Chavez to nationalize oil interests

[Tom Yum]

http://news.yahoo.com/s/ap/20070429/ap_on_bi_ge/venezuela_oil_takeover

Chavez is flexing his muscles in South America again. Venezuela will be nationalizing a majority interest in foreign oil operations in the Orinoco river region, where several global companies are operating.

BP, Chevron and Statoil recently signed agreements to allow PDVSA to take a minimal 60% control of their operations. Exxon Mobil was the last to sign the agreement in private. Connoco Phillips has yet to sign the agreement and has been warned that its operations would be taken by military force if it did not sign the agreement. There are several projects in the region valued as high as $30 bln with total production of 600,000 barrels per day.

Connoco Phillips is the only company that said it would continue operating in the region. Others are taking a wait and see approach since they have significant investments in the region, but are uncertain if Chavez will agree on any favorable valuation and payout for their stake.

A recent press release suggests that he will sell PDVSA's crude production at a 50% discount to "Allies" of Venezuela - a political gesture to win hearts and minds. Whom are Venezuelas' allies? There's some mention of Bolivia, Ecuador and Haiti - but how about beyond South/Central America?

PDVSA sells crude at a 40% discount to countries in the Carribean.

[Tom Yum]

1. Assuming there are no supply bumps, how will a slight reduction in several global oil companies revenues (and earnings) and project assets affect the petroleum economy if at all?

I'm thinking a good starting place to read up on this might be a special edition of Standard & Poors...

2. If Chavez buys off these interests at a significant discount (he's got arms as a negotiating leverage), are there any undeveloped or potential areas beyond South America that could make up for any loss of business for the Oil companies?

This is a tough one; The Orinoco belt is considered one of the most hydrocarbon-rich locations on the earth with 1.8 trillion barrels of reserves, producing 600,000 barrels per day.

3. Will this event increase the likelihood of operational/political risks in the Orinoco or other areas? How does PDVSA's safety records hold up to Chevron/BP/Exxon/Connoco? Also what is the likelihood of a copycat to try and nationalize other foreign oil interests - say in West Africa?

If so, how can these risks be mitigated by U.S. interests? (I've got an answer for this, but I'd like to hear others thoughts)

4. Are there any indications that Chavez is increasing his military arsenal? Now that his country will make more money from the oil interests, would he be motivated to strengthen his military or reinvest in his country's own infrastructure?

Chavez has met with N. Korean arms dealers in the past to discuss the purchase of a small arsenal of medium range ballistic missles. Without a nuclear warhead, the damage of said missles would be minimal; N. Korea is at a point where it could benefit from Venezuelas cash in exchange for selling nuclear warheads. I've looked at some info on medium range ballistic missles; if launched from Venezuela, they could hit targets along the U.S. gulf coast.

5. If we go to war in Iran, would we potentially face a conflict in the Gulf of Mexico/South America against Venezuela?

Chavez and Ahmedinejad have vocalized support for one another against the U.S., but is there any evidence that this is more than words?

[Tom Yum]

Terrorists target Energy Assets

Intelligence Brief: Saudi Arrests Demonstrate Threat to Energy Markets
Drafted By:

http://www.pinr.com

Saudi Arabia's recent foiling of a large-scale terrorist plot, involving attacks on energy facilities, demonstrates the ongoing threat to global energy markets. Saudi authorities arrested 172 people for involvement in the plan, and it is believed that those arrested are Islamist militants pursuing al-Qaeda's ideology.

According to the Saudi Ministry of the Interior, the militants had planned on using aircraft to destroy or damage targets inside and outside of the country, targets that likely included the massive Saudi energy compounds of Abqaiq, Ras Tanura, Juaymah, Rabigh, and Yanbu. If the authorities had failed to disrupt the plot, and the militants had carried out at least some portion of their plan, it would have had a shocking effect on energy markets.

Saudi Arabia currently produces approximately 8-10 million barrels of oil per day, and possesses one-fourth of the world's proven oil reserves. Its key role in global energy supplies means that any interruption in Saudi output results in price increases on the market. The fact that Saudi Arabia has often been the victim of homegrown Islamist terrorist attacks makes the market especially jittery.

