Chavez accelerates the pace of destruction of Venezuela, taking over oil service companies.

May 11, 2009

Not happy with the rate at which he has been destroying Venezuela and its institutions, Hugo Chavez has begun accelerating the pace at which he is doing it, either through ignorance or as a way of justifying the mess he himself has created by the total absence of control and management of the country.

Chavez announced last week that he would be taking over oil service companies and their assets and turn them into “social” companies. In this way, the National Guard took over drilling rigs, barges, boats and equipment that was being used to support the country’s oil production.

While Chavez argued nationalistic reasons for doing this, the true reason is that these companies are owed more than US$ 13 billion by PDVSA and many were refusing to continue their contracts until they got paid or were removing equipment from the country. Additionally, PDVSA was requesting that new contracts be signed at reduced rates and even that the service companies give PDVSA a discount on the amounts already owed.

Chavez said he would pay book vale for what was taken over, but this creates a legal and financial mess, which will take years to sort out. You see many of these boats, barges and drills do not even belong to the companies that have the contracts, but are leased from others. Thus, the equipment does not even appear in their books and there will be suits and arbitration processes that will keep lawyers working for quite a while.

Even worse, PDVSA will now absorb 8,000 workers into a company that the Government is already having troubles managing. In addition, this does very little to promote the sale of the heavy oil tracts that PDVSA wants foreign companies to buy into and provide financing for in the upcoming months. The Chavez Government has once again changed the rules on the fly, affecting the equity of these company’s shareholders. What guarantee do these large multinational oil companies have that there will be no more changes in the future? Many are now likely to have additional second thoughts

To me this is simply further evidence that Venezuela’s Dictator is simply out of control by now: In the face of the problem of the debt of the service companies, Chavez took the autocratic, expedient and simplistic solution of taking them over. This is just like a little kid playing a game that kicks the board because he is losing.

Except that the debts do not go away like the game on the little kid’s board, PDVSA can’t handle this new responsibility and the drop in oil production will not only continue to go down, but is likely to accelerate with these measures. And the debt itself does not go away either.

Because now besides the US$ 13 billion debt, there will be the compensation for their assets, which has to be added to the arbitration processes of Cemex, ConocoPhillips and ExxonMobil, as well as other takeovers that while not in arbitration have yet to paid for.

Thus, Chavez continues to dig Venezuela into a hole in order to protect himself from the realities of the drop in oil prices and the crisis that is already developing in our country. By now, only a dramatic jump in the price of oil can cover up a decade of mismanagement and the results of the irresponsible whims and decisions of Hugo Chavez.

One way or the other, with or without Hugo Chavez, it is Venezuelans that will one day have to pay for all of these decisions. And even more than before, the poor will be worse off in the end that Chavez’ much hated oligarchs.

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21 Responses to “Chavez accelerates the pace of destruction of Venezuela, taking over oil service companies.”


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  2. concerned Says:

    China should have the inside track on any venture due to debt owed to them and their willingness to invest. I would think that upon completion of current pipline projects with Russia, the attraction for the Venezuelan crude would diminish due to the high risk and transportation costs. The relationship appears good now, but if PDVSA’s past partners are an indicator, the honeymoon won’t last.

    Also, thanks for the link Roger…looks like a good source of info.

  3. Roger Says:

    A few notes. Online unless somebody knows better the best source of venezuelan oilpatch information is http://www.rigzone.com/news/archive_search.asp?keyword=venezuela . When I was there I went to some sort of Venezuelan Petroleum Association comference at El Morichal Hotel in Maturin. I assume that some of these groups still operate and know what the hell is going down. I know some of you reading this site do! This is your chance to be your childhood hero, Zorro! Si?

  4. Alek Boyd Says:

    I heard that the guisito to grant Bloque Carabobo to the Chinese has already been cooked.

  5. Gringo Says:

    Concerned:
    Throw in the Chinese bailout loans for future oil deliveries and Venezuela’s future is mortgaged beyond recovery.

    To his and Venezuela’s chagrin, Chavez will find out that the Chinese take care of their own interests much better than do the Imperialist Yanquis.

  6. concerned Says:

    There will be no new contracts or joint venture projects with PDVSA controlling majority ownership and operation. The major oil companies that still have a foot in the door were banking on the fact that Chavez would be gone by 2013. After February, all realized that Chavez will be in power for life…however long that may be. No one thought he would go this radical or to this extent. PDVSA is a failed company with enormous debt with no way of repaying anyone it owes. Throw in the Chinese bailout loans for future oil deliveries and Venezuela’s future is mortgaged beyond recovery. PDVSA’s only hope for a new venture was to find someone foolish enough to foot their percentage of investment in exchange for percentages of ownership. With PDVSA controlling construction and operation, any new venture is a failure before it starts. Any percentage of zero production equates to zero.

    If Venezuela would only realize that without Chavez and his insane revolution, Venezuela can be a major producer and the gains can benefit everyone. The good thing is that the oil reserves are still there for the future and good of Venezuela. It’s a good thing it is beyond Chavez’s means to extract or he would leave nothing but an empty void.

  7. moctavio Says:

    I am traveling but saw some names this morning in either unionradio or globovision

  8. gabrield Says:

    Miguel, do you know where I could find the names of these companies? We keep hearing that they are 60 oil service co.s but no one knows their identities.

