There's been a lot of action lately surrounding the oil situation in Venezuela which I've been racing to keep up with since coming back from a two-week vacation in the middle of August. Where to begin?
How about with this story from the FT last weekend, detailing the cold feet that some 19 parastatals and private sector companies are having on the auction for development rights to the Carabobo oil blocks in the Orinoco belt, a project estimated to require some $30-50bn of capital. At the top of the list of concerns is fear of losing money, whether due to stiff financial terms or state expropriation, neither of which should come as a surprise to anyone with even half an ear to the ground. In particular, the initial refusal of Venezuela to allow investors the right to take contractual disputes to international arbitration should be especially worrying.
My question, which is the same question I've always had regarding any other country with a patchy history of honoring oil development contracts (Read: Russia), is this: How many times do you get the rug pulled out from underneath you before you just don't even try anymore?
Answer, from an anonymous representative in Caracas of one of the state oil companies bidding:
"The project may require serious investment, yes, but given that there is no exploration risk and that this could be the last project of its size left in the world, we can't afford not to get involved."
Even, it seems, at a price as steep and as ludicrous as this:
Another serious obstacle relates to the stiff financial terms, particularly with tough conditions in international credit markets. In spite of companies being allowed at most a 40 per cent share in each of the projects up for auction, with PDVSA maintaining 60 per cent, they are being asked to fork out 100 per cent of the financing.
On the other hand, by all accounts, the Venezuelan economy is tanking, and it needs oil investment more than ever. As one local resident told the LA Times' Chris Kraul recently in a report on the ground,
There was a rumor last week that the first well was being drilled. Half the town rushed out there looking for work," Fernandez, 23, said. But the project was only a small field test, and there were no jobs. "We were all disappointed."
What's the reality here?
One possible scenario is that Hugo is using the current tactics to scare away the "non-friendly" bidders (ExxonMobil, etc) so as to further solidify ties with the "friendly" bidders (China, Russia, etc) under the aegis of a supposedly open bidding process.
Scenario two is simply that he's betting that the bidders' desperation for new development contracts is greater than Venezuela's desperation for fresh revenue, effectively forcing the bidders to blink first.
To the extent that scenario two holds (and let's face it, that's the more likely), how does, say, China's and Russia's threshold for Hugo tactics compare with ExxonMobil's?
If I'm Hugo, I'm looking for any way possible to shut the non-friendlies out.
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