Expropriating Venezuela’s Refineries

You heard it here first. Two months ago, I wrote Let’s Confiscate Venezuela’s U.S. Refineries. Looks like I may not have been too far off the mark, as others have started thinking along the same lines:

Citgo assets may be at risk in arbitration: Experts say ConocoPhillips, Exxon Mobil could seek Venezuela’s refineries in U.S.

Maybe those “experts” have been reading my blog. 🙂

Here are some excerpts:

ConocoPhillips and Exxon Mobil Corp. could hold a powerful card to make Venezuelan President Hugo Chavez bet his country’s sizable American assets in the high-stakes nationalization of the Venezuelan oil industry, experts say.

The Citgo subsidiary of Venezuela’s national oil company has five refineries in the U.S. experts say could be targeted for seizure if a stalemate prompts one or both U.S. oil majors to seek recompense through international arbitration.

Now, before some of the communist/socialist lurkers get bent out of shape, I say again that my issue is not that we are entitled to Venezuela’s oil. My issue is that oil companies were invited in under certain terms, signed contracts, and after investing billions on the ground, had their assets expropriated. Since these companies can’t exactly pick up their property and take it with them, Chavez has them over a barrel and can make outrageous demands, which he has been doing (as I show below). If he wants to compensate the companies at fair market value for their investments, then I have no complaints. He can cut all the deals with Russia and China that he wants, and hope they can manage those heavy oil assets for him.

I can’t speak for the other companies involved, but these are certainly not terms I could have agreed to:

A lawyer familiar with the negotiations told the Chronicle that the companies — ConocoPhillips, Exxon Mobil, Chevron Corp., Britain’s BP, France’s Total and Norway’s state-controlled Statoil — were offered essentially the same deal. PDVSA gave them veto power over investment decisions but said they would not have the right to seek international arbitration over future disputes, the lawyer said.

Think about that. In the future, Chavez decides to up his take from the projects. Yet you have given up your right to seek international arbitration. Nah, I will pass on that option given the past actions of Chavez.

“The government of Venezuela owns significant assets in the United States through Citgo, as well as significant resources that move through the U.S. financial system,” said Jose Valera, a partner with King & Spalding in Houston. “These are assets that could conceivably be subject to an arbitration award.”

PDVSA took majority interest in four projects, valued at about $30 billion, which had been operated by Exxon Mobil, ConocoPhillips, Chevron and Total. BP and Statoil were already minority partners.

That’s the sticking point. The projects are valued at $30 billion, but Chavez wants to pay far less than that. He doesn’t want to pay market value. He is like a gambler who changes his bet after he sees which way the game is going. The oil companies took the risks, and now Chavez wants the rewards. Do you think he would have stepped forward with billions had the risks not paid off?

ConocoPhillips said last week that while it hopes compensation talks succeed, it has preserved all legal rights, including international arbitration. In the meantime, the company said it expects to write off $4.5 billion, or its entire interest in three Orinoco projects, in its second-quarter results.

Yes, it is in fact personal. Chavez has his hand in my pocket. If he steals my wallet, I reserve the right to take him to arbitration and get some compensation. One or more of his refineries would be nice compensation. I believe the COP projects are valued in the neighborhood of $10 billion. It is not clear whether the $4.5 billion write off mentioned above means that COP think they will get $5.5 billion, or whether they only value the projects at $4.5 billion (the $10 billion estimate came from outside analysts).

But the U.S. companies’ focus is turning toward compensation, Sira said. They want it based on the market value of their operations, while the Venezuelan government has said it would pay what the companies put into the assets rather than what they would sell for.

If Venezuela refused to honor such an award, a U.S. judge could issue an enforcement order to seize PDVSA U.S. assets, which could include refineries, cash in bank accounts or accounts receivable.

“The moment you hear someone sniffing around, looking into your bank accounts, you can pull that out,” Barajas said. “With a hard asset, that’s just game, set, match. You know where it is. It’s not going anywhere.”

Of Citgo’s refineries, three process fuels while two process asphalt. Earlier this year NuStar Energy, a spinoff of Valero Energy Corp., put in a bid to buy the asphalt plants, but no sale has been announced.

Maybe we can work out a deal here. Our oil companies will stay out of Venezuela, and Chavez can stay out of the lucrative U.S. market by giving up his refineries here. I would be happy with that option.

This is an essay that is sure to bring out the trolls, as some see Chavez as the champion of the little guy. They don’t think criticism of Chavez is warranted. I would point out, though, that without the massive investments that have been made by U.S. oil companies into his country, Chavez wouldn’t be able to carry out his social revolution. Ironic, isn’t it?

If you want to have a rational discussion on the subject, I am open to that. If you want to spew rabid froth, I can delete those non-productive comments as quickly as you can post them (although I have only ever had to do that twice).

63 thoughts on “Expropriating Venezuela’s Refineries”

  1. Hi Robert,

    I’m the same Fernando from TOD.

    First, I’d like to note that I consider you a noble and intelligent man.

    Second, I would like to comment that if you consider only the facts presented, then you’re rigth, the whole thing is a theft, plain and simple.

    But maybe, it could be possibly to find some others sides in this issue if we think about context.

    USA has had a ver agressive policy toward LA. It has supported coups, bribed politicians, mandated assasinations of key people, US ambassadors (who represents the country and its companies) have always been considered when crucial decisions has to be made.

    The recent disclosure of CIA files has been just the the tip of the iceberg.

    I mean, no president (dictator or elected) can come out of the blue and do such a thing without at least some form of legitimacy.

    Big Oil has always been associated with crony capitalism. Not always big oil just “gets invited”, sometimes it pushes very very hard weak governments and gets help from “the consular burgeoisie” to obtain that “invitation”.

    Total and the other company, not being american, were just considered as part of the “deal”.

    Just my thoughts trying to put things in context.

    Fernando

  2. It’s a bit unclear, but your post implies that the oil companies accepted the “no arbitration” clause as part of the contract they signed with the Venezuelan government.

    If that interpretation is correct, then I don’t see that they have much to complain about. As you point out, the oil companies did in fact sign a contract, one which gave them no legal recourse should their host decide to screw them. They signed anyway, presumably on the assumption that the circumstances that cause Chavez to let them in in the first place would continue to pertain (i.e. he needs them more than they need him). Circumstances changed, Chavez took advantage of this change, and the oil companies are hoist on the petard of their own greed.

    *shrug*

    There’s also the point that fernando makes, which is worth considering: when a contract is negotiated under circumstances of a substantial discrepancy in power between the two parties, it raises important questions. Contract law, which guarantees fair dealings between essentially equal entities, can also become a mechanism for enforcing a continuation of an imbalance of power.

  3. It’s a bit unclear, but your post implies that the oil companies accepted the “no arbitration” clause as part of the contract they signed with the Venezuelan government.

    That was the new deal they offered. Conoco and Exxon did not sign that one. They decided they would not be willing to give up their right to international arbitration.

  4. OK, thanks for making that clear. Yeah, that clause in a new deal (after a demonstration of bad faith) would be a sucker bet for sure.

    Fernando’s point is still worthy of consideration, though.

  5. Fernando has an interesting point…but I believe that they are taking over all of the oil companies operating in Venezuela, not just US companies.

  6. Anon:

    Yes, they just get in the middle of all this. It’s an “umbrella” decision. In fact, there is a steel company of argentinian capital which Chávez wants to seize.

  7. America has done horrible things in the past. That is all very true. But those contracts were signed relatively recently. If America oil companies are so bad, how come they were invited in?

    Having said that, I won’t cry for American oil companies if they get their assets seized. When you deal with corrupt third world countries that is the type of risk you have to run. If they didn’t price it into their deals projected profit, more fool them.

