Exxon Not Budging Vs. Venezuela Gov’t Over New Contracts

Posted 12/29/2005

Alone among big oil, Exxon Mobil (XOM) isn’t backing down from a confrontation with Venezuela.

Venezuela’s government says all foreign investors must accept “mixed company” arrangements by Dec. 31 under a 2001 law.

Other firms have reluctantly “migrated” to new state-dominated oil production joint ventures, or signed letters of intent, often to just keep a stake in the country.

Oil giants are desperate to shore up declining reserves. With so much of the world’s untapped energy in the hands of unstable governments, beggars can’t be choosers.

But Exxon has dug in its heels. The world’s largest oil company has relatively high reserves. It argues that the current agreement is valid, and that any forced change would be a breach of contract.

Join Or Get Out
If Exxon doesn’t give in by year-end, it stands to lose potentially billions of dollars in future business, according to Venezuelan Energy Minister Rafael Ramirez. “The doors are closed,” he said at a recent news conference.

Venezuela already is one of the world’s biggest oil producers. But 75% of its fields are unexplored, and at least 27 Orinoco region blocks are available for bidding in coming years. Caracas wants to raise output from 2.6 million to 5 million barrels a day by 2012. But it has a reputation of playing rough with foreign investors.

Exxon’s plans for a $3 billion petrochemical plant could be iced.

Worse, the government might take control of Exxon’s existing operations, according to Venezuelan oil officials, at least until Exxon accepts a joint venture.

But 1970s-style expropriation is unlikely, according to David Voght, managing director of IPD Latin America, a strategic adviser to the Venezuelan oil industry.

“There certainly has been no indication the government is aiming at an all-out confiscation of assets. It just wants greater control to bring all service agreements in line with legislation,” he said.

Global Implications
For Exxon, whose $354 billion in revenue is three times the size of Venezuela’s economy, the standoff has global implications. It has operations in more than 200 countries and territories. Exxon has identified Western Africa, the Mideast, the Caspian and Russia as growth areas. None are places noted for the rule of law and respect for foreign investors.

Governments in those regions are watching the confrontation closely in an era of high oil demand and tight capacity.

“Exxon is more concerned with contract sanctity than anything else,” said Voght. “But the rest of the world is watching carefully to see how well Venezuela can improve its position in terms of gathering rents and obtaining greater control over the industry.

He added: “So many countries are doing that now — take a look at U.S. windfall profit tax proposals. It happens any time oil prices rise.”

Exxon loathes uncertainty, said industry consultant Gustavo Coronel, a retired board member of state-owned Petroleos de Venezuela SA.

“They don’t want to yield, because after this demand, there will be other demands. For newcomers like Russian and Chinese companies, it can be done. But Exxon has a global reach and other places to go besides Venezuela,” Coronel said.

Exxon owns stakes in just three Venezuelan fields. Globally, it produces 4 million barrels of oil a day, or 3% of world supply.

Exxon depends on ironclad contracts because it requires long time frames to operate effectively.

“Given the scale and nature of our business, effective policies must be stable, predictable and long term in their focus,” Exxon Chairman and CEO Lee Raymond testified before Congress in November.

That’s why Venezuela’s new joint ventures are so dreaded. Voght said these contracts are evolving processes, and many firms are unsure of their rights.

“You’ve got multiple opinions about what contracts say and how contracts are approved, and by and large the government seems to be respecting them,” Voght said. “But there are gray areas.”

Coronel said another problem is that the new law is being applied retroactively, something that should not hold up in a court.

History plays a role with the current spat. Exxon had rocky relations with Venezuela well before socialist Hugo Chavez came to power in 1999, noted Coronel.

Exxon declared Venezuela a terrible place to invest after a tax hike on oil companies in the late 1960s. Its Creole Petroleum unit was nationalized along with other foreign oil companies in 1976, wiping out 40% of Exxon’s revenue.

At the helm of Creole was none other than Raymond. “One would have to be very careful about thinking about any investments in Venezuela,” Exxon’s CEO told Reuters in June, vowing to fight a royalty hike in another dispute this year.

Exxon was reluctant to reinvest in Venezuela, passing on project bids in the late 1990s. Its current assets there stem from Exxon’s 1999 $82 billion merger with Mobil.

For now, Exxon is saying little. An e-mail response stated it is “aware of the deadline for the migration of operating agreements to joint ventures, and we are in discussions.”

Voght and others think the standoff is getting so much attention due to continuous ideological feuding between the leftist Venezuelan government and U.S. administration.

In addition, Venezuela is inexperienced at renegotiating contracts.

Voght said all governments where Exxon does business have hard bargainers. “In no country is it easy to get acreage. Everyone isolates Venezuela because it has an unusual president. In other areas of the world it’s no picnic,” he said.

Coronel disagrees, saying this is not about ideology, but “about a violation of the rule of the game.”

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