Venezuelan President Weighs In On ExxonMobil Court Orders; Threatens Supplies to U.S.

In the latest episode of this unfolding saga on the relationship between PDVSA, the Venezuelan national oil company, and ExxonMobil, the world's largest private oil company, President Hugo Chávez of Venezuela has stepped in to threaten a halt in oil supplies to the United States. ExxonMobil last week managed to secure a U.K. court order freezing over US$12-billion-worth of PDVSA's global assets and preventing the NOC from drawing on about US$300 million in cash. The ruling was granted on the basis that a real risk was found that the company might divest itself of these assets before ExxonMobil was able to successfully conclude legal proceedings seeking damages for PDVSA's nationalisation of its oil assets in Venezuela last year. The move by ExxonMobil has angered Chávez, who seems to believe that the U.S. government is in some way involved. In a widely quoted, true-to-form tirade, he has singled out U.S. President George W. Bush directly, saying, “If you end up freezing [our assets], if you harm us, we're going to harm you because we're not going to send petroleum to the United States. Take note of that Mr. Bush; Mr. Danger.” In 2006, Venezuela exported some 1.42 million b/d to the United States—or about 10% of total U.S. crude oil and product imports.

For its part, ExxonMobil has been seeking international arbitration over the poor terms it received for its Orinoco Belt heavy oil assets in Venezuela when PDVSA nationalised them last year. While other international companies such as BP, Chevron, StatoilHydro, and Total acquiesced over the move, accepting to stay under far less profitable terms, ExxonMobil, along with ConocoPhillips, chose to extricate themselves on principle, seeing little upside in the country given its current politics. Since then, the two have been trying to get appropriate compensation.

The Orinoco Belt is regarded as an area with considerable untapped potential and, if the country were to see any significant future oil-production increase, this is where it would most likely come from. The four Orinoco projects—Ameriven, Cerro Negro, Petrozuata, and Sincor—were set up during the 1990s and are estimated to be collectively worth over US$30 billion. Previously, ExxonMobil held a majority 41.7% stake in the 105,000-b/d Cerro Negro project, while ConocoPhillips had a majority 40% share of the 190,000-b/d Ameriven project, also know as Hamaca. ConocoPhillips also lost its 50.1% share in the 104,000-b/d Petrozuata project. These shares were all suspended following nationalisation, with PDVSA taking majority stakes in all projects.

Outlook and Implications

The latest rhetorical broadside on the part of Venezuela's Chávez is not entirely unexpected, and it very much constitutes one of his signature anti-U.S. public commentaries with a characteristic populist twist. There is, however, reason to believe that the threat to cut off oil supplies to the United States is little more than emotional venting, rather than a rational economic calculation. Chávez has often resorted to such posturing in the past, in his efforts to fight against what he outwardly labels the U.S. “empire”. The reality for PDVSA, and the country more generally, is that despite oil prices being so high, cash is sparse, with this being down to the fact that much of PDVSA's income is syphoned off by the government to pay for its expensive social and infrastructure projects. This has left PDVSA with little to be reinvested for maintenance, let alone for much-needed new oil investments. Venezuela has been trying to boost production for a number of years, but has consistently overestimated its ability to do so. It is for this reason that ExxonMobil's success in securing this court order has so riled Chavez, with the freeze further impeding PDVSA's already limited freedom to move.

The U.K. court ruling will be subject to a further hearing, currently scheduled for 22 February, so the asset freeze may yet be suspended. Assuming it is not, it is possible that further down the road, PDVSA and ExxonMobil will be able to reach some sort of agreement on just compensation, potentially setting the stage for other companies attempting to seek the same. Until then, we should expect Chávez's rhetoric to remain highly flammable, to the detriment of Venezuela and its people.

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