    By the same token, I think Mr. Rapier is right to say that it is only fair for Venezuela to give up its assets in the US. What is good for the goose is good for the gander.

    The real victims here are the Venezuelan people. No matter what happens, the share holders and workers of the American oil companies are going to remain rich by world standards. But the Venezuelan people are seeing their economy destroyed before their very eyes.

    That seems like a rather high price to pay for getting revenge on America for its past crimes.

    On a different subject, would Mr. Rapier like to offer his thoughts on this story?

  8. USA has had a ver agressive policy toward LA. It has supported coups, bribed politicians, mandated assasinations of key people, US ambassadors (who represents the country and its companies) have always been considered when crucial decisions has to be made.

    That’s painting with a very broad brush, Fernando. Are you aware of specific acts committed by the companies whose assets were expropriated? After all, I can find many instances of guilt by association in which the “guilty” parties didn’t actually do anything wrong. It is easy to stereotype entire groups like that.

    I think you need to make a stronger case than that if you wish to argue that there is justification in Chavez’ actions in these specific cases.

    Cheers, Robert

  9. On a different subject, would Mr. Rapier like to offer his thoughts on this story?

    I did see that story earlier today. That is a relatively small refinery, but we are definitely skating very thin on gasoline inventories just as we enter the highest demand months of the year.

    I also read today that on of BP’s units in Whiting will be back up in 2 or 3 weeks, which will help. But the gist of that link was that oil as down because the Coffeyville was down. But oil ended up closing up for the day.

    Cheers, Robert

  10. Here is a blurb from a CNN story earlier today:

    It remains unclear how any of the companies are being compensated for their losses. The six companies invested more than $17 billion in the Orinoco projects and hold some $4 billion in outstanding debts, but Petroleos de Venezuela SA, also known as PDVSA, would not be assuming those obligations, Venezuelan Oil Minister Rafael Ramirez has said.

    Some oil companies actually borrowed money to do these projects. The government says that they are taking over, but they won’t be assuming that debt. That’s a lot of gall. Take no risks, but collect the rewards.

  11. It’s the nature of business to take risks to make a profit, and the nature of governments to act in the perceived interests of their people. It’s the practice of empires to use military power to get their way, and the practice of downtrodden countries to find other means to get their way. The British Empire has mostly been on the taking side, so I find it hard to criticise. Especially when we are in Iraq, carving up their resources for the benefit of western companies.

    The doomers say that there will be resource wars, perhaps nationalisation is the more likely step. Obviously Russia has also been “taking back” oil/gas interests from private countries. The question is will anyone start a shooting war over it?

    CERA et al say the Peak could be hidden by above ground factors, they could be right too.

  12. Robert,

    Of course, I don`t have any proof.

    But, Robert, you are a smart guy and you sometimes don’t have facts but nevertheless you know that things look fishy.

    So, if you want to understand how come that people like Chávez saying the things they said about US and doing the things they do nevertheless getting approval across the globe then you`ll have to suspect that something isn’t going well with american policies.

    No, it’s not that the world envies America, I can assure you.

    Crony capitalism exists, american government/oil companies backed coups are well documented (http://en.wikipedia.org/wiki/Operation_Ajax), intervention in latam is well documented too(https://www.cia.gov/library/center-for-the-study-of-intelligence/kent-csi/pdf/v47i3a03p.pdf)

    Fernando

  13. So, if you want to understand how come that people like Chávez saying the things they said about US

    Fernando, look at your argument here. You are arguing that the U.S. has done bad things, therefore there may be some justification for Chavez’ actions. That just doesn’t add up. Sure the U.S. has done some bad things; I am not sure what you are trying to prove there as I never argued otherwise. But you could use that to justify anything you want. But unless you can show that XOM or COP have been doing bad things in Venezuela, then all you are doing is attempting to broadly smear them – with zero evidence to back you up – to exonerate Chavez. That won’t work with me.

    If you want to continue down that road, I will start to pull out examples where Venezuelans acted badly, therefore justifying the outright seizure of Citgo assets. But do you really think that is a legitimate form of argumentation?

    Cheers, Robert

  14. A blurb from yesterday’s Dallas Morning News:

    Mr. Chavez draws support by reminding Latin Americans of Washington’s mistakes but conveniently forgets that most of them are long past. True, the CIA helped install military dictatorships, now replaced by thriving democracies. Yes, Latin American economies suffered disastrous meltdowns following our failed attempts to introduce “neo-liberal” reforms in Mexico, Brazil and Argentina in the 1990s. But today those economies are roaring back.

    Mr. Chavez’s greatest influence is among economically deprived Latinos. He plays on their negative image of America as a defender of big business and capitalist exploiters. Washington would only feed that image by threatening him or coming to Big Oil’s defense.

    For our message to resonate in Latin America, the strategy needs to shift from highfalutin concepts of big business and free trade toward lower-falutin models that put money more directly into poor Latinos’ pockets.

    Big Oil can fend for itself. For Washington to beat Mr. Chavez at his own game, it must show Latin Americans that we also stand up for the little guy.

    I would also reiterate that the U.S. government does not equal Big Oil. They are not one and the same. Their interests may align, but I can be an owner of an oil company – which I am – and still a critic of the present administration – which I also am. But the fact that the U.S. has supported some terrible policies in South America does not justify Mr. Chavez’ actions.

    As I have said, Venezuela has the right to manage their oil as they see fit. But they should be expected to pay for their seizure of assets.

    Cheers, Robert

  15. The real question I have is — if PDVSA is stripped of its Citgo refineries in the U.S., where will those refineries (presumably tuned for the heavier grades of crude prevailing in Venezuela) get their crude?

  16. It’s a world market for oil. If Venezuela sells to China, the U.S. will just buy from the displaced Chinese suppliers. But I think tar sands will scale up to displace a lot of that Venezuelan oil. COP has indicated this is the direction they intend to go.

  17. I’m very seriously trying to enjoy my family and a Canadian summer and limit my computer time to work, but I quit smoking and feel like venting on something at 6am. 🙂

    Let’s say a farmer had a cow and his neighbour had a cream separator and they had an agreement to process the milk and split the profits from selling cream. If they got into a fight and ended the agreement, they would both lose revenue, but the farmer that owns the cow still has something of value.

    A cream separator has no value without a cow and an oil refinery in the USA has no value in a crude shortage.

  18. A cream separator has no value without a cow and an oil refinery in the USA has no value in a crude shortage.

    Ah, but you are wrong about that. A refinery with no crude has no value. A refinery can make incredibly high margins during a crude shortage, as margins tend to open up as crude prices climb.

  19. It takes 5 things to extract value from heavy oil crude. Access to the resource, the intellictual capital to find and develop it, the financial capital to install the equipment needed, a marine fleet, and refineries or markets to take your crude. Mr. Chavez now has about the first 1 1/2 of these things.

    He is looking to the Russians and the Chinese for technical help – but they have little experience in heavy oil. Many of the PDVSA employees are working tar sands in Western Alberta. The Orinoco field is not easy. Despite being a “Venezuela” operation, there were whole buildings of scientists and engineers in Houston supporting the effort and telling the partnerships where to drill and how deep.

    The key is the refineries, it would be like putting diesel in a gasoline engine, Orinoco crude would lock up a refinery not designed to handle it. With Chavez voiding the development contracts with the IOCs (international oil companies), the IOCs may be free to void the Orinoco crude purchase agreements.

    Yes, with time and effort Chavez can replace the IOCs with somebody else. But in the meantime if crude production drops in the Orinoco, which now accounts for 1/4 of Venezuela’s production, Chavez may not last. When Chavez is forced to cut social programs or stop subsidizing gasoline (He pays $2/gallon on the open market and sells locally at $0.25) his people will have had enough. Chavez is killing the goose that lays golden eggs. The IOCs can outlast him. Sooner or later he will be back to the negotiating table.

