Venezuela’s Slide Continues

At this point, you have to wonder who in their right mind will ever do business in Venezuela again as long as Chavez is in power. The risk that Chavez will steal your property is simply too great. During his administration, Chavez has seized phone companies, electric utilities, private real estate (just this week he ordered seizure of a private shopping mall), oil field investments, mines, steel plants, food processing plants, farms, (shades of Mugabe) and cement plants – to name a few.

Now this week he has stolen the assets of oil field services companies:

Venezuela Seen Paying Price for Chavez Expropriation of Oil Contractors

In the wake of the seizure of foreign and domestic oil service companies and assets by armed troops following the orders of Venezuelan President Hugo Chavez, experts began to count the cost to Venezuela — which holds the Western Hemisphere’s largest oil reserves — in lost oil production, lost jobs, lost foreign investment and lost foreign expertise.

This one is ironic, because he was “forced” to seize these assets based on his miscalculations on his previous thefts. Let me explain. In 2007, when oil prices were rising, the heavy oil investments of ExxonMobil and ConocoPhillips (Full disclosure: My former employer) finally began to pay off. It is very expensive to extract and process the heavy oil from the Orinoco Belt in Venezuela. It requires a lot of capital investment and significant expertise, but it also doesn’t pay off until oil prices rise. But when oil prices did rise and Chavez saw the goose start to lay golden eggs, he decided to seize the goose for himself. The problem is that Chavez doesn’t know how to care for a goose, so what has happened in the wake of these seizures should come as no surprise.

It was bad enough that oil production has fallen sharply under the Chavez regime. The reasons for that are simple enough, and have been covered here before. In a nutshell, the issue is this: It takes a lot of capital to maintain the heavy oil business, and Chavez was siphoning off profits to pay for his social programs. Now some (extreme-leftist) people might think that’s just great, but the only reason any money was there to siphon off was due to the high investments to begin with. By not reinvesting back into the business, Chavez set the stage for the plunging oil production we see now – but now the goose is on life-support so there will no longer be money for those social programs.

Much higher oil prices for a while dampened the blow of falling production, but once oil prices started to fall, plunging revenues became a real problem. You would think he would have saved some money for a rainy day, but he is just like that irresponsible person who spends their entire paycheck every week, no matter how much money they make. Although I guess you don’t have to save for a rainy day if you are willing to just rob a bank when the rainy day comes.

But first, he had the bright idea to invite Western oil companies back in to invest again. Surely they can let bygones be bygones? Apparently not, because there doesn’t seem to be a rush to come back in. After all, does anyone doubt that Chavez will steal the investments as soon as prices/production turn back up?

This all leaves Chavez in a bind. He hasn’t made the investments that he needs to make, and nobody else is doing it for him. Production and prices are falling, and he has social programs to pay for. Debt started to pile up with oil services companies, and Chavez demanded lower prices from them. Given that he simply has no money for investment, he does what he always does. Threaten and then steal when he doesn’t get what he wants:

Venezuela’s Oil Production Squeezed by Chavez’s Heavy Hand

Chavez’s government and seized the assets of 60 foreign and domestic oil service companies after conflict erupted over nearly $14 billion in debt owed by the country’s state-owned energy company, Petroleos de Venezuela (PDVSA).

Irate over a growing backlog of invoices, many of the companies threatened to halt operations – something PDVSA and Chavez can ill-afford. The company accounts for about half of Venezuela’s revenue, and is largely responsible for funding and administering the social programs that Chavez has employed to court popular support.

PDVSA brought in more than $120 billion in revenue in 2008, but this year, it will likely make just $50 billion. With its back against the wall, PDVSA is demanding that service companies accept a 40% cut in their bills. Last Friday, the government began expropriating equipment and projects from foreign oil service firms that refused to renegotiate their debt. At least 12 drilling rigs, more than 30 oil terminals, and about 300 boats were seized, the according to The Financial Times.

But the brash gesture will also bring negative consequences that could significantly jeopardize the nation’s oil production, which is already in decline.

“PDVSA has to invest in the business,” James L. Williams, heads of oil consultancy WTRG Economics told BusinessWeek. “You have to feed a cow if you expect it to give milk.”

Hey, this is about geese and golden eggs, not cows and milk. But, point taken. The fact is that Chavez continues Venezuela’s slide toward becoming Zimbabwe. One wonders if he truly lacks the ability to plan, or was just too stupid to see the consequences of this road he has chosen to go down. The only thing that can save him at this point will be for oil prices to go up. Ironically, that’s the same thing I would like to see happen, but if we are lucky Chavez will be ousted before prices get much higher. Then again, if production continues to fall it won’t matter how high prices go; they won’t be able to offset the drops in production.

Chavez is now rattling sabers with Coca-Cola, so don’t be surprised if they go down next. Seriously, I don’t know why we don’t just seize Citgo as a response, auction off the refineries, and then pay damages to those whose assets have been expropriated. Chavez has said he doesn’t want to operate in the U.S., so we should extend a helping hand. It is the least we could do.

Chavez Had Me Fooled

It seems I have been wrong about Hugo Chavez. I had thought the man didn’t have a clue about the oil business. While companies like ConocoPhillips were pulling in $15.5 billion profits*, they were investing $15.3 billion back into the business. Chavez, on the other hand, was siphoning off the profits of the national oil company of Venezuela, PDVSA, and spreading them among the public in support of his socialist platform. (Shame on those who complain about food shortages). Some, like me, probably thought “A few years of this, and he won’t have any oil profits to spread among the public.” How little I understood of his master plan.

You see, at first glance it does seem like his strategy is backfiring, as PDVSA is reportedly “facing growing operational problems” because of its failure to focus on its core business. It seemed like Chavez was running the business into the ground, as if Oil Watchdog had suddenly started to run the show. But that was before I read a story yesterday that revealed the man’s brilliant strategy:

Citgo cuts hundreds of Louisiana contractors-sources

HOUSTON, Jan 17 (Reuters) – Citgo Petroleum Corp cut more than 500 contract maintenance workers in late December at its Louisiana refinery as part of a program to increase returns to corporate parent Venezuelan state oil company PDVSA, according to sources familiar with the company’s refinery operations.

PDVSA is a key revenue generator financing Venezuelan President Hugo Chavez’s social development programs, but has drawn criticism for ignoring operational problems that have reduced oil and refined product output in Venezuela.

“Citgo wants to send 100 percent of what it makes to Venezuela,” said a source. “They’re only spending what’s needed to meet legal and regulatory obligations.”

It’s sheer genius. The profits from the oil company operations can be used to pay for social programs, and then the savings from job cuts in the refinery can be used to fund the oil company operations. Oh sure, there are naysayers, even internally:

Without the contractors, preventative maintenance at the refinery may fall off, the sources said.

“I don’t see how effective a maintenance program can be if you’re just chasing urgent jobs,” said a source.

PDVSA sources have told Reuters of similar problems at the company’s Venezuela-based refineries, lamenting the fact the company is carrying out “corrective maintenance” rather than “preventative maintenance.”

I say to these people “Don’t be so pessimistic!” After all, it is “preventative maintenance.” It’s like wearing your seat belt or motorcycle helmet: No accident, no problem. Besides, things don’t go wrong at refineries.

No, I was wrong about Chavez. He is clearly a misunderstood genius in the spirit of Vincent van Gogh. Stand back and let the man create a masterpiece.

Note: I do own ConocoPhillips stock, and I still don’t care for Hugo Chavez. It’s going to take more than a few maintenance cuts to impress me. After all, does he really need all of those operators and engineers scurrying about?