June 27, 2007
U.S. Firms Fail To Agree on Chávez's Terms
Conoco Phillips is pulling out of its Venezuelan oil ventures after failing to agree on new contract terms with the populist government of President Hugo Chávez, and Exxon Mobil said it had also reached an impasse in negotiations there.
The stalemate follows the Venezuelan national oil company's seizure of majority stakes last month in four projects in an area containing one of the largest oil deposits in the world. The move was part of a wider effort by Chávez to boost state control over parts of the economy such as utilities, television and telecommunications. It also reflected a recent trend in some oil-rich countries, such as Russia, toward squeezing foreign oil companies to a point where many of them prefer to leave.
Four other major oil companies signed deals yesterday giving the Venezuelan state oil company 60 to 83 percent interests in their ventures. The companies were Chevron, Statoil, Total and BP.
The dispute is a blow for Conoco, which said it expects to take a $4.5 billion write-off this quarter while it continues to negotiate with Caracas over compensation. Fadel Gheit, an oil analyst for Oppenheimer & Sons, said Conoco would lose about 5 percent of its crude oil production and about 10 percent, or more than 1 billion barrels, of its total oil and gas reserves.
Exxon Mobil said in a statement that it was "disappointed" but held out some hope, adding that "we continue discussions with the Venezuelan government on a way forward." Exxon's share of crude oil produced by its Venezuelan ventures represents about 1 percent of the company's total; its Venezuelan reserves are less than 2 percent of its total.
The disputes will have no immediate impact on U.S. consumers, but analysts said that oil output in Venezuela could gradually decline because the state oil company, Petroleos de Venezuela, lacks the expertise to effectively manage the projects. Oil in the region that Conoco is quitting, known as the Orinoco Belt, is heavy, which makes it hard to extract and refine. Foreign companies have invested about $17 billion in heavy-oil projects that make up about a quarter of Venezuela's production.
Venezuela produces about 2.3 million barrels a day, analysts said, compared with 3 million barrels it produced daily before 2002, when a strike left the state oil company with fewer skilled workers.
The U.S. government greeted the news about Conoco and Exxon with dismay. "It's not just Venezuela," said Energy Secretary Samuel W. Bodman. "We have problems with Nigeria. We have problems with Russia with development of resources."
State Department spokesman Tom Casey said: "The government of Venezuela, like any other government, has the right to make these kinds of decisions to change ownership rules. We want to see them meet their international commitments in terms of providing fair and just compensation."
Oil analyst Gheit said that even before the May 1 takeover of controlling interests by the state oil company, the Venezuelan government had been squeezing foreign oil companies with a combination of new taxes and royalties. Last year Conoco said it earned about $800 million, or $21 a barrel, on oil it produced in Venezuela. In the first quarter of this year, however, it earned $27 million, or about $3.75 a barrel, Gheit said.
The increase in taxes in the first quarter could be intended to strengthen Venezuela's position if it goes to international arbitration to determine the value of the Conoco and Exxon operations, Gheit said. Chávez "can skew the value of these assets," he said.
Conoco's Venezuela production also dropped, to 82,000 barrels a day in the first quarter from about 100,000 barrels a day last year, because Venezuela imposed cuts as part of its agreement with other members of the Organization of the Petroleum Exporting Countries to bolster oil prices.
Shares of ConocoPhillips fell $2.24, or 2.9 per