Oilfield services companies set for a bumpy ride in Venezuela
Enforced take-overs of services operations are a short-term measure to shore up government finances, but they could do lasting damage to the oil industry, reports Robert Olson
OILFIELD SERVICES companies are the latest to learn that, in Venezuela, the sanctity of a contract is closely linked to the day-to-day needs of the state. Government assumption of control of many support operations are unlikely to boost the country's faltering oil production and could scare off services providers. However, preserving cash flow is President Hugo Chávez's overriding concern.
After racking up billions of dollars in unpaid debts to its suppliers, most of which continued working as the IOUs mounted, Venezuela has grabbed control of some of the most important oil-industry assets that were still in private-sector hands. At the top of the list are two large natural gas compression and injection systems that maintain reservoir pressure at the country's most important light oil fields – El Furrial and Santa Barbara in eastern Venezuela.
By taking control of the Pigap II project at Santa Barbara, the government claims it will save around $57m a year in fees that would be due to the facility's owners, Williams Companies and Exterran. Both Williams and Exterran took multi-million dollar write-offs on the take-overs and the dispute is likely to end up in international arbitration. Venezuelan law now states that PdV, the national oil company, can pay with securities in lieu of cash in the event of an expropriation and that PdV is required to pay only the book value for any asset it takes over.
The two gas-injection projects are the largest and most prominent facilities being taken over by the state, but dozens of smaller services operations – ranging from boats used to ferry personnel and equipment on Lake Maracaibo, to smaller land-based drilling companies – have been informed that they are on the take-over list. The expropriations mean PdV will take thousands more workers onto its already bloated payroll, but reduces the risk that unpaid employees at essential services installations could strike over unpaid wages.
Publicly, the Chávez government talks about the need to reverse the policies of its predecessors that placed assets in the hands of privately owned companies and the importance of strengthening state control over the industry to prevent anti-government activists from damaging or shutting down oil production.
However, the real motivation for the take-overs is probably more expedient. The lengthy dispute-resolution process that is likely to follow the take overs also ensures PdV will not have to make any cash payments for months, if not years, on its debts with contractors and gives the company leverage as it negotiates reductions in its debts with firms that have not yet been nationalised.
PdV ended 2008 owing nearly $14bn to its contractors as payments were withheld to keep cash flowing to the social programmes that have formed the basis of the Chávez government's agenda. The sharp fall in oil prices from their July 2008 peak of near $150 a barrel caught Venezuela by surprise just as the government was girding for a referendum on a package of constitutional changes that would allow Chávez to run for office again in 2012, when his present term expires.
And while the recent recovery in oil prices has eased some of the funding crunch, the government is expected to post a very large deficit in 2009, of at least 5% of GDP. Loans from Brazil and China should help prop up state finances in the short term, but the government is betting on a rapid recovery in oil prices as spending levels have been left largely untouched. PdV has slashed its investment budget to $14bn from a planned $24bn and, in the first quarter, raided its US refining subsidiary, Citgo, for $0.88bn in dividends, despite Citgo posting a loss as a result of the sharp fall in refining margins (see Figure 4, p38).
The government has moved to cut dollar allocations to Venezuelans under its currency-control regime and it is pushing down domestic interest rates to steer more savings into government bond sales.
The take-overs will not help the country's struggling oil industry, which produces 2.5m barrels a day (b/d) or less of crude (see Figure 1), far below the government's claim of 3.3m b/d. Contractors are likely to be reluctant to move equipment into the country for fear of it being taken over and those that do will demand heftier fees to compensate them for the perceived risk of operating in Venezuela. However, the operations being seized by PdV are, for the most part, simple-to-run facilities managed and operated by Venezuelan staff.
PdV has conspicuously avoided taking over the operations of large, integrated oilfield services providers, such as Schlumberger and Halliburton, which have grown in importance to the industry because of the shortage of skilled manpower at PdV. As such, the Venezuelan services sector is likely to be transformed into one where the routine, commodity-type services are mostly handled by nationalised companies or joint-ventures between services providers and PdV, while the bigger, more technologically advanced services providers continue to operate quietly behind the scenes.
Investors will now have to consider the new arrangements in the services sector before submitting bids on any new acreage on offer.
Yet the transformation of the services sector could lead to an even bigger role for the larger services companies. Schlumberger has long been rumoured to be interested in forming a joint venture with PdV along the lines of its Comesa unit in Mexico. Comesa, which is majority-owned by national oil company Pemex, is tightly integrated into the operations of the state-run oil industry, giving Schlumberger a central role in many activities, as well as a first glimpse at many business opportunities.
Nevertheless, a joint venture with PdV will be very different from a partnership with Pemex, as PdV's partners elsewhere can attest. The government has demonstrated time and again that short-term expediency outweighs long-term needs. Oilfield services providers should be ready for a bumpy ride.