Venezuela’s Slide Continues

At this point, you have to wonder who in their right mind will ever do business in Venezuela again as long as Chavez is in power. The risk that Chavez will steal your property is simply too great. During his administration, Chavez has seized phone companies, electric utilities, private real estate (just this week he ordered seizure of a private shopping mall), oil field investments, mines, steel plants, food processing plants, farms, (shades of Mugabe) and cement plants – to name a few.

Now this week he has stolen the assets of oil field services companies:

Venezuela Seen Paying Price for Chavez Expropriation of Oil Contractors

In the wake of the seizure of foreign and domestic oil service companies and assets by armed troops following the orders of Venezuelan President Hugo Chavez, experts began to count the cost to Venezuela — which holds the Western Hemisphere’s largest oil reserves — in lost oil production, lost jobs, lost foreign investment and lost foreign expertise.

This one is ironic, because he was “forced” to seize these assets based on his miscalculations on his previous thefts. Let me explain. In 2007, when oil prices were rising, the heavy oil investments of ExxonMobil and ConocoPhillips (Full disclosure: My former employer) finally began to pay off. It is very expensive to extract and process the heavy oil from the Orinoco Belt in Venezuela. It requires a lot of capital investment and significant expertise, but it also doesn’t pay off until oil prices rise. But when oil prices did rise and Chavez saw the goose start to lay golden eggs, he decided to seize the goose for himself. The problem is that Chavez doesn’t know how to care for a goose, so what has happened in the wake of these seizures should come as no surprise.

It was bad enough that oil production has fallen sharply under the Chavez regime. The reasons for that are simple enough, and have been covered here before. In a nutshell, the issue is this: It takes a lot of capital to maintain the heavy oil business, and Chavez was siphoning off profits to pay for his social programs. Now some (extreme-leftist) people might think that’s just great, but the only reason any money was there to siphon off was due to the high investments to begin with. By not reinvesting back into the business, Chavez set the stage for the plunging oil production we see now – but now the goose is on life-support so there will no longer be money for those social programs.

Much higher oil prices for a while dampened the blow of falling production, but once oil prices started to fall, plunging revenues became a real problem. You would think he would have saved some money for a rainy day, but he is just like that irresponsible person who spends their entire paycheck every week, no matter how much money they make. Although I guess you don’t have to save for a rainy day if you are willing to just rob a bank when the rainy day comes.

But first, he had the bright idea to invite Western oil companies back in to invest again. Surely they can let bygones be bygones? Apparently not, because there doesn’t seem to be a rush to come back in. After all, does anyone doubt that Chavez will steal the investments as soon as prices/production turn back up?

This all leaves Chavez in a bind. He hasn’t made the investments that he needs to make, and nobody else is doing it for him. Production and prices are falling, and he has social programs to pay for. Debt started to pile up with oil services companies, and Chavez demanded lower prices from them. Given that he simply has no money for investment, he does what he always does. Threaten and then steal when he doesn’t get what he wants:

Venezuela’s Oil Production Squeezed by Chavez’s Heavy Hand

Chavez’s government and seized the assets of 60 foreign and domestic oil service companies after conflict erupted over nearly $14 billion in debt owed by the country’s state-owned energy company, Petroleos de Venezuela (PDVSA).

Irate over a growing backlog of invoices, many of the companies threatened to halt operations – something PDVSA and Chavez can ill-afford. The company accounts for about half of Venezuela’s revenue, and is largely responsible for funding and administering the social programs that Chavez has employed to court popular support.

PDVSA brought in more than $120 billion in revenue in 2008, but this year, it will likely make just $50 billion. With its back against the wall, PDVSA is demanding that service companies accept a 40% cut in their bills. Last Friday, the government began expropriating equipment and projects from foreign oil service firms that refused to renegotiate their debt. At least 12 drilling rigs, more than 30 oil terminals, and about 300 boats were seized, the according to The Financial Times.

But the brash gesture will also bring negative consequences that could significantly jeopardize the nation’s oil production, which is already in decline.

“PDVSA has to invest in the business,” James L. Williams, heads of oil consultancy WTRG Economics told BusinessWeek. “You have to feed a cow if you expect it to give milk.”