  20. BTW – Chavez had already sucked most of the profit out of these deals anyway. We call it creeping nationalization. By ratcheting up royalties and tax payments little-by-little the host country increases its share of the revenues.

    Looking over the reported profits, COP’s annual share of VZ amounted to about 7 cents/share. Big deal. The market already figured this out. The stock took about a $5 dip, but is now back to over $80 per share – where it was before the announcement of a $4.5 billion right off.

    Ironically, Chavez may have done the IOCs a favor. Venezuela had a high government take, but no operatorship. Had he kept the status quo, there was little the IOCs could do about it. Now having seized the assets, through arbitration, the IOCs have a way to get back what they lost through both expropriation and creeping nationalization.

  21. Mr. Rapier,

    Thanks for the response. I knew that the oil drop was really just market noise.

    What I really wanted to know was how you thought that the refinery shut down would effect gas prices (which you basically answered).

  22. RR.. as margins tend to open up as crude prices climb.

    but, that’s not gouging
    ..lol

    You crack me up oil boy. Have a nice summer!

  23. Robert,

    I’m not trying to exonerate Chávez, Where did I say such a thing?

    The point that I’m trying to make is that things are not all black and white, with the poor, bad and ugly in one side and the paladins of justice in the other, which is the impression I get from reading your entry.

    Saying that US government and companies have colluded in the past against foreign countries still applies in the present unless proven otherwise (cnn it’s not a proof).

    So, my point is neither Chávez nor US government/companies have their hands clean.

    Sorry, I respect you a lot but tell me when Venezuela mandated the assasination of foreign presidents , actively infiltrated foreign governments with its secret services to preserve its interests and those of its companies or invaded any country.

    Fernando

  24. Sorry, I respect you a lot but tell me when Venezuela mandated the assasination of foreign presidents , actively infiltrated foreign governments with its secret services to preserve its interests and those of its companies or invaded any country.

    I am going to ask you again what this has to do with the seizure of ConocoPhillips’ assets. Are you familiar with the phrase “painting with a broad brush?”

    You are trying to turn this post into a catch-all for a lot of bad things the U.S. has been involved in over the years, yet so far you have failed to specifically implicate COP or XOM in any of this. So what is your point? That the U.S. has done some bad things? That seems to be your point from your first comment. When you tie this into the situation with Chavez and COP, I will be interested.

    I mean, let’s review what we have here. Your point:

    1. The U.S. has done some bad things in South America.
    2. Big Oil has always been associated with crony capitalism.
    3. And of course, unmentioned is that COP and XOM are Big Oil.
    4. And finally, the implication that perhaps they weren’t actually invited in at all, but rather “pushes very very hard weak governments and gets help from ‘the consular burgeoisie’ to obtain that ‘invitation’.”

    Conclusion? I guess I don’t even know what your conclusion is. But if your conclusion is that based the points above, COP or XOM got what they deserved, I am willing to go round and round on that point. You have posted no actual evidence; just a series of insinuations.

    Cheers, Robert

  25. Oh, and as far as my point goes, it was pretty simple. Chavez seized very risky investments that had paid off for the companies that made them. Some companies still owe money related to these investments. Chavez has so far indicated that he will resist fairly compensating the companies involved. Therefore, we should certainly consider the Citgo refineries in the U.S. as fair game.

    The issues you have been bringing up – which are far removed from the point of this post – do not appear relevant to me in this context.

    Cheers, Robert

  26. Robert,

    My conclusion is that things are not black and white, that there is an unavoidable context (which I tried to bring to the table). Nor it is a “figth” between the bad and the good.

    Fernando

  27. Chavez’s policy makes sense? Who is going to exploit Venezuela’s oil? Is this man really cutting the branchhe is sitting on or just faking it for popularity? He cannot be totally irrational. Can he?

  28. Dear Robert,
    demanding hard evidence of direct involvment by oil companies in US-run terrorism is just a way of killing the discussion.
    Anyone who knows anything about the way that the US runs its foreign policy knows how the system works. The oil companies make very clear statements in congressional hearings like ” There are large amounts of oil in country X that we would love to have access to but we require a stable and cooperative government in country X before we can get the stuff”, the US government then obliges by installing a friendly dictator and he signs the contracts that let the oil companies take whatever they want (and borrows billions from the IMF and world bank which he then spends on construction projects run by US companies). The people of country X keep only the debt.
    And before you start banging on about evidence again here are a few items to peruse:

    —————–
    Rep. Kucinich on Iraq:

    “Now, I have maintained from the beginning
    that the war has been about
    oil. We must not be a party to any attempt
    to set the stage for multinational
    oil companies to take over
    Iraq’s oil resources.”
    ——————
    SENATE FOREIGN RELATIONS SUBCOMMITTEE ON NEAR EASTERN AND SOUTH
    ASIAN AFFAIRS
    America’s oil dependence and its implications for
    U.S. Middle East policy
    October 20, 2005

    Mr. Chairman, Members of the Committee, I would like to thank you for inviting me to brief you
    on the implications of U.S. growing dependence on Middle East oil for our foreign policy and
    national security.

    As consumer of a quarter of the world’s oil supply and holder of a mere three percent of global
    oil reserves the U.S. is heavily dependent on foreign oil and a growing share of this oil comes
    from the Persian Gulf.
    Since the 1945 meeting between President Franklin Roosevelt and King Abdul Aziz ibn Saud, the founder of the Saudi monarchy, U.S. foreign policy has been subservient to the nation’s energy needs. Access to the Persian Gulf oil required robust and costly military presence in the region and frequent interventions. Worse, the U.S. has been forced to coddle some of the world’s
    worst despots just because they held the key to our prosperity hence compromising American values and principles.
    —————————-
    Excerpt
    From the 1998 Congressional Record.

    U.S. INTERESTS IN THE CENTRAL ASIAN

    REPUBLICS HEARING BEFORE THE
    SUBCOMMITTEE ON ASIA AND THE PACIFIC
    OF THE COMMITTEE ON INTERNATIONAL
    RELATIONS HOUSE OF REPRESENTATIVES

    ONE HUNDRED FIFTH CONGRESS SECOND SESSION

    FEBRUARY 12, 1998
    STATEMENT OF JOHN J. MARESCA, VICE
    PRESIDENT OF INTERNATIONAL RELATIONS, UNOCAL CORPORATION
    I would like to focus today on three issues. First, the need for multiple pipeline routes for Central Asian oil and gas resources. Second, the need for U.S. support for international and regional efforts to achieve balanced and lasting political settlements to the conflicts in the region, including Afghanistan. Third, the need for structured assistance to encourage economic reforms and the development of appropriate investment climates in the region.

    From the outset, we have made it clear that construction of the pipeline we have proposed across Afghanistan could not begin until a recognized government is in place that has the confidence of governments, lenders, and our company.
    ———————-
    So Robert, when these guys lose a few drilling rigs they should just go home and be thankful that they got out of the country alive.

    Regards

    Steve

  29. Steve – I’m betting you believe the Michael Moore movies too!

    If I have this right, you believe that Unocal, part of the Centgas consortium who wanted to build a gas pipeline across Afghanistan, falieled to get a deal with the Taliban. Therefore the US started a war with Afghanistan, replacing the Taliban with a more stable and oil friendly government.

    The problem is, that the terrorist actions of 9/11 prompted President Bush to request the Taliban to hand over Osama Bin Laden. When the Taliban refused then the US invaded Afghanistan. If this was a war for oil, why wait until 9/11 to invade? Why give the Taliban a choice? By 2001, Unocal had already withdrawn plans for the pipeline. Pakistan and Afghanistan have discussed the line, but no western companies have signed on.

