Venezuela Seizes Last Private Oil Fields

Venezuela's President Hugo Chavez greets supporters as he rides in an open car towards the Congress in Caracas, Wednesday, Jan. 10, 2007.
AP Photo/Leslie Mazoch
President Hugo Chavez's government took over Venezuela's last privately run oil fields Tuesday, intensifying a struggle with international firms over the development of the world's largest-known petroleum deposit.

Oil Minister Rafael Ramirez declared that the Orinoco fields had reverted to state control just after midnight. Television showed oil workers in hard hats raising the flags of Venezuela and the national oil company over a refinery and four drilling fields in the Orinoco River basin.

Chavez, a strong critic of U.S.-style capitalism and a leader of the leftist movement in Latin America, planned a more elaborate celebration later on May Day, the international workers' holiday, with red-clad oil workers, soldiers and a flyover by Russian-made fighter jets.

The companies ceding control included BP PLC, ConocoPhillips, Exxon Mobil Corp., Chevron Corp., France's Total SA and Norway's Statoil ASA.

All but ConocoPhillips agreed in principle to state control, and Venezuela has warned it may expropriate the company's assets if it doesn't follow suit.

Chavez is worried about keeping the big oil companies as minority partners. Industry experts say the state oil monopoly, Petroleos de Venezuela SA, doesn't have the expertise to transform Orinoco's tar-like crude into marketable petroleum.

But multinationals pumping oil elsewhere in Venezuela, one of the leading suppliers of oil to the United States, submitted to state-controlled joint ventures last year because they were reluctant to abandon the profitable operations.

"Because of the strategic importance of both Venezuela's oil deposits and its distributorships in the U.S., including CITGO, Chavez's decision to go ahead with the takeover of privately held oil fields creates a showdown with the U.S.," said CBS News foreign affairs analyst Pamela Falk. "As the conflict escalates, Americans are likely to see higher prices at the pumps."

Chavez also is in the process of nationalizing Venezuela's electricity companies and its biggest telecommunications company. He threatened a month ago to take over private hospitals if they continued raising prices for health care.

The president is operating with special powers given by congress to issue laws by decree in energy and other areas, which he has used to nationalize big companies. He justifies the takeovers as necessary to give the government control of sectors "strategic" to Venezuela's interests.

Chavez hopes to radically make over Venezuela, saying big changes are needed to make sure the poor benefit from the country's wealth and not just the elite.

Using the country's burgeoning revenues from high oil prices, he is financing widespread programs for the poor. He has built new clinics, refurbished state hospitals and sent thousands of doctors to live in poor neighborhoods and provide free medical care.

The campaign has brought popularity for Chavez, who takes to the airwaves almost daily to address the nation, delivering tirades against the rich, the media, international capitalism and his particular enemy — the U.S. government.

In Orinoco, Chavez says the state will take a minimum 60 percent stake in the operations, but he is urging the foreign companies to stay and help develop the fields. They have until June 26 to negotiate the terms, including compensation and reduced stakes.

The companies appear to be taking a tough stand, demanding conditions — and presumably compensation — to convince them that Venezuela will be a good place to do business.

Chevron's future in Venezuela "will very much be dependent on how we're treated in the current negotiation," said David O'Reilly, chief executive of the San Ramon, Calif.-based company. "That process is going to have a direct impact on our appetite going forward."

The stakes are high for both sides.

After the fanfare of the takeover, Chavez will need outside investment to develop the Orinoco region, which could help Venezuela surpass Saudi Arabia as the nation with the most reserves.

If Chavez scares the big oil companies off, the region could be starved of investment capital and the technical know-how needed to work with heavy, tar-like crude oil. Chavez says state firms from China, India and elsewhere can step in, but industry experts doubt they are qualified.

But pulling out would be damaging for the companies, too.

They have already invested more than $17 billion in their Orinoco projects, which are estimated to have grown in value to some $30 billion. Venezuela has indicated it is inclined to pay the lesser amount for taking over control — with partial payment in oil and, some experts suspect, tax forgiveness.

And there are fewer options around the world. State oil monopolies now control three-quarters of the world's proven oil reserves, so Venezuela may still prove enticing even under Chavez's new, tougher terms.

Nationalization of the oil industry has been tried in Venezuela before, though with a different tack. Venezuela shut private companies out of the oil sector completely between 1975 and 1992 before beginning a series of partial privatizations — a period known in Venezuela as the "oil opening."