For instance, just over one year ago, in February 2006, al-Qaeda affiliated militants executed a brazen attack on Saudi Arabia's Abqaiq oil refinery, the world's largest oil processing center. While the attack was not successful, the militants managed to infiltrate the outer perimeter fence of the facility and at least one security checkpoint, an act that highlighted the fragility of Saudi Arabia's oil facilities and one that temporarily pushed oil prices upward.

Indeed, after Saudi Arabia's announcement of the latest plot, oil prices jumped to their highest price in eight months, hitting US$66.46 per barrel. On Monday, however, after it was clear that Riyadh had the situation under control, oil prices dropped below $66 per barrel.

Nevertheless, Saudi Arabia's announcement is a cause for some concern as it means that the Islamist insurgency that began in the country in May 2003 has not been completely eliminated. While Saudi authorities have clearly achieved successes in combating the threat from domestic militants, the sheer size of the latest plot demonstrates that Islamist scheming is still occurring in the kingdom.

Furthermore, those that adhere to al-Qaeda's ideology have been convinced of the importance in attacking energy facilities since a sharp escalation of oil prices damages the economies of oil dependent countries such as the United States, one of the principal adversaries of the global militant Islamist movement; in January, for example, an al-Qaeda affiliated publication renewed a call for jihadists to attack energy interests.

In addition to energy facilities in Saudi Arabia, other energy producing countries have faced threats and attacks by Islamist militants, such as what was seen recently in Yemen; in September 2006, Islamist militants launched unsuccessful attacks on the Canadian Nexen Petroleum Company's oil refinery in al-Dhabba, and at the U.S.-owned Hunt Oil Company refinery in Safer.

On the one hand, Riyadh's string of successes in foiling these plots demonstrates the government's ability to infiltrate and destroy these groups. On the other hand, the fact that such threats still exist on this large of a scale means that the possibility remains for a devastating attack in the kingdom.

[Tom Yum]

I noted the Verizon buyout, but didn't think he would go for the power grab since alot of those technologies were dependent upon some good will, then again if you have a $30 bln investment in the most oil-rich location, its hard to leave.

I would assume the deals that were formerly US/Euro & Venezuelan are now the Indo/Chinese & Venezuelan deals formed earlier this year. China and Venezuela created a $6 bln investment fund, with China contributing 2/3 of the investment ($4 bln) to help develop Venezuelan infrastructure (Energy + Transport). In exchange for taking a majority interest, China will be getting some 800 thd. barrels per day of heavy/sour crude from PDVSA.

[Tom Yum]

Often, the foreign investment phase is only needed to get things up and running. Companies know Chavez always has the "nationalization card" to play, so when it comes time for a buyout, they'll likely take what they can get rather than just have it grabbed for free. The deck is stacked against foreigners from the outset, but the risk is sometimes worth the rewards because of the inexpensive labor, operating costs, etc..

Right. He's got the military as leverage to take those operations with force. The deck is always stacked against foreigners in international business dealings - since we play in there territory and not ours, just less so in some countries than others, right?

I think Chavez may be swinging a lot of foreign investors away from Venezuela with his antics of late, but you never know. I'm often surprised at what people will overlook in favor of a better bottom line.

Fortunately or unfortunately, the bottom line (lol) controls business.

On the surface of things, bottom line results reflect the quality of management's business decisions, largely determines bonus payouts for mid-level management and higher and gives stakeholders a quick indicator of investment success.

Management has a vested interest in seeing the bottom line growing larger not only as a measure of proven business success, but as a way to boost their own compensation and build an image/reputation in their role.

[jannifer]

Chavez, is not doing a lot about the problem. The U.S. tired to overthrow him twice under Bush. Which is like totally ironic because they were preaching democracy! democracy!, but it was pretty obvious they only wanted democracy if it elected people they liked.
So Chavez has a problem with extreme stratification of wealth. When oil was like $140 a barrel last summer he was in fat city, but with it at $50 he is going to have trouble doing the development he needs to do to raise general standards of living in Venezuela.


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