Chavez Moves to Seize Oil Contractors' Assets Friday

Hugo Chavez
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CARACAS (THE WALL STREET JOURNAL via Dow Jones Newswires), May 8, 2009

Venezuela's President Hugo Chavez said Thursday his government will seize the local assets of some international oil-service companies starting Friday -- a response to threats by several firms to stop their work in Venezuela because of nonpayment of bills owed by state-run oil giant Petroleos de Venezuela SA.

Earlier Thursday, the National Assembly, dominated by supporters of Mr. Chavez, approved a law letting the government seize assets of oil contractors without following the usual procedures for expropriating businesses. Big oil-services firms such as Texas-based Schlumberger Ltd. and Halliburton Co. aren't expected to be affected by the move, but dozens of other firms are.

The move is the latest sign of trouble in Venezuela's oil industry. Stung by lower prices for its crude-oil exports, Petroleos de Venezuela, or PDVSA, has run up a huge backlog -- roughly $14 billion at the end of 2008 -- of unpaid bills with service companies that do much of the legwork in the oil industry, from maintaining wells to operating tugboats.

The move also came hours after Houston-based Boots & Coots International Well Control Inc. said it has ceased work in Venezuela until it receives payment from the government. "We will limit our financial exposure," the company said in a statement.

PDVSA says some of those service contracts are now overvalued because of falling crude prices that have squeezed government revenue. Venezuela relies on oil for 93% of its export income, but world oil prices have slid 61% since their July peak, settling Thursday at $56.71 on the New York Mercantile Exchange.

Since becoming president in 1999, Mr. Chavez has dramatically changed Venezuela's oil industry, nationalizing most production and kicking out many foreign oil producers. He has staffed the state company with loyalists and turned it into a poverty-fighting institution, funding and overseeing social projects around the country.

As a result, production in the country with the largest oil reserves outside the Middle East has declined dramatically. Analysts say taking over service companies will only add to the problem.

"Tomorrow we'll start recovering the goods and assets that will now belong to the state -- social property as it always should have been," Mr. Chavez said in a televised speech Thursday. "Mr. Man on the moon, cover your ears because the cries of anguish from the bourgeoisie will reach all the way to the moon."

The new law will only affect some service companies, in particular those involved in the water, steam and gas injection needed to increase the rate of extraction from oil wells. Companies that operate wells, such as Schlumberger, appear to be exempt, at least for now.

"This is a grave error because we don't have the technological capacity" for such activities, opposition congressman Luis Diaz said.

Natural-gas processor and distributor Williams Cos., of Tulsa, Okla., is likely to be affected. It said in April that it plans to write off $241 million related to unpaid fees from PDVSA.

PDVSA has already taken over the operations of some companies that have claimed a default, including the SIMCO consortium. A spokeswoman for Houston-based Wood Group, a 49.5% partner in the consortium, declined to comment on the new law.  

Copyright (c) 2009 Dow Jones & Company, Inc.

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