    Avila, Sincor bank lenders are kicking themselves. They hammered out a deal with Chavez and the terms have already been violated (i.e. they did not receive an amortization payment they had agreed to under the new terms of the deal). I think people learn their lessons.

  9. Robert Says:

    My opinion is things are worse in PDVSA than anyone could ever imagine and the country is more financially strapped that anyone could likewise imagine.

    Chavez is thinking he will gain much……he will not pay the back pay to the companies, he will have more employees at the mercy of his benevolence, he thinks he can keep these companies running, rather than them shutting down because they can’t pay their employees or want to leave the country but the truth of the matter is he’s trying to cover the sun with a finger.

    And for years we’ve all been asking “how much longer can this go on?” Yet it keeps going and going and going.

  10. MiguelE Says:

    Miguel, in my opinion this drastic measure was not Chavez taking the easy route, it was an emergency measure.

    I think the most relevant angle of this story is that if Chavez is willing to pay the political price (domestically and internationally) of this heavy-handed decision, it must only mean that things in PDVSA are much worse than we all think. He’s a calculating person, and I would bet that this decision was taken despite the potentially significant political cost, mainly because these are quite desperate times in PDVSA and they need these services to try to stop the drop in production.

    Maybe this shows that things are even worse than we can imagine in PDVSA, and he’s showing his desperation.

  11. Avila Says:

    Given how much the foreign companies have lost in Venezuela since Chavez took power and the vast majority of them stayed, do not kid yourself. There is always someone willing to work with the Chavez government. ALWAYS. Let us not forget that during the oil workers strike it was was the foreign support companies that pretty much got everything up and running.

    Miguel, on a different note: Your website is now blocked n China! (your new one, not the old one). Maybe Chavez could not silence you at home, but he could keep all of China from reading you (until they use a proxy).

  12. island canuck Says:

    In today’s El Universal:

    http://www.eluniversal.com/2009/05/12/eco_art_produccion-propia-de_1383524.shtml

    “En el documento oficial de Pdvsa se señala que el bombeo de crudo bajó a 1,9 millones de barriles de crudo por día en el 2008 desde los 2,2 millones de barriles por día del año 2007.”

    The government insists that it is producing 3.2 million barrels per day.

    OPEP estimates that in 2007 it was 2.2 million & in 2008 just 1.9 million.

    In addition to the falling prices the falling production will reach a point that the Internal Use + the give aways to Cuba, China, etc., etc. will result in their being no hard currency income from petroleum,

    What a joke!

    In another story:

    http://www.eluniversal.com/2009/05/12/eco_art_autorizaciones-para_1383503.shtml

    Authorizations from Cadivi for external purchases fall 57% in 4 months.

    It’s just going to get worse.

  13. revbob22 Says:

    Unfortunately, wherever there is oil, foreign companies will continue to come and risk things like this.

    Somewhere in their calculations they make allowances for this type of behavior.

    After some time goes by, they’ll be invited back with guarantees that they won’t be taken over. Of course, they know this to be false, but they’ll go in anyway.

    Happened before, will happen again.

  14. Thomas Mohr Says:

    Miguel, what did you expect ? If Castro would be catholic he would qualify for blessedhood since he already worked one miracle: He made sugar vanish from one of the largest sugar producers of the world. Since he is the big idol of Chavez, Chavez too wants to achieve this: By running out of money while governing one of the world’s most important oil producers.

    On the positive side, it shows one time more, how wrecked socialist economic thinking really is.

  15. deananash Says:

    This is truly GREAT news. Yes, it’s horrible that more poor will suffer, but that cake has already been baked. The sooner Chavez ‘completes’ his revolution, the sooner he is run out of town, or suffers the other fate of dictators.

    I’ve long insisted that the best strategy is to give Chavez what he wants. Not only that, provoke him. Let him show his true colors. He’s no fool, but he is a GIANT egoist, and he won’t be able to resist the bait.

  16. GWEH Says:

    Gringo, he cannot take over those two because the oil industry would otherwise collapse without their specialized know-how. Same for the rig operators.

  17. Roger Says:

    I found very few Venezuelan Oil service companies in Maturin in the early to mid 90’s most Venezuelan companies were doing things like water-vac trucks and roustabout services. One of he main reasons was that the offshore companies were able to process the Bolivar to Dollar conversions and thus pay the Dollar “commissions” into the offshore bank account of the PdVSA person in charge. My opinion is that this petty corruption has been discovered by above. What gets me is why Himself cannot drag these people out like HE did Rosales. Para Mi: These people regardless of what government is in power, have stolen from the Venezuelan people!

  18. Steven Says:

    Just heard from some residents of the Costa Oriental: The takeover of the multinationals was in name only. The real targets were the Venezuelan companies, most of whom were established decades ago and who have survived under but were not controlled by the chavistas.

  19. island canuck Says:

    I just can’t believe that any multinational would be stupid enough to invest in Venezuela under Chavez.

    He has shown time & time again that he does not recognize things like contracts.

    It would be financial mismanagement to put any money into this country under current conditions.

  20. Gringo Says:

    If Chavez ends up confiscating the big boys, such as Halliburton and Schlumberger, my guess is that they won’t return to Venezuela as long as Chavez is in power.

    As Miguel points out, this will not assist Chavez in getting the foreign oil companies to invest in the heavy oil belt in the Orinoco. Not when a contract that Chavez signs has the value of toilet paper.


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