In the wake of the February 15th referendum that will allow him to remain in office indefinitely, President Chavez has begun a series of confrontations and nationalizations to cope with falling food supplies and oil production. The underlying cause is the drop in oil prices that the country relies on for 90 percent of its hard currency earnings. With heavy Venezuelan oil selling in the mid-$30s, the situation continues to get worse. Venezuela’s national oil company PdVSA owes its contractors about $8 billion and several companies are refusing to continue work until they are paid. The situation is compounded by the refusal of foreign contractors to pay local employees and domestic vendors.
Last week began with government soldiers occupying a number of Venezuelan rice mills in an effort to force the companies to increase the sales of rice at low state-mandated prices. The local subsidiary of US food giant Cargill was among the rice mills seized. Later in the week the government nationalized part of the holdings of an Irish company that was using its land to grow eucalyptus for cardboard.
PdVSA says it has started paying off $1 billion of the $8 billion it owes contractors, but most of this money is likely to go to small domestic vendors rather than large international oil service companies. The government is attempting to negotiate a 40 percent cut in the cost of contracts to bring them in line with falling oil prices.
The Caracas has already seized one US-owned drilling rig for failure to keep working and is threatening to seize more. At week’s end, union officials reported that 24 oil rigs across the country have halted operations as their owners were not being paid. This tactic of seizing foreign drilling equipment can only work for a brief period for the equipment will soon need spare parts and maintenance support from outside the country.
Venezuelan oil fields have been exploited for over 100 years and require continuous drilling to keep up production levels. Chavez’s policy of giving priority to government social programs over expenditures needed to maintain oil production is certain to continue the lower oil production trend.
PdVSA is counting on increased production from the Orinoco heavy oil belt to offset declining conventional oil production. The company is planning 88 major new projects in the Orinoco region that will require some $125 billion in investment through 2012. Last week PdVSA postponed bidding by foreign companies on the Orinoco projects. Some analysts are skeptical that anything will come of the bidding, given the harsh terms and heavy taxes the government imposed last year.