Hey, this is about geese and golden eggs, not cows and milk. But, point taken. The fact is that Chavez continues Venezuela’s slide toward becoming Zimbabwe. One wonders if he truly lacks the ability to plan, or was just too stupid to see the consequences of this road he has chosen to go down. The only thing that can save him at this point will be for oil prices to go up. Ironically, that’s the same thing I would like to see happen, but if we are lucky Chavez will be ousted before prices get much higher. Then again, if production continues to fall it won’t matter how high prices go; they won’t be able to offset the drops in production.

Chavez is now rattling sabers with Coca-Cola, so don’t be surprised if they go down next. Seriously, I don’t know why we don’t just seize Citgo as a response, auction off the refineries, and then pay damages to those whose assets have been expropriated. Chavez has said he doesn’t want to operate in the U.S., so we should extend a helping hand. It is the least we could do.

30 thoughts on “Venezuela’s Slide Continues”

  1. Chavez is a fascinating study in mismanagement. While Bu$h jr. was wrecking America, Chavez was wrecking Venezuela.
    Brings to mind an old adage from somewhere; Your truly bad enemies will often destroy themselves.
    I wish the Venezuelans well, and hope they can get new leadership. Some say there is a trillion barrels of oil locked up in the Orinoco tar belt, heavy crude, but usable.
    What a boon to mankind and the Venezuelans, if they properly developed their resources. I guess we have to wait for Chavez to pass on. He has the look of a tin-pot dictator who will establish himself in there for life, through thuggery and corruption. Too bad.

  2. What is interesting to me in that in the midst of all these expropriations and power consolidations–the most recent threat being against Globovision, an opposition cable tv station–is that Total SA’s Margerie basically said he was more interested in Venezuela than Brazil because there was less competition there.

    They signed an agreement for Total to build an Orinoco bitumen upgrader with CNPC agreeing to take the product in a joint refinery with PdVSA to be built in Guangdong (where else!). Margerie’s strategy appears to be twofold:

    1) Be part of a venture with the Chinese, given that Chavez sees Chinese ties as key to his regime’s survival.

    2) Somehow get in on the anti-colonial jibe, given that Chavez’s original party, the Fifth Republic Movement was based on the Gaullist Constitution which concentrated all power in the chief executive’s hands. This appears to also have had some benefit for Total in Iraq of late.

    Given recent events it seems there is little chance that Chavez could be ousted outside of the direct funding of an outright insurrection, the fact of which of course would only make folks like him more attractive to the people of South and Latin America … so I’m afraid we–and more unhappily the Venezuelan people–are stuck with him for at least another decade.

    (Course the majority of people in Venezuela still appear to really love the guy … the elections appear to be relatively fair.)

    In any case, Total appears to have more appetite for political risk than any other major at this point in time.

  3. If the US seizes Citgo, then Chavez can point to the US as a big bad bully (doesn’t matter that he’s done the same thing already) /scapegoat and it may boost his popularity at home. No, he’s got enough rope to hang himself at home. The US doesn’t need to be the ones yanking on the rope.

  4. Benjamin – really, the Bush bashing is just getting tiresome. Chavez has eliminated virtually all political opposition, replaced the judiciary with cronies, seized private property, jiggered the constitution to allow himself to be re-elected for life. Venezuela is a democracy in name only and Chavez is a tyrant.

    President Bush may have done some things you don’t agree with, but he did so in an honest effort to protect the country. When his term was up he left the office graciously.

  5. Just saw this posted at the Oil Drum. Rigzone is the original source. I would post a link but I usually screw them up.

    President Hugo Chavez acknowledged Friday that his government will continue to seize oil-company assets next week as part of its plan to expand the state’s control over a key industry.

    “You ask me if we have our eye on other [oil] companies, yes, yes,” Chavez said in a televised press conference during a visit to Buenos Aires. “Next Wednesday…we will continue to seize companies in eastern Venezuela…I don’t know how many, let’s say all of them,” he added.

  6. If there is one thing I can count it, any time I mention Chavez or Venezuela a certain troll will stop by to spew his venom. I am beginning to think our pal Mr. Mathews actually is Hugo Chavez, because he always takes it so personally any time someone attacks his hero. Much like Sean Penn, he thinks Chavez is doing an ultra-keen job and that the revolution is proceeding according to plan.

