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By Robert Rapier on Jul 2, 2007 with no responses

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).