Chavez dumps Exxon Mobil, stokes confrontation with U.S.

G2Americas | Intelligence Brief

07/02/06 – No. 02/06 – Venezuela’s national petrochemicals company Pequiven has dumped Exxon Mobil Corporation from a proposed $3 billion olefins plant which both companies had been developing for over a year. Pequiven gave Exxon Mobil the boot after both companies reportedly had started an international road show to raise $1.8 billion in project financing. This is the third business venture Exxon Mobil has lost in Venezuela since President Hugo Chavez took power seven years ago. It won’t be the last.

Pequiven officials said the joint venture negotiations with Exxon Mobil were terminated because the company was not complying with its obligations under the project development agreement (PDA) signed with Pequiven. In fact, Exxon Mobil was tossed out of the olefins project for political reasons, and to send other oil companies the message that anyone who refuses to comply with the Chavez government’s terms isn’t welcome in Venezuela.

Exxon Mobil issued a statement this week expressing regret for Pequiven’s decision, and stating that the company was still interested in other oil, gas and petrochemical business opportunities that may develop in the future. However, we believe that Exxon Mobil has no future in Venezuela while Chavez remains in power. Many senior officials in the Chavez government view Exxon Mobil privately as a dangerous threat that must be neutralized.

The U.S. oil company’s attorneys are challenging the Chavez government’s decision more than a year ago to hike the royalty rate on four strategic associations in the Orinoco Heavy Oil Belt. Exxon Mobil owns 41.67 percent of the $3 billion Cerro Negro strategic association, with PDVSA also holding 41.67 percent. The rest of Cerro Negro is owned by a Canadian subsidiary of Germany’s Veba Oel. Exxon Mobil maintains that the government broke its contractual obligations when it hiked the royalty rate at the end of 2004.

Last December, Exxon Mobil also refused to accept the forced conversion of its oilfield operating service contract in the Quaimare-La Ceiba oilfield into a joint venture with PDVSA, and withdrew from that business instead. Out of 22 foreign oil companies affected by the government’s decision to suspend the oilfield service contracts, Exxon Mobil was the only company that rejected the government’s pressures.

Exxon Mobil also was excluded a couple of years ago from the Cristóbal Colón liquefied natural gas (LNG) project, which is now called the Mariscal Sucre project (but still hasn’t started construction), because it disagreed with the government’s plans for developing the natural gas sector.

In coming months, the Chavez government likely will seize majority ownership (over 50 percent) of the four strategic associations in the Orinoco Heavy Oil Belt, including Cerro Negro. PDVSA currently isn’t the majority owner of any of these associations, which were created before the enactment of Venezuela’s 1999 Constitution and the 2001 Hydrocarbons Law, both of which mandate that PDVSA must be the majority owner of all joint ventures with foreign oil companies in Venezuela.

It wasn’t a coincidence that Pequiven’s Jan. 20 decision to dump Exxon Mobil from the $3 billion olefins project was leaked by Venezuela’s government immediately after the 14th anniversary of Chavez’s failed Feb. 4, 1992 coup attempt against former President Carlos Andres Perez.

Chavez continues to escalate his political confrontation with the Bush administration. Dumping Houston-based Exxon Mobil publicly from the olefins project is part of his strategy of provoking the Bush administration. Permanent confrontation with the U.S. government is a cornerstone of President Chavez’s foreign policy, which is shaped and refined in frequent personal communications between Chavez and Cuban leader Fidel Castro.

This confrontation, which has been driven from the start by Chavez, pays handsome financial and political dividends for Venezuela’s president. It contributes to driving oil prices higher. For every dollar per barrel increase in oil’s price, Venezuela earns another $1 billion a year. It also strengthens Chavez’s popularity with his followers in Venezuela and regionally. With presidential elections scheduled in 11 months, Chavez plans to spend $65 billion on social and infrastructure programs this year to boost his chances of being re-elected president for another six years. This means he will seek to drive oil prices significantly higher in 2006. We believe that Chavez wants to push oil prices over $75 a barrel, and elevating his political confrontation with the U.S. is a means for achieving that price level.

It has long been assumed, though, that Chavez would not push the confrontation to the point of suspending oil shipments to the U.S. That course of action, critics argue, would be suicidal for Chavez because he would be unable to find other buyers for the heavy and sulfurous crude oil not sent to the U.S. However, we disagree. Since Chavez first announced slightly over one year ago that Venezuela would break its oil supply dependency on the U.S., Venezuela’s oil exports to the U.S. have dropped from an average 1.5 million b/d in 2004 to about 1.2 million b/d in 2005. Oil and products exports to other countries grew about 300,000 b/d in the same period. This trend will be more pronounced in 2006.

It’s unlikely that Chavez would unilaterally curtail or suspend Venezuela’s oil exports to the U.S. without first having a motive he can use to excuse his aggression as the legitimate response of someone who is being victimized. Chavez loves portraying himself as the aggrieved victim in confrontations that he is the first to trigger. By driving tensions with the U.S. ever-higher, he is seeking to reach a point where the U.S. moves against him first in ways that would justify a decision in Caracas to expel or detain U.S. government personnel in Venezuela, nationalize U.S. oil and non-oil assets in Venezuela, or curtail some oil shipments to the U.S.

Meanwhile, Chavez will use the growing stream of oil export revenues flooding into Venezuela during 2006 to create the illusion of prosperity by hiking public spending to the highest levels in the country’s history to achieve growth via increased consumption. He will also buy more weapons, including hundreds of thousands of assault rifles to arm his national military reserve, which now totals over one million volunteers (about half are women). Chavez will seek to buy military transport aircraft and fighters from Russia and China. Chavez also said on Feb. 4 that he will seek to buy several SAM systems.

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