    Dave M., I know you are exceedingly slow, but I remind you that you are banished from here for failing to follow some very basic rules. I can only assume that it quiets your inner demons when you write your diatribes, because nobody else is going to see them. Heck, I don’t even read them. I see that it’s you, and I hit delete.

    Bye bye.

    RR

  7. “Seriously, I don’t know why we don’t just seize Citgo as a response, auction off the refineries, and then pay damages to those whose assets have been expropriated.”
    Didn't ExxonMobil some time ago get a court order stopping Chavez from selling Citgo, in case it was needed to settle Chavez' expropriation of their producing fields?

    Others may be able to cast more light on Citgo — as far as I knew, their refineries were tailored for heavy Venezuelan crude. Those facilities would have low value without a reliable source of that crude.

    Chavez may find that his deals with the Russians & Chinese are just a little too smart for his own good. The Russians are undoubtedly delighted that there will be less Venezuelan crude on world markets to compete with them. On the other hand, once the Chinese are established, Chavez will learn the real meaning of colonialism.

  8. @ Kinuachdrach

    Yes, I believe that’s correct re: sales of Citgo refineries.

    And Exxon attempted a global freeze on Venezuelan (PdVSA assets) that was attempted via London courts last year — but the judge ruled in favor of PdVSA (a ruling which surprised me.)

    PdVSA has stakes in downstream assets in the US Virgin Islands, Netherlands Antilles, UK proper, and the Netherlands IIRC.

  9. King-
    The true extent of damage to the US economy (that happened under Bu$h jr’s watch) is yet to be seen.
    I did not say Bu$h jr. was the same as Chavez. True, he left office (his own party abandoned him cold. He was not even invited to speak at the R-Party convention!
    I did say that Bu$h jr. wrecked the US economy, and Chavez has wrecked the Venezuelan economy. I will stand by those statements.
    (Sorry, I know you are Texan. Can you get us Prezzy who does not get us into an extended war next time? LBJ, and W. )

  10. Robert,

    I got a kick out of your story aout the crazy dairy lady in Oregon. About 4 years ago I was visiting my brother in Portland and we were talking about making our own still for alcohol.

    My brother did some research on the inter-net and we ran across butanol which sounded pretty good since it could be used almost as a direct substitute for gas, energy wise. We even found some inexpensive stuff (zeolite, I think) at the hardware store we could buy to dry it out with, We were going to brew it – not gas it.

    We ran across pictures of the Germans during WW II making alcohol on the back of their trucks in stills with potatoes. I guess they were pretty much out of gas by the end of the war.

    It Looked like butanol was a lot tougher to make than ethanol. All I can say to the dairy lady is good luck. Looks like pretty tuff stuff to make. Also less volume produced than straight alcohol.rt

    John

  11. Ben – when you mention Bush and Chavez in the same sentence you ARE making a comparison.

    In my opinion, Obama is much closer to Chavez than Bush. Obama and the government are moving to take over the banking business. Obama abrogates contracts in violation of the constitution (ask the Chrysler bondholders), Obama’s EPA withdraws permits already issued. Obama’s Interior Department suspends oil and gases leases already paid and awarded (Chavez suspended leases awarded in the Apertura), Obama proposes punitive taxes on the oil industry, just as Chavez raised taxes on the IOCs. Under Chavez the government went into massive deficit spending, leading to inflation. Obama – massive deficits, inflation to follow.

    I was spending about 1 week a month in Venezuela before and after the Chavez election in 1998. Much of the rhetoric that Obama uses today reminds me of Chavez shortly after he was elected.

    Theh Chrysler deal really bugs me. Obama tries to jam a deal down the throat of the bondholders, essentially giving the company to the unions. Then threatens to unleash the White House press corps on the bondholders who protested. Chavez used similar tactics against those who stood in the way of what he wanted. Rule of law prevailed – for a while in Venezuela. Let’s hope rule of law fares better here.

  12. Benjamin, please be specific and provide the exact data how G W Bush wrecked the economy, it is easy, you can tell what Chavez moves are wrecking Venezuelan economy. And no, “we would know the extent at some future point” won’t do. I mean, how long you want, a decade of mismanagement by Obamanomics to be still attributed to GWB? Get real!

