Under Duress

At the same time that the singer Harry Belafonte was leading a UN visit to Venezuela and proclaiming how many in the US support President Chavez's socialist revolution, the country's oil minister was tidying up the details of the recent "renegotiation" of contracts covering energy projects with Shell, BP, Total and Chevron, among others. The changes make these deals significantly less attractive for the oil majors, and much more so for Venezuela. They amount to a partial nationalization, on threat of total expulsion if the companies hadn't agreed.

For example, the Hamaca heavy oil project, with which I am familiar from my time at Texaco, was established with 30% ownership by one of the arms of PdVSA, the state oil company. The previous government of Venezuela was happy to have foreigners invest in the oil sector, because they brought significant expertise in dealing with the challenging types of crude oil that make up most of Venezuela's reserves, and represented an important new revenue source, via the taxes and royalties they would pay. The contract revision has hiked state ownership to 51%, giving PdVSA--the main vehicle for funding the government largesse that maintains the President's popularity--control of these assets and their future development.

It is worth noting that the international projects covered by this forced renegotiation have been a godsend for Mr. Chavez. Not only are they big money-spinners, but they were the primary means of preventing the total collapse of Venezuela's oil production following the crippling industry strike of 2002-3. Rather than gratitude, the emotion this seems to have spawned is envy.

Did the affected companies have any real alternative, other than conceding? Could they have collectively refused to deal and taken their cases to the WTO or the World Court? Perhaps, but given the current profitability of Big Oil, they don't exactly make the most sympathetic group of plaintiffs. Venezuela would argue that it was merely seeking its legitimate share of the value of its own resources, an argument that would probably find favor in international circles.

Nor would the companies' shareholders be likely to reward them for walking away from billions of dollars of investment and hundreds of thousands of barrels per day of production, even to stand on a principle with important implications throughout their international portfolios. Without access to enough similar, large-scale opportunities in other OPEC countries or Russia, the managements of these firms had little choice but to agree, however distasteful and unethical they might regard the circumstances.

There's an old rule about blackmail, though, and it leads to the following prediction. If President Chavez was able to justify breaking these contracts and re-writing them in order to claim a larger share of the present high prices, he will have even more incentive to "renegotiate" again in the future, when oil prices fall and his absolute revenues decline. The companies involved need to consider at what point they would call Mr. Chavez's bluff about the ability of local staff to keep these plants--which include very sophisticated refineries, in addition to the drilling rigs one normally thinks of--going indefinitely. Otherwise, they will again find themselves having to compete to buy the output of facilities they designed, funded, built and lost.