Venezuela's Govt Declares Takeover of Last Private Oil Fields

CARACAS May 01, 2007 (AP)

President Hugo Chavez's government took over Venezuela's last privately run oil fields Tuesday, intensifying a struggle with international oil companies that could slow development of the world's largest known petroleum deposit.

Oil Minister Rafael Ramirez declared that the Orinoco River fields reverted to state control just after midnight. State television showed cheering oil workers in hard hats raising the flags of Venezuela and the national oil company over a refinery and four drilling fields in the Orinoco River basin.

"Our oil workers are taking control," Ramirez said at the Jose heavy crude refinery near the eastern city of Barcelona. "The president has ordered us to assume full control of our oil sovereignty, and we are doing it."

Chavez, a strident critic of U.S.-style capitalism and a leader of the leftist movement in Latin America, planned a more elaborate celebration later on May Day, the international workers' holiday, with red-clad oil workers, soldiers and a flyover by Russian-made fighter jets.

The companies ceding control included BP PLC, ConocoPhillips (COP), Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), France's Total SA (TOT) and Norway's Statoil ASA (STO).

All but ConocoPhillips signed agreements last week agreeing in principle to state control, and Venezuela has warned it may expropriate that company's assets if it doesn't follow suit.

ConocoPhillips said Tuesday it was cooperating by ceding control of its two Orinoco oil projects, even though it hadn't reached any agreement with Venezuela on compensation.

All the oil companies remain locked in a behind-the-scenes struggle with the Chavez government over the financial terms and the conditions under which companies will be allowed to stay on as minority partners.

The multinationals have leverage because analysts say Venezuela's state oil company, Petroleos de Venezuela SA, is incapable of transforming the Orinoco's tar-like crude into marketable oil without the investment and expertise of the foreign companies.

But multinationals pumping oil elsewhere in Venezuela, one of the leading suppliers of oil to the U.S., submitted to state-controlled joint ventures last year because they were reluctant to abandon the profitable operations.

Chavez also is in the process of nationalizing Venezuela's electricity companies and its biggest telecommunications company, and he threatened a month ago to take over private hospitals if they continued raising prices for health care.

The president is operating with special powers given by Congress to issue laws by decree in energy and other areas, which he has used to nationalize big companies. He justifies the takeovers as necessary to give the government control of sectors "strategic" to Venezuela's interests.

Chavez hopes to radically make over Venezuela, saying big changes are needed to make sure the poor benefit from the country's wealth and not just the elite.

Using the country's burgeoning revenues from high oil prices, he is financing widespread programs for the poor. He has built new clinics, refurbished state hospitals and sent thousands of doctors to live in poor neighborhoods and provide free medical care.

The campaign has brought popularity for Chavez, who takes to the airwaves almost daily to address the nation, delivering tirades against the rich, the media, international capitalism and his particular enemy - the U.S. government.

In Orinoco, Chavez says the state is taking a minimum 60% stake in the operations, but he is urging the foreign companies to stay and help develop the fields. They have until June 26 to negotiate the terms, including compensation and reduced stakes.

The companies appear to be taking a tough stand, demanding conditions and compensation to convince them that Venezuela will be a good place to do business.

Chevron's future in Venezuela "will very much be dependent on how we're treated in the current negotiation," said David O'Reilly, chief executive of the San Ramon, Calif.-based company. "That process is going to have a direct impact on our appetite going forward."

The stakes are high for both sides.

After the fanfare of the takeover, Chavez will need outside investment to develop the Orinoco region, which could help Venezuela surpass Saudi Arabia as the nation with the most reserves.

If Chavez scares the big oil companies off, the region could be starved of investment capital and the technical know-how needed to work with heavy, tar-like crude oil. Chavez says state firms from China, India and elsewhere can step in, but industry experts doubt they are qualified.

Michael Lynch, an oil industry analyst at Strategic Energy and Economic Research in Winchester, Mass., predicted that most oil companies would likely stay, with the possible exception of Exxon Mobil.

"They're hoping ... that as time passes Chavez will realize he needs them more than they need him," he said.

Lynch said Chavez "doesn't have the personnel to run those operations" or the management. "He's going to discover that nationalism is one thing, but money talks... And I don't think he's going to be able to get more money out of the Orinoco or the foreign oil companies without being a lot nicer to them."

Pulling out, however, would be damaging for the companies, too.

They have already invested more than $17 billion in their Orinoco projects, which are estimated to have grown in value to some $30 billion. Venezuela has indicated it is inclined to pay the lesser amount for taking over control - with partial payment in oil and, some experts suspect, tax forgiveness.

And there are fewer options around the world. State oil monopolies now control three-quarters of the world's proven oil reserves, so Venezuela may still prove enticing even under Chavez's new, tougher terms.

Nationalization of the oil industry has been tried in Venezuela before, though with a different tack. Venezuela shut private companies out of the oil sector completely between 1975 and 1992 before beginning a series of partial privatizations - a period known in Venezuela as the "oil opening."

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