Venezuela Decrees Nationalization of Last Foreign Controlled Oil Fields

Venezuela’s President Chavez announced a new law-decree, which will nationalize the last remaining oil production sites that are under foreign company control.

Caracas, February 27, 2007 (— Venezuela’s President Chavez announced a new law-decree, which will nationalize the last remaining oil production sites that are under foreign company control. The nationalizations, which affect oil production in the Orinoco Oil Belt, will take effect on May 1st of this year, until which time companies may negotiate the terms of the nationalization.

Oil production in the Orinoco Oil Belt, which is said to contain the world’s largest reserves of extra-heavy oil, is currently being conducted via joint ventures between Venezuela’s state-owned oil company PDVSA and a wide variety of foreign oil companies. Joint ventures that were started under Chavez in the Oil Belt have all maintained a minimum 60% ownership for PDVSA, but previous arrangements gave PDVSA a minority stake.

These earlier joint ventures, which involve ExxonMobil, ChevronTexaco, Statoil, ConocoPhillips, and BP, will be transformed so that PDVSA will have a minimum 60% stake.

In the course of 2005 the Chavez government already embarked on a similar project, when it transformed so-called operating agreements in Venezuela’s older oil fields into joint ventures. Here a wide variety of foreign companies were extracting Venezuelan oil under contract with PDVSA. 30 out of 32 such operating agreements were transformed by the end of 2005. Only two challenged the transition in court.

“We are recovering property and management in these strategic areas,” said Chavez. “The privatization of oil is over in Venezuela. This was the last area that we hadn’t recovered. This is the true nationalization of the oil. The oil belongs to all Venezuelans.”

Venezuela’s oil industry had been under private control until 1974, when Venezuela nationalized it. In the 1990’s, though, PDVSA engaged in a so-called “oil opening,” where it allowed more and more private companies to extract oil, via majority shares in joint ventures and the operating agreements.

Chavez supporters have long argued that oil was never truly nationalized in Venezuela because the same management controlled oil production after nationalization and that the oil industry never really operated under government control until the old management was fired in the wake of the December 2002 to January 2003 oil industry shutdown.

Chavez emphasized yesterday, though, that foreign oil companies are still welcome in Venezuela, just not as majority stake holders. Chavez said that his government does not want “that the companies leave, but that they are minority partners. The owner will be PDVSA and the business will be in the hands of Venezuelans.”

The Orinoco Oil Belt nationalizations represent the third wave of nationalizations that Chavez had announced earlier this year. The other two involve the country’s main telecommunications company CANTV and the country’s electricity companies. The nationalization of CANTV involves, in a first step, the purchase of Verizon’s 28.5% stake, for a sum of $572 million. Earlier, the government announced that it had reached an agreement with the energy company AES to purchase its 82% stake in Electricidad de Caracas for $739 million.

The transition to majority stakes in the Orinoco Oil Belt joint ventures will probably cost the Venezuelan government far more than these earlier nationalizations because, according to AP, foreign companies say they have invested over $17 billion in these oil fields.

The Chavez government says it wants to nationalize these industries because they are “strategic” for the country’s development and that leaving these to foreign investors alone is not sufficient to assure the country’s economic growth.

Chavez made the announcement yesterday, during his recently re-programmed radio program Hello President, which has been converted from a marathon Sunday program into a one hour program every weekday evening.

The nationalization decree is being passed as part of the enabling law that the National Assembly had granted Chavez on January 30th, which allows him to pass law-decrees in a wide variety of areas for a period of 18 months. Chavez had asked the legislature for this power so as to advance the country more rapidly on the path towards “21st century socialism.”