Venezuela Private Oil Rig Ops May Drop on Nationalist Risk

NEW YORK May 15, 2007 (Dow Jones Newswires)

Venezuela's threats to "nationalize" 18 oil rigs currently operated by outside firms sent a shock wave through the local oil services industry at a time these services are in high demand around the globe.

Executives at drilling firms said foreign rig operators could easily try and move equipment to other markets if the business environment worsens, hurting the country's ability to produce oil.

At the same time, Venezuela may be forced to lean on foreign oil service firms to keep the oil flowing until it follows through on plans to begin assembling rigs in country to help spawn a domestic oil services industry.

That means Venezuela may exempt from its nationalization drive some oil service company activities on which the country depends.

"This is something that took us all by surprise," said an executive at a U.S. firm that has several rigs operating in Venezuela. "Rigs will move to other contracts elsewhere in the world."

The International Energy Agency claims Venezuelan output has fallen to 2.35 million barrels a day, a million barrels a day less than what PdVSA claims it is producing. Ironically, Ramirez's comments come at a time PdVSA is putting together a tender for up to 70 rigs, a plan observers said was not feasible even before Ramirez's rhetoric over the weekend.

"This is obviously impossible. There aren't that many rigs available in the whole world," said another Venezuela-based drilling executive.

Service companies have for the last few years seen record revenue and profits thanks to a worldwide spending bonanza by national oil companies such as PdVSA. As Venezuela and other governments have pushed the international oil majors out, they have increasingly relied on service firms for technological expertise.

Some companies think Venezuela's urgent need to increase oil production will keep the market open to foreign firms despite Ramirez's comments.

"Chavez is often in the paper with negative news. But at the same time, they are focused on trying to arrest a production decline and they need the service industry to help them pull that off," Hans Helmerich, CEO of rig operator Helmerich & Payne, said on May 2. "So we think that we're going to see considerably better rates from Venezuela and lots of activity going forward."

Helmerich & Payne operates 11 rigs in Venezuela. The Tulsa, Okla.-based company hasn't been affected by the nationalization campaign, said Juan Pablo Tardio, manager of investor relations.

Reports that Venezuela was extending its nationalization campaign to the services sector did little to outwardly dent the optimism of companies operating there.

"We've got a very good relationship with PdVSA," said H. Gene Shiels, assistant director of investor relations at Baker Hughes. "To date, our activity levels in Venezuela remain good. We're not expecting any significant changes."

Ramirez, however, sees a limited future for these western oil services firms.

"We've started a battle to end the corruption from the traditional scheme for rig contracting," said Ramirez in an interview with local paper Panorama over the weekend. "In the past, each PdVSA affiliate contracted - without any type of controls - drilling equipment from some international firms. This system will end soon."

The PdVSA head envisions a future of domestically built rigs run by local firms. The company is currently importing rigs from China, and plans to set up a joint venture company to build them in Venezuela.

Copyright (c) 2007 Dow Jones & Company, Inc.