Venezuela expropriates oil service companies

CGES | MAY 2009 | SOURCE: Global Oil Insight

Venezuela moved quickly to begin expropriating oil service companies operating in Lake Maracaibo within hours of the National Assembly passing a law extending state control to all oil-related activities.

The move is a response to PdVSA’s mounting debts to oilfield service companies and the failure to agree reductions in contract values in the face of falling oil prices.

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The rhetoric from the Venezuelan president and oil minister has been as politically charged as usual, but nationalisation may not be the solution to PdVSA’s problems and removes another scapegoat on which the government can pin the blame for falling oil production and collapsing revenues.

The Venezuelan government has moved quickly to nationalise parts of the country’s oil services sector after the National Assembly passed a law allowing the state to take control of companies providing services in natural gas processing, water and gas injection and the management of vessels and docks on Lake Maracaibo. 

Employees of state-owned Petroleos de Venezuela (PdVSA), backed by the military, moved in to take control of gas compression plants, water injection facilities and fleets of vessels on Lake Maracaibo.

Among the most important assets seized by the government were the El Furrial and PIGAP II high-pressure gas compression projects, owned by US-based Williams, the SIMCO consortium, 49.5% owned by the Scotland-based John Wood Group, which has a 16-year, $800-mn contract to carry out water injection support activities in Lake Maracaibo and the country’s largest towing operators, Zulia Towing, Terminales Maracaibo Maritime Services and Marine Services. 

President Chavez was on hand in Maracaibo to lend an air of gravitas to this latest manifestation of his socialist revolution. ‘To God what is God’s, and to Caesar what is Caesar’s. Today we also say: to the people what is the people’s’, the Financial Times reported Chavez proclaiming to his supporters in Maracaibo as more than 30 oil terminals and some 300 vessels were expropriated.

“Today,” he went on, “the private services companies disappear, we don’t need them, the people and workers can do the labour and be more efficient. We’re going to bury capitalism in Venezuela. We are liberating the homeland, building socialism with workers”.
Some of the workers are less convinced, worried that many may lose their jobs. “The law does not benefit us,” El Nacional newspaper quoted Bernardino Chirinos, leader of the Union of Oil

Workers in Venezuela’s Zulia state, as saying. “There are 35,000 workers on the east coast [of Lake Maracaibo] and only 8,000 of them will be absorbed [in PdVSA]. There are 22,000 workers without guarantees.”

The impetus for this latest round of oil industry nationalisation comes from PdVSA’s inability to pay for the services it receives from these private foreign and domestic contractors. PdVSA stopped paying the service companies in August 2008, as oil prices began to fall rapidly, and had run up debts estimated at $13.8 bn by the end of last year.

Several contractors stopped work in Venezuela as the arrears mounted. Houston-based Boots & Coots stopped operations in Venezuela in the first quarter of 2009 due to unpaidbills, drilling company Helmerich & Payne idled seven rigs in the country, while Ensco idled one, which was subsequently seized by PdVSA.

Despite cutting its dayrates for drilling, Ensco has failed to reach any agreement with PdVSA over payment and has subsequently announced that it will cancel its contract with the company’s Petrosucre subsidiary unless a settlement is reached before the end of May.

Venezuela has been battling for months to reduce the cost of oilfield services and has become increasingly belligerent in its dealings with service companies, demanding a 40% cut in costs after oil prices collapsed in the second half of 2008. President Chavez has said that the nationalisations will allow PdVSA to cut its costs by 20%, worth $500 mn per year; Oil Minister Ramirez put the savings even higher, at $700 mn. 

As well as being part of a wider move against private businesses in Venezuela, on which President Chavez is increasingly laying the blame for his country’s slide into recession, the latest action is also seen as payback for those companies deemed to have supported the 2002 work stoppage organised by opponents of Chavez. “To those contractors who stopped work during the 2002 oil strike, we’ve told them it’s time to settle accounts and rates, change our relationship, or we will take over those companies,” Energy Minister Rafael Ramirez told PdVSA employees in April, according to an article in Upstream.

Contractors were also accused of using the run-up in oil prices during 2007 and 2008 to profit at the country’s expense. “These intermediary companies speculated, and took a large part of our oil earnings,” Bloomberg quoted Mr Ramirez as saying on Venezuelan state television. “We will not pay [the bills] of contractor companies that have pretended to speculate and don’t care about our company. To those companies: you speculated in 2007 and 2008, now we have to reset those rates,” he told PdVSA employees.

According to Venezuelan government sources, companies will receive compensation only for the book value of the assets expropriated after deducting labour and environmental costs, while the compensation will be made in bonds, rather than cash. For their part, the service companies appear intent on pursuing all options available to them, including direct negotiation with PdVSA, to secure full compensation.

Speaking of its SIMCO contract, John Wood Group reported that “the contract has been taken over byPdVSA following the consortium submitting a notice of default due to non-payment and other contractual disputes,” adding, “We should be in a strong contractual position to recover money which is due,” according to a Reuters report.

PdVSA had reportedly offered service companies the opportunity of creating joint ventures as a way of capitalising unpaid bills, although it was unclear which companies had been offered such alternatives. International arbitration also remains an option for securing compensation for the nationalised assets and annulled contracts.

While the expropriation of service contractor assets in Lake Maracaibo may be a short-term fix for PdVSA’s current cash shortage, it may well cause longer-term difficulties for the company and for Venezuela’s future oil production capacity. The actions of the Venezuelan government send a very clear message to any and all potential investors in the country that their assets are not safe.

This message is unlikely to be lost on potential bidders for new upstream contracts in the country, or for future service providers to the Venezuelan oil industry. PdVSA may find it difficult to source spare parts that it is likely to require to maintain imported equipment that it has expropriated and will lose out on the longer-term benefits of technological innovation, much of which has been driven by the services sector.

Major service companies operating elsewhere in Venezuela, such as Schlumberger, Baker Hughes and Halliburton, which has been subjected to frequent insults from Chavez’s supporters for its close ties with former US Vice President Dick Cheney, must also feel vulnerable. They, too, are owed millions of dollars by PdVSA and must feel that they are likely to be next in the firing line.

Under President Chavez, Venezuela has increasingly been turning its back on Western companies in favour of those from Asia, the former Soviet Union, or elsewhere in Latin America, who are less concerned about alleged abuses of human rights and the political process in Venezuela and are seen as generally more sympathetic to the socialist revolution.
Official sources insist that Venezuela’s oil sector has thrived since the disruption caused by the work stoppage of December 2002 and the subsequent nationalisation of privately-operated oil projects.

According to official figures published by PdVSA in its quarterly reports, production of crude oil (excluding condensate and NGLs) was on a rising trend during the first three quarters of last year, exceeding 3.2 mbpd in 3Q08. This is in stark contrast to the estimates of outside observers, who put Venezuela’s production at a level of around 2.4 mbpd in 3Q08 (see Figure 1).

Venezuela clearly believes that its new friends from China, Russia, Belarus, Iran and elsewhere can help it to raise its production capacity. It may also be counting on the assumption that its huge declared oil reserves mean that oil majors and oil service companies alike cannot afford to just walk away from Venezuela.

Several of the companies who saw their Orinoco heavy oil projects nationalised have reportedly shown an interest in bidding for new projects, despite the much tougher terms on offer. Caracas may be betting that, once service companies get used to the new terms under which they are invited to operate in Venezuela, they will be back.

Time will tell whether it is right, or if it will be able to substitute their skills with those from elsewhere.

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