    And even if this was all true, what does it have to do with Venezuela? The Orinoco Basin deals were signed back in the 1990’s by the democratically elected government of Venezuela. At the time the deals were signed, crude was selling for $20-30 per barrel and Venezuela had neither the cash or the technology to develop the Orinoco.

  30. demanding hard evidence of direct involvment by oil companies in US-run terrorism is just a way of killing the discussion.

    Yet making insinuations that the companies that had their assets expropriated were involved in malfeasance in Venezuela does a disservice to those companies, considering that there is no evidence of such. I expect to see things like this in the National Enquirer. But this is not the National Enquirer. If someone suggests that XOM or COP got what they deserved, I want to see evidence that they did anything wrong.

    So far, we have a lot of complaints about the U.S. government, and oil companies in general, but nothing specifically related to these companies. People are trying to assign guilt by association, because they lack any actual evidence and wish to deflect some of the blame from Chavez.

    Cheers, Robert

  31. Robert, what do you regard as “evidence” and what do you regard as “wrong”?

    When in 10 years time there is a popular uprising in Iraq and the US oil companies are thrown out by a popular president, are you going to tell me that this is a travesty of justice because the contracts allowing the US oil companies to exploit Iraqi oil was signed by a democratically elected government?

    If the US military and the (US run) IMF dictates to a country that it has to let US oil companies move in and extract its natural resources for 7C on the dollar (happens in South America), is the Oil company guilty of anything?
    Have you been following the BAE bribery case ? BAE was just “following the governments rules” Is BAE guilty of anything?

    Tesco’s pays farm workers in South Africa next to nothing and claims that this is OK because the South African Government allows it to. But the South African government was co-oerced by the British/Americans/EU and the World Bank into passing “Free Market” laws that provide zero worker protection? Tescos knows this and in fact demands this as a condition of buying from SA.
    Is Tesco’s guilty of anything?
    In your opinion obviously not.
    This is a simple subterfuge. The EU/US/IMF/WB tilt the playing field massively in favour of their own companies by whatever means necessary, and the companies can go in and take the profits while keeping their hands clean.

    You have obviously chosen to ignore this reality.
    ——————————-

    Now, to the rest of your reply:

    “Steve – I’m betting you believe the Michael Moore movies too! “

    If there is any part of “Sicko” that you would like to take factual issue with then Mr. Moore would be very please to hear from you.
    ———————–
    Don’t be so naive Robert.
    Yes, of course the US invasion of Afghanistan was planned way before 9/11, as was the invasion of Iraq (or are you one of those happy group of gullable souls who still believe that the invasion of Iraq wasn’t on the agenda before 9/11 and it is all about democracy?)

    9/11 gave the political cover for the invasion that’s all. They didn’t do it before because they couldn’t find a smokescreen big enough to cover the act (not having the cold war as a perenial reason for anything and everthing any more is a real bugger).

    Dick Cheney is on the record in the 90’s stating that control of the Caspian oil and gas reserves was of geopolitical strategic importance to the USA.

    The pipeline deal was signed with the Afghani pupet regime in 2002, but stability isn’t a key feature of Afghanistan right now so the oil majors can’t go in yet.
    ————————

    What has it got to do with Venezuela? There is not a country on earth with large oil reserves that has not been under US control since the 1950’s (before that French or British control).

    You are simply chosing to ignore history and look at “facts on the ground”. That dog won’t hunt.

    Steve

  32. Robert, what do you regard as “evidence” and what do you regard as “wrong”?

    Basically, since XOM and COP had their property seized, I would like for someone to show that they did anything wrong in Venezuela. Throwing out things that were done by other companies in other countries is irrelevant. A lot of people have suggested that the actions of Chavez were warranted. I have yet to see anyone show how they were. All I have seen is a bunch of insinuations that have nothing to do with the companies involved.

    Don’t be so naive Robert.

    I didn’t write any of that piece that you are responding to.

    Here is what Occidental has done in/to Colombia.

    Yet that’s not XOM or COP, and Colombia isn’t Venezuela. Those sorts of arguments are simply ludicrious. It’s the equivalent of denouncing a company in the U.S. on the basis of the wrongdoings of a different company in Mexico. If you people have any actual evidence, I presume it would have been produced by now.

    RR

  33. Hi Robert,
    as my last post whent astray i would just ask two querstions.

    You state that without the huge investments by the oil companies Chavez would never have been able to have his revolution.
    Q1. How much profit did big oil make from Venezuelan oil between 1990 and 2007?

    Q2. When are we going to see a post stating how awful and ilegal it is that big oil is just about to steal most of Iraqs oil and that the Iraqi people should be compensated?

    Cheers

    Steve

  34. Q1. How much profit did big oil make from Venezuelan oil between 1990 and 2007?

    That would be pretty tough to get at that number. You would have to look at each company’s annual reports for the past 17 years. A guess? Given that tens of billions have been invested, my guess is that billions have been earned. And many, many Venezuelans were employed in the process. And many of these are not happy about Chavez’ actions, because he is demanding that they take a pay cut. I am talking about your standard blue collar workers here.

    Reading through COP’s 2006 annual report, they don’t break down earnings specifically by country, but it looks like the value of the oil extracted from Venezuela in 2006 was around $600 million. How much of that is earnings, I don’t know. I do know that they have invested around $2.5 billion, so you would hope to earn a few hundred million per year off of that investment.

    When are we going to see a post stating how awful and ilegal it is that big oil is just about to steal most of Iraqs oil and that the Iraqi people should be compensated?

    I am not at all in favor of what is transpiring in Iraq, and I was vocally opposed to the war before we invaded (and while support for the war was very high). People are quick to forget that most supported the war in the beginning. But I didn’t.

    Cheers, Robert

  35. Robert,

    An interesting parsing of this discussion is into 1) what the strategic/legal next steps the various parties should take (which I think is the crux of your post), and 2) what is the moral judgment of the situation (which seems to be what “Fernando” and “Steve” are arguing). The 2nd point, while very intriguing, does not seem to have space in the context of this blog discussion to explore adequately or come to any conclusions (we need history and philosophy classes for that).

    As to the 1st point, I think that’s where the ‘rubber meets the road’… I can see why Chavez is taking the steps that he is, considering he probably feels as though he can maintain power through any economic malaise brought on by a deterioration in revenues from lack of operational expertise in heavy crude. While other countries open the taps a bit to compensate, his assets will stay in the ground until they’re worth even more. I’m also whole-heartedly in favor of XOM & COP not agreeing to the new terms (particularly the clause on foregoing future arbitration), and am very disappointed to see CVX agree to that (BP, Total & Statoil can do what they like ;-)).

    As to arbitration that leads to Citgo asset seizures, I think XOM & COP would be wise to threaten such action as part of their compensation negotiations, but that should remain a ‘last resort’, as most int’l arb has resulted in so much bad blood between the entities involved that any future dealings are impossible (this, with $$B at stake, should be no different). I would think it a shame if XOM & COP lose any future access to such rich reserves in their own hemispheres at such a time as Hugo is gone (if ever) because of tit-for-tat engagement.

    Also, although it substantially harms US interests to be seen as “rewarding” breach of contract by doing nothing, I’m not sure our interests are better served by what will certainly appear (even if falsely) to other nations and peoples as expropriation of our own. If I were Señors Tillerson & Mulva, I’m not sure which path I’d take if Hugo forced my hand in compensation negotiations. But in the grand American traditions of litigation (one of our favorites) and pursuing any action (including ill-planned ones) over none at all, I guess I’d sue.

    My two cents.

    Cheers,
    BKM

  36. “You heard it here first. Two months ago, I wrote Let’s Confiscate Venezuela’s U.S. Refineries.”

    I heard it first in Venezuela while I was working there on an agricultural project in 2002. American oil field employees, in the compound where I lived in El Tigre, often discussed the fact that Citco assets would be in play if Chavez expropriated the assets of American oil companies.

