former supporter of Chávez, Wilmer Azuaje, says that the government expropriation amounts to an appropriation of land by the Chávez family. Azuaje expressed concern over the planting of sugarcane at a plantation seized by Chávez will lead to soil exhaustion.



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Spero News writer Martin Barillas is a former US diplomat, who also worked as a democracy advocate and election observer in Latin America. His first novel 'Shaken Earth', is available at Amazon.

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