Nationalization Of Oil Sector In Venezuela: Action Or Reaction?
Rovshan Ibrahimov
Sunday , 04 March 2007
This commentary is from USAK's Energy Review Newsletter
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There are many interesting events happen recently in the world in the area of energy economy and politics. In particular, in Iraq, a law on oil has been admitted, which will regulate oil policies of the state. According to this document, income from the oil would be distributed equally among the provinces of Iraq, and the relations with foreign companies will be based on the Production Sharing Agreement.
Another event occurred in Venezuela where the president of that country, Chávez announced the nationalization of the oil industry of the country by the date of May 1, 2007. This decision mainly affected the one of the largest oil fields in the world in the delta of the Orinoco River. Without a doubt, this decision of the fifth oil exporter in the world will affect oil prices at world level.
Some experts thought that this decision may have only a negative impact on the economic situation of Venezuela, on the grounds that the country and its major oil company Petroleos de Venezuela may lose needed foreign investment. This conviction is not exactly unfounded, and no doubt Venezuela will face serious challenges in the search for foreign capital for a possible investment in the further development of its oilfields. However, in view of the fact that in recent years the quotation of oil prices in the world markets has been raised, many oil exporters’ countries are to be able to accumulate sufficient amounts in their stabilization funds. In this case, it is anticipated that Venezuela is no exception and in the short term this state should not faced with the serious problems in financing own energy projects.
In addition, Venezuela is trying to diversify its oil exports to the world markets, thereby providing a source of income from the sale of oil can also be used for the investment.
The most serious problem with which Venezuela may be faces is that, in the care of foreign companies may move with all equipment, specialists will leave the state. That’s why, President Chavez who predicted such a situation, in an interview to the `Alle` reported that the decision of Venezuela is not to the complete withdrawal of foreign companies, but simply wants to own 60% of the company's assets in the territory of their country, that is, to establish joint ventures with the companies.
Some specialists argue that even if western firms will withdraw from Venezuela, this state will be able to find an alternative and, as such, will be open to Russian companies. Thus, since 2004 the Russian company LUKOIL plans to invest in the economy of the country about one billion USA dollars. Then from the end of 2006, the company started a joint drill with the national company of the country in one of the oil fields.
But even in the event of fall-back position, as represented by Russian companies, may demand from Venezuela to provide the necessary guarantees for the provision of the conditions for investment capital and business. The absence of such safeguards may discourage potential investors.
In addition to the nationalization decision by President Chávez, some observers compared to a similar decision of the Prime Minister of Iran, Mohammed Moussadyk when, in the 50th years, it announced the nationalization of oil sector in the country. It raised the Anglo-Iranian Oil Company, and Iran has had to face economic sanctions. As a result of that Iran which had to back down and modify policy towards foreign oil companies.
However, to compare these two examples is not the right, firstly because that in the 1950-thies, the international policy on the safety of energy resources was as crucial as today. Still, an international oil cartel of Petroleum Exporting Countries OPEC weren’t established and each oil exporter country was just glad to intensified own activity in the absence in the market one of the main suppliers of oil.
In addition, Iran has not had the opportunity for alternative supplies of its resources to the world markets, which Venezuela tries to guaranty to themselves. However, Venezuela in the case of possible economic embargo should provide such a market which will be the alternative to the United States, that is in principle, is very problematic.
Decision Venezuela can be compared to other nationalizations, which took place in Mexico on the eve of the Second World War. While knowing the situation in the world at the time, the government of Mexico has not only successfully hosted the nationalization but also found alternative markets for its oil, the main importer of which was Germany. At that time, on the eve of the Second World War, the United States was unable to support their companies and they had to be satisfied with a moderate payment by the Mexican government. In this case, it suggests that Venezuela is not accidentally chosen the period for the announcement of privatization.
Indeed, this spring possible the USA operation against Iran can be started, and the government of the United States may decide to ignore the Venezuelan nationalization, and will continue to purchase energy from this country. If the operation against Iran will not be held, Venezuela still may change their minds prior to the imposition of any sanctions, because this country has decided to give its decision in effect only for the month of May.
With the nationalization of Venezuela, it could be said that it was timely for two main reasons. Firstly, similar the nationalization processes were been held in neighboring Bolivia and Honduras. Honduras, declared temporary privatization and Bolivia has got full nationalization. Thus nationalization in Honduras touched the foreign oil companies such as American companies Exxon Mobil and Chevron, and in Bolivia Brazilian Petrobras, the French Total and American Vintage Petroleum. Thus, the temporary nationalization Honduras let this state to save about $ 66 million a year, while Bolivia now will receive in budget up to 80% of the proceeds from mining and the oil.
After nationalization these states haven’t been faced with serious problems that could come from the companies which lost developed fields. So, Venezuela by taking this decision, which primarily affect the oil companies as Americans Exxon Mobil, Chevron and Conoco Phillips, and French Total, Norwegian Statoil and British Petroleum, it is possible based on the analyses of the effects of the results of the nationalization of its neighbors.
It should also be borne in mind that some companies had worked in Venezuela also participated in the development of deposits in Bolivia and Honduras. And Venezuela just could see the response of these companies and their governments in relation to the policies of the management of the first two cases. However, if the decisions of Bolivia and Honduras have regional importance, while the decision of Venezuela, the world's largest exporter and can seriously affect the balance of power in the world market, and reaction to the decision of the government Venezuela may be more visible than it was in Bolivia and Honduras.
First of all, even if nationalization will be held without any serious incidents country will still have to pay to the oil companies for their assets to be removed. This amount can be overwhelming, and Venezuela could face serious problems in the return. If Venezuela refuses to pay or to reduce the amount it is not adversely affect the image of the country and in this case, the loss may be even greater.
The nationalization of Venezuela is a populist policy, but it is noteworthy that the time for that decision has been selected in a way. Current developments in the international arena, in the short term, Venezuela may feel more or less unperturbed and satisfied with the dividends that can bring its decision. Over time, however, this situation may change radically and potential investors in the medium and long term may translate its activity in less risky and more stable regions of the world.
Rovshan Ibrahimov, rovsen@azerimail.net
Editor of USAK Energy Review
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