Chávez's Oil Threats Slick but Not Solid
Halting Exports Would Hurt Venezuela More Than U.S.
Venezuelan President Hugo Chávez, center, has threatened to halt oil sales to the United States.
By Steven Mufson
Washington Post Staff Writer
Wednesday, February 13, 2008; Page D01
A full-page ad blasting Exxon Mobil appeared in the Venezuelan newspaper Ultimas Noticias on Monday. Drawings of drops of oil went from black at the top of the page to red at the bottom. "Exxon turns oil into blood," the bold-face text declared. Addressing "Exxtranjero" -- the Spanish word for foreigner, with an extra "x" -- it used a slogan from the Spanish Civil War that roughly translates as "you will not pass."
Then, on the front page of the paper yesterday, a headline proclaimed that the state oil company, known as PDVSA, "prepares a counterattack."
But whether Venezuela's government can marshal more than bellicose slogans and headlines in its intensifying war with the Texas oil giant remains doubtful.
In an era of scarce prospects, it's rare for a major oil company to openly confront a nation possessing massive reserves. Yet when Venezuela last year seized control of two joint ventures with Exxon Mobil, instead of acquiescing, Exxon Mobil walked away and filed for arbitration. Last week it announced that it had obtained three international court orders to freeze about $12 billion in assets belonging to Venezuela and PDVSA. In addition, under a New York district court order, about $300 million was already frozen.
President Hugo Chávez responded by threatening to cut off the 1.3 million barrels of oil that Venezuela exports daily to the United States. So far, however, Chávez has done little. The reason: As much as the world needs oil, Venezuela needs customers and investors.
Oil accounts for 90 percent of Venezuela's export earnings and half of the government's revenue. Chávez has tapped into the revenue of the state oil company, Petroleos de Venezuela, to finance domestic food and fuel subsidies, social programs, the Fund for National Development, and a $1.7 billion aid program for Cuba and other countries in the Caribbean and Latin America.
Moreover, the United States is Venezuela's biggest market, and Venezuelan crude oil is of such low quality that few of the world's refineries outside the United States can use it. One firm well-suited for using Venezuelan crude is U.S.-based Citgo, a unit of PDVSA. Chávez may talk of cultivating new customers by selling to China, but China doesn't have a refinery capable of handling the heavy crude.
"It'd be hard for them to place their oil in terms of finding a good match," says David Goldwyn, a consultant and senior associate at the Center for Strategic and International Studies. "A lot of the new refineries are going to be able to refine the heavy oil. But right now there's not a lot of that capacity."
Venezuela also needs foreign investors and experts, oil specialists say. The country's oil output has dropped about 20 percent since PDVSA laid off thousands of engineers and managers in a strike about five years ago. Moreover, new frontiers in the Orinoco region, where oil is locked in rock similar to Canada's tar sands, require major investment and unwieldy technology. And PDVSA, straining to finance other government priorities, boosted its debt almost eightfold last year despite soaring oil prices.
Chávez appears to have miscalculated by thinking Venezuela's extra heavy oil reserves were vast and alluring enough for foreign oil companies to accept tougher terms now that oil prices have soared. After all, the companies were making more money than they ever imagined. And Exxon Mobil's operation in Venezuela, acquired when Exxon bought Mobil a decade ago, represented about 1 percent of production and less than 2 percent of reserves.
According to court documents. Mobil had entered a 35-year agreement to exploit the extra-heavy crude oil fields of the Orinoco belt. Oil prices at that time were extremely low and soon fell to around $10 a barrel. So Mobil and other foreign companies received tax and royalty breaks as incentive. In 1998, Exxon bought Mobil.
In 2004, Venezuela imposed a "extraction tax," which Exxon Mobil lawyers say was "a disguised royalty," income tax increases and production limits.
In February 2007, Chávez ordered that PDVSA seize a 60 percent interest in the Orinoco fields, up from 42 percent. He gave foreign companies four months to accept his terms. While Chevron and others did so, ConocoPhillips and Exxon Mobil walked away.
"There's an overriding issue here," said Pedro Burelli, a former member of PDVSA's board who lives in the United States. "Has resource nationalism made Venezuela irrelevant despite 300 billion barrels of reserves? Are you such a bad partner that you're irrelevant?"
It's a question that oil companies and oil-rich nations, such as Russia and Nigeria, will ponder as they watch for the outcome of this drama.
"How this case is handled is going to be a signal about whether countries have free rein to renegotiate contracts when the underlying circumstances change," said David Victor, director of an energy and sustainable development program at Stanford University. "This happened all across the oil industry. Oil prices went up. A lot more money was on the table." Producing countries, he said, figure that oil firms were stuck once they sank capital into a venture.
"We remain willing to engage in substantive discussions with the government of Venezuela and PDVSA on the fair-market value of assets," Mark Albers, senior vice president of Exxon Mobil, said yesterday at a news conference at the Cambridge Energy Research Associates conference in Houston.
Meanwhile, Venezuela will have trouble sidestepping the asset-freeze orders because big commercial transactions mostly go through New York or London banks. "It's going to be very difficult to move that large a stream of oil outside the U.S. stream of commerce," said Joseph Profaizer, a lawyer and arbitration expert at Paul Hastings Janofsky & Walker. "It's easier to hide when you're small."
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