  13. King-Morseleux:

    Okay, okay, I declare a ceasefire, as this is not the right forum. I just felt that Bu$h jr wrecked our economy, same as Chavez is wrecking Venezuela's.
    I will note the Dow was lower when Bu$h jr left office than when he went in. The Dow quadrupled under Clinton.
    If you believe in markets, the verdict was rendered, and not be me.
    Clinton proposed and ran federal surpluses, Bu$h jr. just ran barrels of red ink, good times or bad.
    Neither President developed an energy program, and Bu$h jr. was suspiciously close to the throne of Saudi Arabia.
    Bush overreacted to a single terrorist attack (9/11) largely planned and manned by Saudi Arabians, and then occupied Iraq, where he created a Shiite-Islamic theocratic state all at fantastic expense, but paid for by borrowed money.
    Our financial system collapsed on Bu$h jr's watch. No arguing that one. Utter failure on that score.
    Both Clinton and Bu$h jr. failed to fix our debt rating system, in which a Moody's, or S&P is paid by the issuer–a conflict on interest that has obviously undermined the rating system. (Obama will get a zero from me if he does not fix that.)
    Obama inherited a full-on train wreck. I don't see much argument there either.
    I do wonder about the Chrysler deal–definitely a rough-tough cram down.
    Obama has no real energy program, just impractical greenie-weenie stuff. Obama is probably making another mistake in Afghanistan, and expensive undertaking with little upside. Call it Bu$h jr. lite.
    But how bad of a Prezzy was Bu$h jr? A sitting President, at the end of his second term, and the R-Party does not invite him to the convention, and McCain-Palin run against his record, calling D.C. "corrupt" while Bush was there.
    Please, that is the picture of abject failure.
    Bu$h jr. wrecked the economy, he did not conclude his expensive adventure into Iraq, and he developed no energy program while we imported hundreds and hundreds of billions of dollars of Saudi oil.
    I hope Obama does better, but to be frank, I do not see how he can do worse. So far, I give Obama a C+, compared to an F for Bu$h jr.

  14. I can cite several examples where the Obama administration is implementing Chavez-like policies. The Dept of Interior (DOI) conducted lease sales in southern Utah. The Gov’t was glad to take lesees money – then cancel the leases.

    Cancelling the leases appears to be politically motivated, as all the leases are adjacent to working oil and gas properties, AND the closest is 15.5 miles from a national park. The oil and gas companies are fighting back .

    Chavez also voided leases when they didn’t get the deal he wanted. He retroactively applied taxes, just as the Obama administration wants to add addiotional taxes on Gulf of Mexico lease sales dating back to the late 1990’s.

    Chavez has certainly ruined his economy by creeping socialism. A road that Obama is also taking.

  15. King-
    When you give up that subsidized highway running up to your house in Katy, and when you say “kill the homeowners tax deduction,” and when you say “kill the Dep’t of Agriculture,” then maybe you will be talking tough.
    How about we get rid of federal deposit insurance? Social Security? HUD? No federal regulation of securities markets? Just whose socialism do we gore?
    And point to me the year the R-Party balanced the federal budget. Maybe Eisenhower did it ( a great president by the way).
    You make some good points about Obama.
    But we saw more socialism and nation-building under Bu$h jr, than ever before. Medicare prescription alone will cost a fortune, although the money mysteriously goes to drug companies.
    Right now, in terms of failed government, I rank Bu$h jr. with Chavez.
    Maybe Obama will sink lower than either one. Time will tell.
    Of course, Lincoln suspended habeas corpus, and threw newspaper editors in jail. Yet Lincoln towers above the rest. It is difficult to judge a President by isolated particulars. I think you are doing that with Obama. However, if you take Obama’s whole energy program, I think it is also very weak, and he deserves criticism on the score.

  16. “Right now, in terms of failed government, I rank Bu$h jr. with Chavez.”
    It would really help if people would occasionally read the US Constitution. The US is a Republic, not a dictatorship. The President is head of the Executive Branch, charged with implementing the laws & expending the funds authorized by Congress.Now, if someone wanted to argue that Congress over the last few decades (on a thoroughly bipartisan basis) has shirked its responsibilities and left the difficult decisions to the Executive Branch, it would be hard to argue with that. Just listen to Speaker Pelosi, for example.

    The fact remains that Congress authorized the responses to 9/11 and provided the funds. Anyone who does not like what was done has to recognize that the blame can not be dumped on President Bush alone — not when almost every action required the assent of the majority (sometimes super-majority) of Congress's 535 Representatives & Senators.

