The situation in Venezuela apparently took a turn for the worse last week and may be coming to a head. A US firm that says it is owed $100 million for drilling services is having difficulty in renegotiating new contracts and is threatening to pull out its drilling rigs. Local unions claim to have taken control of 2 rigs that were about to be moved. The company denies that their rigs have been commandeered, but say they have stopped drilling at two sites due to the contract problems.

Some of the problem can be linked to a referendum, on whether President Chavez can stay in office indefinitely, that is due to take place on February 15th. In advance of the vote, Chavez is said to have increased social spending, leaving the state oil company very short of cash.

In April there will be a new round of bidding for development rights in seven Orinoco oil fields. As these projects are the key to increasing Venezuelan oil production, the results of this bidding will be important to the country’s economic future and perhaps to Chavez’s political career. It has only been two years since Chavez forced several of the international oil companies out of their Orinoco projects through a combination of tax increases and nationalizations.

Despite increasing signs of financial stress, such as rapid inflation and food shortages, Chavez remains popular with the majority and is expected to win the referendum by a narrow margin. Over the longer run, oil prices will be the key to Chavez’s future. Financial reserves are running short and major policy shifts, such as devaluation and sharp reductions in social programs, are likely later this year.