Chávez Goes After the Oil Drillers

As lower crude prices bite state oil company PDVSA, Venezuela is putting the squeeze on foreign oil services companies
El Comandante wants to revisit deals with foreign contractors David Rochkind/Rapport

Caracas - In his never-ending search for scapegoats, Venezuelan President Hugo Chávez is quick to point the finger overseas. Now El Comandante has found a new bunch of foreigners to blame: Instead of Big Oil, this time he's hounding oil services companies, which do drilling, exploration, and other important work for state-owned Petróleos de Venezuela (PDVSA). "We will not pay contractors that have tried to speculate and don't care about our company," PDVSA President Rafael Ramírez warned in an Apr. 24 video address to employees. "We have to renegotiate the rates [we pay them]."

PDVSA already owes contractors and suppliers some $3 billion. Tulsa-based natural gas processor Williams Cos. (WMB) has written off $241 million to cover late Venezuelan payments, and the company is threatening to stop all work in Venezuela unless it gets the money. Offshore drilling contractor Ensco International (ESV) in January stopped work in the country after Venezuela confiscated a drilling rig in a dispute over payments, though the two sides agreed to a new contract on May 6.

And drilling contractor Helmerich & Payne (HP) is waiting on $116 million from PDVSA. While CEO Hans Helmerich expresses some optimism that he will ultimately get paid, he says he will no longer book revenue from Venezuela until the money is in the bank. The Tulsa company is idling seven of its 11 drilling rigs in the country while it negotiates payment. "It's been a difficult period, and frustrating," Helmerich said in an Apr. 30 conference call to analysts.

Things could get even more frustrating for foreigners. On May 5 the National Assembly gave preliminary approval to a bill that would allow PDVSA to take over services such as water injection into oil wells and compressing natural gas. This work is currently done by private companies; the bill says they would be compensated. The measure still faces a few hurdles before it becomes law. But the atmosphere in Caracas is already having a chilling effect on private investment in the oil sector, which last year fell to $500 million from twice that level in 2007, according to the Venezuelan Hydrocarbon Assn., a trade group of foreign companies involved in the oil business. If this keeps up, says Roger Tissot, an independent oil analyst, "PDVSA will find it difficult to find new service companies willing to do business."

Last time Chávez picked a fight with foreign oil companies, prices for Venezuela's heavy crudes were heading for record highs. In 2007, Chávez nationalized four oil joint ventures, spurring ExxonMobil (XOM) and ConocoPhillips (COP) to leave the country. Now, even though oil prices are plunging, Chávez still wants to extract more money from foreigners.

That's because PDVSA, which provides about half the government's revenue, is in trouble. The company last year clocked more than $120 billion in revenues, but this year it's likely to see only about $50 billion. In April, PDVSA cut salaries for managers by 20% and imposed a wage freeze for rank-and-file employees—a move that could poison upcoming contract negotiations with its unions. And the company has slashed investment by $10 billion, delaying three new refineries in Venezuela and two abroad. "PDVSA has to invest in the business," says James L. Williams, heads of oil consultancy WTRG Economics. "You have to feed a cow if you expect it to give milk."

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