    “However, if you take Obama’s whole energy program, I think it is also very weak, and he deserves criticism on the score.”
    No disagreement there. Still, remember the comment above. Obama can propose whatever dumb thing he wants, but Congress ultimately decides. Unfortunately!

  17. the chinese will allow chavez to damage himself further. then will reappear with deals he can’t turn down. why rush in when you’re the only player willing/capable to play the game–letting the fool strut his stuff; knowing you’ll get access in the end. as they are doing with commodities the world over.

    fran

  18. “Obama can propose whatever dumb thing he wants, but Congress ultimately decides.”

    The president can create great uncertainty for energy producers. Under Clinton, coal and nuke plants were under attack through the courts. I do not have a problems with regulations based on laws passed by congress and implemented through public debate.

    By this time in the Bush administration the NATIONAL ENERGY POLICY, May 2001. On 9/11, congress was debating an energy bill. The position of the Bush administration was very clear.

    “It would really help if people would occasionally read the US Constitution.”

    It would appear that many Bush bashers do not understand that the Senate must ratify treaties like Kyoto. Bush bashers also failed to acknowledge the very strong position to take action on AGW by building wind, solar and nuke plants.

    I have been listening very carefully. Obama does not have a coherent energy policy. I can not tell if Obama even understand the differences between making electricity and transportation fuel.

    Obama policy on energy can be summed up in one word. Tax. Taxes on food and energy are very repressive.

  19. Kinu-
    Yes, we are a republic. Still, our system has evolved to the point where Presidential leadership is necessary. One example: The Prezzy sits atop the intelligence gathering networks we have. Those networks report to the Prezzy, not Congress.
    The intelligence gathered is shaped and altered within the Executive Branch.
    Yes, Congress authorized funds for the Iraq occupation, based on intelligence handed to them by Bu$h jr. Sheesh, even Colin Powell identified a laundry as a bio-weapons lab.
    Saddam said he had no WMD. Bu$h jr said he did. It turned out Bu$h jr. was the liar. A sad fact and day when a tin-pot despot like Saddam is more truthful than a US Prezzy.
    Additionally, a Prezzy can instigate a war through military action, taken on an emergency basis (Vietnam, anyone?).
    Few Americans (including myself) would leave US soldiers somewhere not fully funded and armed (although Bu$h jr. was fine with US families having to buy flak jackets for their sons). So, if a Prezzy gets us into a war, we tend to stick it out, even though only the Congress is supposed to declare war. In real life, the Prezzy gets us into war.
    I suppose the Congress is like the board of directors, and the prezzy is the CEO. Problem is, the CEO controls info and knowledge and manpower. That is why corporate boards and Congresses have limited powers.
    Kinu: But if it makes you feel better, then Bu$h jr., and the R-Party Congresses that controlled D.C. for six of the eight years Bu$h jr. was prezzy, contrived together to wreck our economy.
    Let us hope the new team does better. I think nukes, PHEVs, and natural gas are the way to go. I se no action in this area, but only weakness.

  20. Back on topic. Taking Citgo as compensation for seized assets in Venezuela might seem like a good idea, but it would be wrong. Even tin-pot dictators like Chavez have property rights here in the U.S. Most companies doing business in Venezuela had the good sense to include international arbitration as part of the agreement. It may take some time, but they’ll get at least partial recovery.

    One of the primary functions of government is to protect property rights and to enforce legal contracts. Chavez has shown that he respects neither.

    That is also my concern about the state of things in the U.S. When congress or the president can demonize and vacate agreements, like the employment contracts for AIG or bank executives, then it makes doing business in the U.S. less attractive. With the 2nd highest corporate income tax in the world, reliable contract law was one of the guarantees that helped offset the higher taxes.

    Chavez pushed Venezuela towards tyranny a little bit at a time. It started with demonizing PDVSA and its executives. Then condemning the profits of the IOCs which lead to revoking their leases, first raising their taxes and then later unilaterally renegotiating their deals so the government took over. Finally he uses the military to physically seize anything he wants. Does any of this sound familiar?

    Scratch out PDVSA and insert “AIG executives”. Substitute Chrysler bond holders for ExxonMobil or ConocoPhillips ownership in the Orinoco. Swap “Gulf of Paria” leases for “Chuckchi Sea” leases.