    Tom

  37. ExxonMobil posted profits of 100 Billion dollars for the years 2004-2006 alone. I think that even without looking at the detailed financial reports we can safely say that it has been amply rewarded for its “investment” in venezuela.
    Exxon pulled out not because it wasn’t going to geta “fair” deal, it pulled out in a tantrum because a sovereign state actually had the temerity to try and enforce its rights against the mighty Exxon. I am sure that Exxon is expecting the US government to orchestrate the overthrow of the Chavex government so that it can move back in on more “favourable” terms once again.
    We shall see.

    As to the oil grab in Iraq, we are witnessing the theft of an entire nations natural resources and the best you can say is that you are “not in favour” of what is going on in Iraq, well i would hate to think what the oil companies woud have to do for you to be actually “against” what they are doing.

    Steve

  38. I think that even without looking at the detailed financial reports we can safely say that it has been amply rewarded for its “investment” in venezuela.

    So, you require no actual evidence before jumping to conclusions? Sorry, but I do. I can understand that you don’t care for Exxon, but that’s no excuse for the line of reasoning you have been following. So far, we have no evidence, but a lot of insinuations on your part.

    And it wasn’t an “investment.” It was an investment, made after the first effort at nationalization failed. The democratically elected government invited oil companies back in to invest. Now that they have, Venezuela has decided to again nationalize. Why? Because they couldn’t afford to develop the fields themselves, so they pulled a fast one after the investments were on the ground.

    Exxon pulled out not because it wasn’t going to geta “fair” deal, it pulled out in a tantrum because a sovereign state actually had the temerity to try and enforce its rights against the mighty Exxon.

    Sorry Steve, you are full of crap. Venezuela changed the laws long after the contracts were signed and the investments were in the ground. So, Exxon didn’t throw a tantrum, they just said “No Thanks” to the new terms. Spin it any way you want, but that’s what happened. The economics of a project take things like taxes, etc. into consideration. If the taxes are increased by an enormous amount, which they were, then the economics will be reevaluated. If they don’t look good, then it makes sense to pull out.

    As to the oil grab in Iraq, we are witnessing the theft of an entire nations natural resources and the best you can say is that you are “not in favour” of what is going on in Iraq

    Steve, you are grasping at straws at this point. I actually spoke out against going to war before we went to war. Did you? Or were you one of the majority who supported it right up to the point that it was clearly not going to be a walk in the park? My views have been consistent since before it started. We had no business in Iraq, and we still have no business in Iraq. If you feel the need to spin my position into something else, then that’s your own personal problem.

    Cheers, Robert

  39. If you take the amount of oil that Exxon extracted from Venezuela as a % of its total world wide production 2004-2006 and then take that % of 100 Billion you can’t be far from the real earnings number.

    There is a ton of hard evidence of oil companies doing very very bad and nasty things everywhere since the Rockerfeller days of Standard oil (I worked in the industry for a few years and I also lived in Africa long enough to know how the system works). So my arguing that they have been doing the same things in Venezuela is a quite reasonable call. Your arguing that Venezuela is somehow a special case is just nuts.
    Exxon guilty until proven innocent? Well, yes.

    Read Confessions of an Economic Hitman for a bit of background on the issue.

    I am not doubting that you were against the Iraq war Robert, that isn’t the issue and wasn’t my point (as you well know).

    I want to hear you complaining as righteously about the plundering of (possibly trillions of dollars worth) of Iraqi oil by the oil majors, as you complain about Chavez’s plundering of Exxon’s drilling gear.

    Regards

    Steve

  40. Your arguing that Venezuela is somehow a special case is just nuts.

    I just expect evidence for your claims. I am sorry you find that so unreasonable. If you think Exxon got what they deserved, show me their wrong doings in Venezuela. So far, we have gotten complaints about Colombia and Iraq and Standard Oil. You are on a smear campaign. Yet you have no actual evidence, but you so strongly believe that it is there that you feel the smearing is OK. I do not.

    FYI, I don’t really care to defend XOM. But I do care to defend COP. I think they have been a very good corporate citizen down there. They gave back a lot to the community. For Chavez, it wasn’t enough, so he tore up signed contracts and demanded better terms after the assets were on the ground. He didn’t risk billions to bring the projects online, but he wants the rewards.

    Cheesr, Robert

  41. I want to hear you complaining as righteously about the plundering of (possibly trillions of dollars worth) of Iraqi oil by the oil majors, as you complain about Chavez’s plundering of Exxon’s drilling gear.

    Incidentally, this Iraq thing has not come to pass. The Chavez deal has. I was not complaining about the Chavez deal before it became reality, even though it had been hinted at for quite some time. But if you want to write up a factual essay on the Iraq situation, I would be glad to post it as a guest post. Frankly, I have been ignoring the whole Iraq/oil situation. To my knowledge, my company is not involved.

    Cheesr, Robert

  42. But if you want to write up a factual essay on the Iraq situation, I would be glad to post it as a guest post. Frankly, I have been ignoring the whole Iraq/oil situation. To my knowledge, my company is not involved.

    Don’t hold your breath waiting for Steve. The fact of the matter is that US companies have been largely shut out of Iraq.

    Iraq Oil

    Scroll down to the section on Oil Development Deals with Foreign Companies. There is no plundering. If anything western companies are assisting the Iraqi National Oil company for free with the hopes of getting concessions some day.

    If this was a “war for oil”, US oil companies sure didn’t get anything out of it.

  43. Don’t hold your breath waiting for Steve. The fact of the matter is that US companies have been largely shut out of Iraq.

    This does not surprise me. Steve demonstrated a bit of trouble with facts. He favored argumentation via innuendo and generalizations. But that’s why I offered him a chance to write a factual essay on the situation in Iraq. If he could actually support his statements, I would post his argument for discussion.

    Cheers, Robert

  44. If you take the amount of oil that Exxon extracted from Venezuela as a % of its total world wide production 2004-2006 and then take that % of 100 Billion you can’t be far from the real earnings number.

    Incidentally, why don’t you do that? This is your argument. Shall I be expected to support your argument? Remember, you said they have been amply rewarded for their “investment.” Show us how much their investment was, and how much they have been rewarded.

  45. Robert – the following article was written in 2003 and concerns the Apertura Gas Natural in Venezuela. But on page 5 it has a nice summary of the Apertura Petrolera including the tax and royalty rates.

    Apertura Gas Natural

    You have to put the Apertura into context. In the 1990’s crude prices were in the $10-$20/barrel range. PDVSA had to borrow money in the early 1990’s to pay its “social premium” to the government. Production had peaked and was in decline. PDVSA was unable to provide money to the government and capital spending to maintain or increase production without private capital.

    Steve’s contention was that the IOCs exploited Venezuela in the Apertura. Nothing could be farther from the truth. The IOCs were relegated to the fringe producing areas and the Orinoco basin – basically the stuff PDVSA had already picked over and didn’t want. The Apertura was an open and transparent process where the IOCs bid premiums and a royalty rate in exchange for concessions. The 3rd marginal bid round in 1997 brought billions of $ in premiums to Venezuela. The price of oil at the time was $18.90. In 1998 it fell to $12.50.

    With foreign investment and expertise, the Orinoco and marginal production now produces nearly 40% of Venezuelan production.

    When Chavez came in to power he gradually ratcheted up the taxes and royalties of the IOCs. In a $70 per barrel price environment, the deals struck in the 1990’s look extremely generous. But at the time the investments were made, these were considered very risky.

    ExxonMobil exploiting Venezuela? Hardly! If anything, it is Venezuela who has taken advantage of the IOCs.

