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Venezuela's complex oil terrain

Mixed messages from Venezuela to foreign oil companies

Venezuelan President Hugo Chavez talks with oil workers in Maracaibo, May 8, 2009. Chavez has tightened his grip on Venezuela's oil industry in tough economic times, seizing a major project from a U.S. firm and a range of assets from local service companies. (Miraflores Palace/Handout/Reuters)

CARACAS — Earlier this month, on the same day that a law was passed sanctioning the nationalization of companies working in Venezuela that provide services to the oil industry, troops began seizing installations belonging to foreign firms on the oil-rich Lake Maracaibo in the west of the country.

As the national anthem played and workers clad in the revolutionary red of Hugo Chavez’s "Bolivarian Revolution" chanted his name, the president said the move was a triumph for Venezuelan sovereignty and socialism over capitalism.

“You are no longer going to be exploited,” Chavez told his supporters. “It was capitalism that exploited you for 12 years, 15 years, some of you for 20 years, without social security, exploiting the workers, exploiting the country and getting rich. Who? The bourgeoisie that had taken control of these services. Today we are taking them back.”

In mid-May, Venezuela’s state oil company Petroleoes de Venezuela (PDVSA) took over more companies operating in the east of the country, increasing the total number of nationalized companies to 74, said Rafael Ramirez, Venezuela’s oil minister and president of PDVSA.

The companies will be compensated at book value. Venezuelan law allows PDVSA to pay them with bonds rather than cash.

The expropriations mark a new chapter in the government’s hostility toward foreign investment. In 2007, a similar wave of nationalization swept across the country as Chavez ordered that Venezuela should have a majority stake in any venture in the country. Exxon Mobil and ConocoPhillips decided to abandon their multi-billion dollar stakes in oil projects rather than agree to the changes in their contracts, while Statoil, BP and Chevron acquiesced to the demands. Exxon and Conoco are still seeking compensation through an international arbitration process.

But Caracas is sending mixed messages to the oil industry. Late last year it launched its first oil bidding round since 2000. Some 19 companies have expressed interest in purchasing the rights to explore for oil in seven blocks of the Orinoco Belt in the east of the country.

Venezuela has so much oil that despite frequent changes in the rules of the game, international oil companies remain interested. By the end of last year, Venezuela’s proven oil reserves had swelled to 172.3 billion barrels. That figure meant that the South American nation leapfrogged Iran, Iraq, Kuwait and the United Arab Emirates in terms of proven reserves, making it level with Canada behind Saudi Arabia. Venezuelan officials believe the country may have between 260 and 300 billion barrels, which would make it the country with the greatest reserves of oil in the world.