Vol. 72/No. 9      March 3, 2008

On May 1, 2007, the Venezuelan government took over majority control of oil companies operating in the Orinoco Oil Strip. Most of the foreign-owned companies affected accepted the takeover, but two, Exxon and Phillips-Conoco, did not. Negotiations over compensation with Exxon broke down, while talks with Conoco are proceeding. Exxon won a British court ruling in January that froze $12 billion in PDVSA assets in the United Kingdom, the Netherlands, and Netherlands Antilles. The company claimed the assets freeze was necessary to guarantee Venezuela would pay compensation should Exxon prevail in arbitration over the Orinoco Strip. On February 14, a U.S. District Court extended a freeze that the oil giant had already won on $315 million in PDVSA funds in the United States.

Venezuela’s oil minister, Rafael Ramírez, said Exxon was demanding 10 times what its losses were from the takeover. PDVSA lawyer Joseph Pizzurro said Exxon demanded only $5 billion during negotiations over compensation, not the $12 billion it has now frozen in the oil company’s bank accounts.

The U.S. government stood firmly on the side of Exxon. “We fully support the efforts of Exxon Mobil to get a just and fair compensation package for their assets according to the standards of international law,” said State Department spokesman Sean McCormack. Sen. Richard Lugar, the ranking Republican on the Senate Foreign Relations Committee, also attacked the Venezuelan government, demanding it resolve the dispute with Exxon “within the legal framework” and not disrupt oil markets.

The day after announcing the cut in sales to Exxon, Rafael Ramírez said PDVSA would complete its current contractual agreements with Exxon. The government also explained that shipments would continue to a refinery in Chalmette, Louisiana, that PDVSA and Exxon jointly own. PDVSA sells 78,000 barrels a day to the Chalmette facility and another 50,000 a day directly to Exxon.

Venezuelan oil amounted to 5 percent of Exxon’s imports in November. Nobuo Tanaka, the head of the International Energy Agency, told reporters he thought the affect of Venezuelan cuts to Exxon’s supplies would be “very limited” and not require drawing on other oil stockpiles.

Following Exxon’s initial victory in getting courts to freeze PDVSA assets, Venezuelan president Chávez announced in a February 10 televised speech that Venezuela would end oil shipments to the United States if Exxon won its legal case. But in a statement broadcast on television February 17 Chávez said, “We don’t have plans to stop sending oil to the U.S. All I’ve said is that if the U.S. attacks us, we’ll have to decide not to send one drop of oil to the U.S.”

The Economist noted that 75 percent of Venezuela’s export earnings comes from U.S. oil sales. PDVSA earnings are 50 percent of the government’s revenue. Loss of that revenue would seriously impact social programs initiated by the Chávez government that have been funded in large part by PDVSA. Recently, the president ordered PDVSA to set up a subsidiary to distribute food due to the widespread shortages in the country.

The big-business intelligence news agency Stratfor noted that Venezuela produces heavy crude oil and is dependent on the United States to refine it. “Approximately 90 percent of Venezuela’s 2 million barrels per day (bpd) in crude exports either goes to U.S. refineries that are explicitly designed to process Venezuela’s poorer grade of crude or is refined into products subsequently sold to the United States,” the agency said. “Only U.S. refineries are specifically geared toward Venezuelan crude, and configuring specialized refineries in countries capable of refining Venezuelan crude would be costly.”  
 
 
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