  46. OK People, some numbers. (long post – sorry)
    Firstly, the earnings of the IOC’s and the State in Venezuela based on the contracts negotiated in the 90’s with oil at various prices:

    $10 Price $15 Price $25 Price
    Export price 10.00 15.00 25.00
    Production -4.00 -4.00 -4.00
    Upgradin -6.00 -6.00 -6.00
    Expl.tax 1% -0.10 -0.15 -0.25
    Inc. tax 34% nil -1.65 -5.02
    Net profit/b -0.10 3.20 9.73
    Government nil 5.00 15.00

    Repeating this excersise for oil at $50/b results in profits of $20 per barrel for the oil companies.
    Increasing the exploitation tax to 33% and income tax to 50% (as Chavez did) simply returns IOC profits back to $10 per barrel, a number with which they were quite happy a few years ago.
    (Oil at $75 still gives the IOC’s $22 clear profit).

    Now to Exxon.
    It would appear that Venezuela amounts to about 2% of Exxon’s total oil extraction business.
    Exxon pumps about 2.5mbpd so:
    2.5E6x365x0.02 = 18.25mb
    Profit on this oil has been between $10 and $20 (say $15) since 2000, so Exxon has had net profits of 18.25E6x15x5 = $1.4B between 2000 and 2005.

    Sanity check: In this time Exxon posted net income of $105B, so 2% is around 2B which is close enough for rock and roll.

    So, after all expenses, depreciation, etc etc Exxon made a profit of about 1.4B from its operations in Venezuela, and was going to continue to make probably more than this given the price of oil. This, of course is why every one else stayed, the deal is OK.

    Now, to Iraq (a subject that Robert just doesn’t think much about…).
    It would appear as though the US administration is demanding a totally inappropriate PSA agreement
    “Production sharing agreements (PSA’s) are generally applied in circumstances where there is a strong possibility that oil exploration will be extremely costly or even fail, and/or where extraction is likely to prove prohibitively expensive.
    “None of these conditions apply in Iraq: huge reservoirs of easily accessible oil are already proven to exist, with more equally accessible fields likely to be discovered with little expense. This is why none of Iraq”s neighbors utilize PSAs. Saudi Arabia, Kuwait, Iran, and the United Arab Emirates all pay the multinationals a fixed rate to explore and develop their fields; and all of the profits become state revenues”
    —————————–
    The putative losses to the Iraqi people and the corresponding gains to the IOC’s are stupefyingly huge numbers.
    (http://www.globalpolicy.org/security/oil/2005/crudedesigns.htm#5.3 )
    ——————————-
    On May 23, 2007, Congressman Dennis Kucinich (D-Ohio), said of the Iraqi “hydrocarbon” law,
    “This administration has led Congress into thinking that this bill is about fair distribution of oil revenues. In fact… except for three scant lines, the entire 33-page hydrocarbon law creates a structure to facilitate the privatization of Iraq oil,”
    ——————
    March 13, 2007,New York Times, Antonia Juhasz, an analyst with the watchdog group Oil Change International, said,
     
    “The Iraqi hydrocarbon law would take the majority of Iraqi oil out of the exclusive hands of the Iraqi government and open it to international oil companies for a generation or more… The Administration has highlighted the law’s revenue sharing plan, but the benefits…are radically undercut by the law’s many other provisions – these allow much (if not most) of Iraq’s oil revenues to flow out of the country and into the pockets of international oil companies.. The Iraqi National Oil Company would have exclusive control of just 17 of Iraq’s 80 known oil fields, leaving two-thirds of known – and all of its as yet undiscovered – fields open to foreign control”
    ————————

    The fact that US oil companies have up until now not been operating directly in Iraq means nothing. They are all waiting for just two things:
    1. the deal to be signed
    2. the US military to stabilise the country

    So, in conclusion I would say that Exxon has been entirely fairly rewarded for its investment in Venezuela and walked away because of either sheer greed or some political calculation, and that the IOC’s are just hovering around Iraq waiting for the dust to settle and the puppet government to sign the 40 year PSA’s handing over control of the oil.

    Regards

    Steve

  47. “So, in conclusion I would say that Exxon has been entirely fairly rewarded for its investment in Venezuela”

    Um, doesn’t that depend on how much was invested? Don’t you need to know the investment and the return to be able to say they have been fairly rewarded?

  48. Steve – I don’t know where to start! Let’s tackle the Iraq situation first. Antonia Juhasz is a frequent guest on “Democracy Now” and the darling of “Democrat Underground”. Her organization is calling for the breakup of the IOCs and claims that President Bush is invading “one economy at a time”. She probably hasn’t met an oil agreement she likes! So her condemning the Iraq oil law is hardly news.

    Production Sharing Agreements are used in over 50 countries going back to the 1950s. You said: “Production sharing agreements (PSA’s) are generally applied in circumstances where there is a strong possibility that oil exploration will be extremely costly or even fail”

    This is only one aspect of the PSA. They are used primarily in countries where ownership of mineral rights by private companies is prohibited – as it is under the new Iraqi constitution.

    One cannot judge whether a PSA structure is good or bad without knowing 2 things, the up front premium paid to acquire the PSA, and the “share” or percentage of the production the prospector is allowed to keep.

    Antonia Juhasz and others criticize the PSA structure before the first sale is even held! She presumes that Iraq will get a lousy deal. But if the 3rd marginal bid round in Venezuela (1997) is any indication, then I would expect huge premiums for Iraq. The Iraqis are free to set a minimum bid and minimum share, as in any auction to ensure that the assets are not sold at fire sale prices. There are huge flows of capital available in the industry with relatively few places to spend it. ConocoPhillips announced this week it was buying back $15 billion in stock (more than 10% of the shares outstanding).

    The PSA structure is probably the fastest way to get money into the Iraqi treasury. The Iraqi National Oil company doesn’t have the capital or expertise to rapidly expand its oil production. Like most state oil enterprises, INOC is plagued by incompetence, corruption, bueracracy, and indifference.

    I agreed with the Heritage Foundation, privatizing oil reserves would have been the best way to ensure that Iraqi citizens directly received the benefits of its oil wealth. I would have done it as part of a larger land reform.

  49. As for Venezuela – you argue that ExxonMobil should be happy with its $10 profit, fair enough, but that argument cuts both ways. Why shouldn’t Venezuela be happy with the deal they signed in the 1990s? They are making much more now than they would have.

    What about the sanctity of a contract? If one side can just tear up the agreement and renegotiate any time they want then what is the point of the contract? Chavez will claim that HE didn’t sign the contract – well neither did Rex Tillerson, the CEO of XOM.

    Your arguments also ignore risk. Had the Venezuelans proposed today’s deal to the IOCs back in 1992, the IOCs would have likely passed on it, judging the risks not worth the potential rewards. The IOCs might have invested elsewhere or returned dividends to their shareholders or bought back stock.

    Imagine that Hugo Chavez proposed a lottery where players could buy a ticket, if they lost they walked away with nothing. But if they won, Chavez would raise the taxes on the winner and demand that the state be allowed to keep most of the profits. Would anyone want to play a lottery under these terms?

  50. “Um, doesn’t that depend on how much was invested?”
    No, the numbers I quote are profit. Profit is what you get after paying all of the bills.

    “The Iraqis are free to set a minimum bid and minimum share…”
    the Iraqi’s, if you hadn’t noticed aren’t actually free to decide anything.

    “The PSA structure is probably the fastest way to get money into the Iraqi treasury…”

    Do you remember the island of manhattan being bought for some glass beads and a mirror?

    “The Iraqi National Oil company doesn’t have the capital or expertise…”

    Ah! the patronising colonialist approach. I haven’t heard that since I talked with an Israeli about Arabs.

    “I agreed with the Heritage Foundation…”
    sit down, have a stiff drink, it will pass.

