IHS Global Insight Perspective | |
Significance | The announcement confirms earlier reports that the takeover of specific activities had begun late last week following the approval of a new law permitting their nationalisation. |
Implications | The move will exacerbate existing concerns regarding legal stability for foreign investors in the sector at a time when the state oil company, PDVSA, is facing mounting financial difficulties. |
Outlook | PDVSA's financial problems and low levels of private investment will in turn mean that Venezuela is likely to continue to struggle to maintain production volumes. |
The Venezuelan government has started to take over assets belonging to service companies following last week's approval by the National Assembly of a law allowing the nationalisation of specific activities including gas and water re-injection, marine transport, and natural gas compression. The government announced yesterday that it will take control of 39 companies, but the number is likely to rise as President Hugo Chávez on Friday (8 May) ordered the seizure of 60 companies. The official announcement followed reports that the takeover of operations in the Lake Maracaibo region had started last week, shortly after the approval of the new law.
The new law's approval follows earlier threats that the government would seize the operations of service companies unless they agreed to reduce their fees by up to 40%—a move aimed at reducing the large debt owed by the state oil company PDVSA to contractors. However, the government's desire to increase control over service activities goes back further. It had previously signalled its intention to develop the country's capacity to build its own rigs, and has contracted some rigs from China in order to reduce its dependence on external contractors such as Schlumberger and Halliburton. The takeover of primary activities also complements the earlier nationalisation of the hydrocarbons sector that saw the conversion of operating agreements for conventional oil production and the strategic associations in the Orinoco heavy oil belt to mixed companies, in which PDVSA has at least a 60% stake. As with the earlier nationalisations, companies will receive some recompense for the seizure of their assets, although the unresolved payment disputes could complicate future negotiations over appropriate compensation. PDVSA will pay in cash or bonds, according to a statement.
Companies Affected
There are a number of foreign oil service companies operating in Venezuela, including Halliburton, Schlumberger, and Baker Hughes. Some companies appear to have been more affected than others:
- Ensco International, Inc., a U.S. company that has a jack-up drilling rig contracted to the Petrosucre mixed company developing the Corocoro field and another rig contracted to Chevron for an offshore project, has announced that it has informed Petrosucre that it intends to terminate its contract if PDVSA does not settle its outstanding debt by the end of May. It did, however, leave open the possibility of negotiating an accord with PDVSA. The company claims that it is owed US$33.5 million. Early this year it temporarily halted operations at the drilling rig in order to put pressure on PDVSA to pay—a move that prompted the takeover of the rig by PDVSA.
- Williams Companies, Inc. released a statement on Friday confirming that the Venezuelan government has seized two assets that the company operates in Venezuela, the El Furrial and PIGAP II projects. Williams said that it recently issued notices of default under its service agreements after what it described as a long period of non-payment by PDVSA, and said that its first-quarter results contain non-cash charges of around US$241 million related to its operations in Venezuela. Williams also warned of the possibility of international arbitration over the payment dispute.
- Helmerich & Payne, Inc. In contrast, another U.S. company that temporarily suspended drilling at some of its rigs over the payment dispute has signalled a willingness to continue negotiations. Reuters cited the company's director of investor relations, Juan Pablo Tardio, as saying that the company will "continue to be focused on working something out with PDVSA to amicably resolve our collections issues". Helmerich & Payne claims that it is owed almost US$100 million.
- Wood Group said that PDVSA has taken over a water injection company in which it has a stake.
Outlook and Implications
The financial difficulties facing the state oil company PDVSA have increased following the steep fall in international oil prices last year, and the company itself has admitted that it owes oil service providers up to US$8 billion. The payment dispute has in turn prompted labour unrest and idling of some rigs by private companies. PDVSA has already responded by absorbing some contracted workers and this process will continue, with the company signalling that the new law could result in its workforce expanding by over 8,000. Meanwhile the Ministry of Energy and Petroleum claims that the nationalisation of services will save the company US$700 million. What is not clear is how much it will cost PDVSA in terms of compensation payments and loss of operational effectiveness. PDVSA's production capacity has declined under the Chávez government, and the takeover of some service companies will certainly not help to raise production volumes over the long term. This is because it is unclear as to whether PDVSA has the necessary technical expertise to run their operations. The move might also make companies unwilling to supply new rigs to Venezuela in the future. Meanwhile the absorption of a further 8,000 workers will increase labour costs for the company at a time when it is under pressure to reduce costs in order to maintain its investment budget.
The latest expropriation move is symptomatic of general weak legal security in Venezuela and high operational uncertainty, continuously reflected in IHS Global Insight's Country Intelligence Group's risk ratings. Debates over whether the regime would soften or become harsher in the wake of Chávez's 15 February referendum win on constitutional change have long been abandoned, as the government proceeded to seize food companies and continue its ongoing land expropriations, all coupled with the habitual populist and sovereign rhetoric. In the meantime measures to curtail the opposition's activities have multiplied. The more recent wave of criticism against the opposition media has fuelled fears of yet-tighter control over opposition voices. The general business climate in the oil-rich country largely remains on the risky side in Venezuela, and economic difficulties seem to be pushing the controversial government towards yet more detrimental action, casting marked uncertainties on long-term oil production and economic performance as a whole.