Tensions between the Chavez government and the oil service industry have been on the rise for many months over PdVSA’s failure to pay service companies. The total now owed to the companies is said to be over $14 billion. Last week matters came to a head when several firms threatened or actually ceased operations. These companies perform much of the work in the Venezuelan oil industry, from drilling the wells to maintaining pressure on the reservoirs. Without these services Venezuelan oil production would be seriously reduced.

In response to threats of desperation by service companies, Chavez rushed a nationalization bill through the National Assembly and on Friday sent troops to seize the assets of 60 local and foreign-owned firms employing some 8,000 people. The seizures appear to have been selective and some large foreign-owned drilling companies, presumably ones that continued to work without being paid, remain untouched. Some oil service workers will be taken into PdVSA’s 80,000 workforce, but union leaders are claiming that thousands will lose their jobs.

Many outside observers believe the nationalization will backfire and Venezuela will see a substantial drop in oil production from the current 2.1 million b/d. The seizures may also discourage foreign investors from participating in an upcoming auction of oil blocks. The companies whose assets were expropriated own patents to the technology and the equipment used to for gas injection and drilling as well as having much technical expertise.

The government is already trying to entice the expropriated firms to remain as junior partners, but unless some money is forthcoming, this seems unlikely. If production starts to slip badly, Chavez’s only alternative would be to seek Chinese or Russian aid.