    “As for Venezuela – you argue that ExxonMobil should be happy with its $10 profit, fair enough, but that argument cuts both ways. Why shouldn’t Venezuela be happy with the deal they signed in the 1990s…”

    Who owns the oil? Have you noticed how governments seem to have the right to change tax levels whenever they please? I believe that even the US government has been known to raise taxes without consulting with the population.

    “What about the sanctity of a contract?”

    You will find that contracts that turn out to be very unfair to one party can be revoked and re-negotiated, rock stars do it all of the time with former managers.

    “Your arguments also ignore risk…The IOCs might have invested elsewhere”

    The IOC’s are in the business of extracting oil reserves. They would have invested in the massive Venezuelan reserves almost regardless of the risks, remember the story about the fox that ate the frog and drowned himself?

    All done?

    Cheers

    Steve

  51. Steve – as for contracts, that is why IOCs insist on international arbitration – which is where XOM and COP are probably headed to get their investments back.

    Again, going back to the Venezuela Apertura process in 1997, the sale exceeded everyone’s expectation. the Government did extremely well. Here is a summary from a Duke business school case study:

    “The Third Round Results

    The third round was the latest step in the Venezuela Apertura process. It aimed to attract foreign oil companies’ investments to 270 bnbbls of heavy reserves, with the intent of helping raise national production from current 3 Mbd to 6 Mbd over the next 10 years.

    The round bidding occurred during the week of June 2nd and June 6th of 1997, as planned by PDVSA. 130 International companies and 70 Venezuelan companies qualified on financial and technical grounds. Each prospective bidder was given the same, fairly extensive data spreadsheet for the specified areas of interest. A closed bidding process was conducted on a single dollar figure to assign the areas under offer.

    Bid levels in the 3rd round exceeded BP, industry analyst and PDVSA expectations by over factor of four and are high given the contractual and fiscal terms, crude and reservoir quality, which collectively restrain value potential. Total bids received amounted to $2170m for the 18 Areas on which bids were received against a pre-bid PDVSA view of circa $350m.”

    Recall that this was at a time when oil company profits were tight, and oil was selling for $18/barrel. IOCs bid over $2 billion in premiums for very poor fields that PDVSA didn’t want.

    Imagine in 2007 with tens of billions of $ to invest on prime fields – Iraq could do extremely well with a bidding round.

    It is not going to be “glass beads and a mirror”.

    So if not the PSA model, how would you propose that Iraq develop its oil fields?

  52. No, the numbers I quote are profit. Profit is what you get after paying all of the bills.

    Actually, you said that they have been “fairly rewarded.” And that certainly does depend upon how much was invested. If their return was lower than the general return on the S&P 500, have they been fairly rewarded? Or are you one of those folks who can’t seem to understand that profits and profit margins are entirely different animals? Profits in the oil industry are huge. But that’s because billions must be invested to get a return. The profit margins tell the tale: They are not all that high. So if you make a very risky investment into Venezuela, how do you quantify whether your return is adequate? Do you do this without considering the amount you invested? Of course not.

    So, your profit number is still only half the story. Figure out the return on investment, and you will have the rest of the story and maybe a better understanding that XOM is not getting rich on the backs of poor Venezuelans. (In fact, you would find that a lot of poor Venezuelans have been employed and pulled out of poverty).

    You will find that contracts that turn out to be very unfair to one party can be revoked and re-negotiated, rock stars do it all of the time with former managers.

    But if the manager has invested billions into the rock star, he will probably jusifiably sue to maintain the contract. You ignore the fact that the oil companies were asked to invest, put billions on the ground, and then were asked to renogiate. Quite a difference from your rock star.

  53. “So if not the PSA model, how would you propose that Iraq develop its oil fields?”

    Well, why not do what the Saudi’s do and just Pay the majors a fixed price for extracting the oil?

    “If their return was lower than the general return on the S&P 500, have they been fairly rewarded?”

    What???? Why don’t they just put all of their cash into equities and call themselves a bank? In fact, Microsoft has pretty good numbers, why don’t then invent an operating system and call themselves a software company?

    “Profits in the oil industry are huge. But that’s because billions must be invested to get a return. The profit margins tell the tale: They are not all that high…”

    Huh? The oil companies reckon with 12% ROI which is damn good in any industry and absolutely mind-blowingly high when talking about sums of money like hundreds of billions of dollars. The risk free discount rate is the Tbill which offers around 5%, so I would say they are doing damn well.

    “In fact, you would find that a lot of poor Venezuelans have been employed and pulled out of poverty)”

    Horseshit. You will in fact find that Chavez was elected several times over by the vast majority of the population because exactly the opposite was true.

    “But if the manager has invested billions into the rock star, he will probably jusifiably sue to maintain the contract. “

    and he/she would lose because you are not allowed to take advantage of someone even if they are willing parties to the transaction. I think that you will find that sub-prime borrowers can and do sue the banks that lent them the money to buy houses that they could not afford, and that they win.

    “You ignore the fact that the oil companies were asked to invest”

    Invited, they were invited to invest and could of declined. Are you suggesting that the oil companies have no risk management ? They do nothing but invest in poor 3rd world countries (‘cos that’s where the big money is, it is much more difficult to rip off 1st world countries like Norway, or smart oil producers like the Saudis) .
    In any case, the new deal offered to Exxon was fair at $50 and more than fair at 75 or higher. Exxon refused because they wanted the whole pie and did not want to cede control.

    Bottom line is that Exxon was not pushed, it jumped.

    Steve

  54. What???? Why don’t they just put all of their cash into equities and call themselves a bank? In fact, Microsoft has pretty good numbers, why don’t then invent an operating system and call themselves a software company?

    You aren’t making any sense now. You suggested that they were fairly rewarded, but insist that you don’t need to know how much was invested to determine whether the reward was fair. That is ludicrous. It is the return on investment – not the magnitude of the return – that tells whether a rerun was good or not. And the comparison with the S&P 500 is just meant to show that it is the percentage that is significant.

    If I significantly underperform the rest of the market, but make large amounts of money because I invested much larger amounts of money, I hate to tell you that the vast majority of economists are going to disagree with your assertions that rewards were adequate (based solely on the profit number and ignoring the amount invested). Is that the way you manage your household finances? Judge whether an investment was good based merely on the profit number? If I profit $100, is that good? It is if I invested $20 and earned that in 1 year. It isn’t if I invested $5000 and earned that in 5 years. But I don’t know too many people who would suggest that you don’t need to know how much you invested.

    Huh? The oil companies reckon with 12% ROI which is damn good in any industry and absolutely mind-blowingly high when talking about sums of money like hundreds of billions of dollars. The risk free discount rate is the Tbill which offers around 5%, so I would say they are doing damn well.

    Oil company returns are just about average for all industries. They make significantly less than sectors like banks and pharmaceuticals, while risking far more.

    Really, Steve, you have an incredibly odd view of economics.

    You will in fact find that Chavez was elected several times over by the vast majority of the population because exactly the opposite was true.

    I am going to have to call you on that statement, because I personally know lots of people in the oil industry down their whose lives were bettered as a result of the IOC involvement there. I don’t know anyone who was made poorer because of this. But, I certainly await the evidence of your assertion.

  55. I may have to write a summary of this and post it as a thread. This is an interesting discussion.

    It is clear to me, Steve, that you are largely ignorant of economics. But I am going to ask you to do a thought experiment that may cause you to see the error in your thinking. Well, 2 thought experiments.

    Let’s say that you are in charge of evaluating XOMs opportunity in Venezuela. For you, personally, what are the criteria that are important? Keep in mind that you are competing with capital requests across the rest of the company. Generically, there are 3 things to consider. How much will we have to invest, what is our expected return, and what are the risks? If those look good, you make the investment as long as the total package ranks highly on the list of potential investments.