  21. Obviously Chavez is not a businessman. If he were, he would realize the need to plow some of the profits back into maintaining infrastructure and preparing for the future.

    Chavez’s chickens will come home to roost, unfortunately those who will suffer are the people of Venezuela, while Chavez will be in exile somewhere in Southern France or Spain with a billion dollars or so in a Swiss bank account.

  22. It appears the diminuitive dictator is not done yet:

    Chavez eyes more oil-industry takeovers

    I know some people at Williams that built the gas injection project. These were competitively bid. PDVSA didn’t have the capital or technical expertise to build and design these systems – essentially just large compressor networks that take associated gas from oil production, remove the liquids, compress and reinject the gas into the oil formations to maintain reservoir pressures.

    Without the compressors running, production will fall. If PDVSA continues to produce at high rates without maintenance pressure, they will destroy the reservoir and severely reduce the ultimate recovery.

    Who will sell PDVSA spare parts or service their turbines and compressors? PDVSA will have to pay for everything up front in cash.

    This is insanity. Of course, why would anyone want to buy corporate bonds in US companies that might need gov’t bailouts?

  23. Kinu:
    I don't think Obama has replaced the stars on the US flag with a hammer & sickle yet.
    Remember, Obama inherited an economic train wreck. He is taking actions now in a near-emergency environment.
    It was Bu$h jr. who first handed hundreds of billions of taxpayer money to banks, AIG, auto companies etc. The road to socialism was plowed and paved by Bu$h jr. Obama is just daintily driving down the wide-open lane left open.
    Socialism? Bu$h jr., socialized Medicare prescriptions. The price tag on that will dwarf anything Obama will do (I hope).
    Comparing Obama to Chavez strikes me as extreme. I just hope Obama does not practice as much socialism as Bu$h jr. did.

  24. King,
    I agree broadly with much of what you say, but I’d add that the part that gets me worried about the US is the similarities (not the differences) between the Bush and Obama administrations.

    Afterall, the mess with the Chrysler bondholders could have been avoided, saving us taxpayers several $billions if Mr. Bush simply left GM and Chrysler to their own devices last November: “Sorry guys, these TARP funds are not for you. You guys failed to convince congress. Twice. This isn’t baseball. There is no third strike. You’re out of here. Don’t look at me.”

    Instead, Mr. FreeMarket himself had a sudden urge to go Socialist. Perhaps he just didn’t have the brass to close the door on GM and Chrysler…

  25. Mugabe and Chavez are almost identical in policies. Both court China to bail them out from their own stupidity. Chavez has oil to loot. Mugabe had mineral wealth, but he drove out his market dominant minority and his people starved.

    Now a trillion Zimbabwe dollars will buy a cup of coffee. Chavez will have the same problem once the US and China find alternate energy sources. Hyper inflation and starvation.

    Of course, Obama started with much more than either Chavez or Mugabe, but his economic policies reveal an eery similarity to the two forementioned gentlemen.

    Both were elected, but neither wanted to leave when it was their time. Presidents for life? Like papa doc Duvalier, is Obama of the same cloth?

  26. Perhaps President Bush should have allowed the automakers to just file for bankruptcy. That might have been the better.

    But Bush didn’t toss out contracts or try to pass legislation that allowed judges to just rewrite mortgage loans (cramdown), or stiff bondholders who would have come out better in bankruptcy.

    Just because Bush did some things wrong doesn’t give Obama a free hand to lead the country to neo-socialism.

  27. Just because Bush did some things wrong doesn’t give Obama a free hand to lead the country to neo-socialism.
    True. And not my point.

    Rather: It would be great if the most recent Republican administration was at least consistent in its adherence to Free Market principles.

    Instead, it seems the adherence was all to Bailing Out the Rich by Fleecing the (few remaining) Workers.

    Now the Dems are taking full advantage, while the Republicans can’t seem to find a spokesman. Other than Dick (Mr. Openess Himself) Cheney. Or Rush (Mr. Deep Thought) Limbaugh. Or… You pouring a stiff drink yet?

  28. I enjoy this blog for the topic it covers – not a bunch of half baked political comments – that especially applies to Benjamin who should go elsewhere to spew his garbage.

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