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To expropriate or not to expropriate?

 The wave of expropriations that has hit Venezuela in the last few months continued today with the seizure of installations belonging to oil and gas service companies.

 The Venezuelan National Assembly passed a law Thursday entitling the state oil company PDVSA to expropriate property belonging to companies that provide services such as gas and water injection in the oil fields and transportation for workers.

 As of today, 35 percent of the installations — oil rigs, tugboats, terminals, etc. — are now in government hands, guarded by the army.

It’s the culmination of months of wrangling in which service companies have been negotiating with PDVSA over an unpaid bill that is believed to be as much as $14 billion.

 PDVSA wants the service companies, which include household names such as Halliburton and Schlumberger, to reduce their fees by 40 percent because of the crash in oil prices that has seen the price of a barrel of oil fall from a high of $147 last year to its current price of $58, severely cutting into the company’s profits and cashflow.

 This is something that is going on across the oil industry, not just in Venezuela. But the main sticking point seems to be that PDVSA wants this to be a retroactive reduction from when prices were still high last year.

 I’m not going to go into the ethics of taking over companies when you can’t pay them but a crucial point is: what kind of message does this send to the oil industry and the world?

 Oil is essential to Venezuela. It constitutes 93 percent of its exports and oil makes up half the government’s budget. The country is brimming with oil but in current circumstances lacking the capital to exploit it. And common consensus is that daily production is falling by around 8 to 10 percent per year.

 It’s in the middle of a bidding round to sell the rights for developing seven projects in the enormous heavy oil Orinoco Belt. There has been plenty of interest — 19 companies including majors such as BP, Total and Chevron bough $2 million data packs — but also plenty of wariness: the round has been delayed by three months so far because of worries about terms and conditions.

 These expropriations — which some analysts believe are a way of gaining leverage to negotiate lower fees — may be effective in the short-term. But if it scares off the investors it needs to develop the Orinoco Belt what will happen to PDVSA — and Venezuela — in the long run? 

http://www.globalpost.com/notebook/venezuela/090508/expropriate-or-not-expropriate