    Now, let’s say that over time, your returns start to go down as Chavez sees that your risks have paid off and decides he wants more of the pie. Your risks have gone up as Chavez clearly does not have any qualms about not honoring existing contracts. So, how do you evaluate the investment now? Do you give up control in this situation? I don’t, and I can see why XOM walked. And I wouldn’t call this greed. They have made a realistic appraisal of the circumstances and decided the risks and rewards no longer justify the expenditure.

    Consider the 2nd thought experiment. You invest in a mutual fund with a guaranteed rate of return. Over time, the mutual fund manager decides to take part of your returns and give them to more needy people. If you then take your money and move it elsewhere, are you justified? Yet you have done on a personal level what XOM did on a corporate level.

  56. I maintain a backup of this blog at WordPress, and the following comment on this topic was just posted:

    Robert

    Trying to be an apologist (or even a fair commentator) on oil companies and the US in Latin America is no easy task, especially when the other participants use only convenient bad history or conventional wisdom (oil companies bad and greedy and deserve whatever they get) as simplistic answers to everything.

    Western democratic and capitalist system (America prime example) not perfect but it has certain real benefits:

    1. There is a history both good and bad, so yes we know in former times we helped get rid of Allende in Chile and various other actions in Latin America that were not necessarily good, judged in 20-20 retrospect. We also usually know when abuses in the private sector such as bribes or even totally uneconomic deals (country exploitation we could say) occur, often currently these days and clearly after the fact. Other systems or countries (China or Western Europe for example) are no less interested in energy security but certainly less likely to ever air their “dirty linen” in acquiring it or maintaining it.

    No surprise if even in supposed pure socialist paradises as Venezuela the remaining oil companies, (based where such practices are less troublesome), have other means (such as high level relationships and inducements) to feel more secure in the long term even with no right of arbitration.

    No surprise that while Chavez can call Bush the devil at the UN, it not so easy to criticize him when he can stop free press when it suits him.

    2. Free markets judge industries and actions purely (and ruthlessly) on an economic basis. If the oil industry was really so “bad” and so influential and so profitable and had so much power that its risk profile going forward was a cakewalk, its stock multiples (which only in recent years have returned to even respectable but still modest grounds) would reflect this. At the same time in the US if it had exploited the government of Venezuela or paid bribes etc and it was disclosed (as it ususally is) its stock would be penalized. But it isn’t for not accepting an abrogation of a contract with a clear risk to future operations and rights.

    3. While one can argue the pros and cons of social democracy a la Europe or we could call it more capitalist democracy (uniquely in case US also idealistic and seemingly naïve compared to Europe) a la America, its clear that pure socialism a la Chavez is only nice as a concept and generally it breaks down to what Winston Churchill said, Democracy is the unequal sharing of benefits, socialism is the equal sharing of misery (not exact quote paraphrasing as too lazy to look up). There is a long history of socialism in Latin America and it still has deep roots there, but in general it hasn’t worked. Argentina and Brazil are both very rich countries in terms of natural resources but both have experienced major economic difficulties (defaults and devaluations) and have close to 30 % of their populations living below the poverty line.

    From blog comments, the American oil companies are indicted by conventional wisdom (they should have come whatever the risk, the initial contract is judged exploitation and since they make so much money – very low average return on capital over time versus most industries – they are crying over nothing, etc. etc.) and no rational arguments will prevail.

    Truthfully seeing the oil industry cave in to Russia and knowing their real concern about retaining reserves if at all possible I don’t think its just sour grapes and it’s a bit refreshing to see some oil companies no thanks, we will not just cave in and we will retain our commercial rights and courses of action on the original agreements.

    On Iraq, much of the technical talent in Iraq has left the country and developing the oil reserves there will be quite difficult under almost any go forward scenario. and if (again conventional wisdom) we really got involved to plunder oil we’ve spent billions and billions and haven’t received any guaranteed access or commitment for Iraq oil going forward. Pretty poor for an evil imperial power, what Chavez and a lot of normal US bashers would call us.

  57. I asked Steve what structure he preferred to the Iraqi PSA: “Well, why not do what the Saudi’s do and just Pay the majors a fixed price for extracting the oil?”

    That is one option. Nigeria also pays an extraction fee on a sliding scale. The problem is one of timing. Presumably the Iraqi National Oil Company or other entity would hire IOCs to extract the oil for them. But who would put up the initial capital for the investment? The IOCs? At what interest rate? It gets back to risk/reward. Iraq will be a very risky place to do business. The judicial system in Iraq leaves much to be desired, contract law is not well founded. I would tell you right now that I would advise my company against investing anything in Iraq under a fee contract – too risky.

    Another aspect Robert and I have not discussed is stock valuation. One measure of oil company value used by stock analysts is reserves base. Estimates of a companies reserves are an indication of future cash flows. Under a PSA structure, the SEC allows company to claim the value of the reserves as an asset, while not actually holding title to the reserves in the ground. A straight extraction fee does not allow the company to “book” the reserves.

    The concept is similar to loaning money for a car. If the bank holds the title to the car you get a better deal than for a personal loan.

    Now getting back to your argument that XOM, COP and others “exploit” the resource holders. Look at the country of Norway. It’s oil development used a combination of state owned enterprises and private development (they also ratcheted up the tax and royalty rates over time – but allowed IOCs to operate). This development scheme has made Norway rich:


    Norway Claims most Millionaires

    Here is the important excerpt:

    The rising levels of affluence in Norway also reflect the small country’s economic growth since the discovery of offshore oil in 1969. High oil prices the past few years sparked an unprecedented boom in Norway’s offshore industry, and in the economy in general.

    So Steve – how can you explain this? If oil companies are the source of evil, why is their evilness not everywhere? We could talk about the UK North Sea. Ask the average resident of Aberdeen or Glasgow if oil development in the UK sector has been good for them. Let’s go to the tar sands in Alberta and ask the local motel or restaurant owner if they feel exploited by big bad oil.

    The answer is that arguments that oil companies are exploiters are populists myths spread by people like Steve with no basis in fact or reality.

  58. I meant to say “Edinburgh” instead of “Glasgow”. Could have also said “Hartlepool”, “Middlesbrough” or any of the cities along the UK North Sea that support oil and gas operations.

    Steve is likely to tell me that you can’t compare Norway and Iraq. Iraq is a lot bigger. Well not really. Iraq has only 25 million inhabitants compared to Norway’s 5 million. However, Iraq has an estimated 115 billion barrels of reserves – Norway just 7.7.

    On a per capita basis, Iraq has 23,000 barrels of oil reserves per capita compared to Norway with just 1,540.

    If private oil development in Norway led to prosperity – imagine what it could do for Iraq.

    The Iraqi oil law doesn’t sound too different from the Norwegian development model. INOC would control a large share of the existing reserves, with private development under PSAs for developing newer fields. Clearly at around 2 million barrels per day of exports Iraq is not anywhere near its full potential.

    In further support of my argument that Iraq needs IOC help, here is an excerpt from the DOE country brief on Iraq:

    “Throughout most of the 1990s, Iraq did not generally have access to the latest, state-of-the-art oil industry technology (3D seismic, directional or deep drilling, gas injection, etc.), sufficient spare parts, and investment. Instead, Iraq reportedly utilized sub-standard engineering techniques (i.e., overpumping), obsolete technology, and systems in various states of decay in order to sustain production. In the long run, reversal of all these practices and utilization of the most modern techniques, combined with development of both discovered fields as well as new ones, could result in Iraq’s oil output increasing by several million barrels per day.”

    “U.N. oil experts have estimated that some reservoirs in southern Iraq have been so badly managed that their ultimate recovery rates might be only 15 percent-25 percent, well below the 35 percent-60 percent usually seen in the oil industry.”

    Similarly, PDVSA is bungling its oil and gas operations and reducing the ultimate recovery to just a fraction of what an IOC could do.

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