No fewer than 60 oil service companies in Venezuela – including Williams, Wood Group and Boots & Coots – were in for a nasty shock when President Hugo Chavez began to expropriate their equipment and installations on Lake Maracaibo, the nation’s oil heartland, last Friday. Venezuela’s socialist leader indicated that takeovers will continue this week in the east of the country. Although larger companies like Schlumberger and Halliburton have so far not been affected, with the government leaving rigs alone, they are keeping their heads down.
What kind of signals will all this send to the 19 oil companies – both oil majors and foreign state corporations – currently preparing bids for what is touted as the biggest oil auction on earth?
Over 800,000 bpd are at stake, requiring investments of $25-30bn. Most likely, some are getting cold feet, already turned off by the extremely aggressive fiscal terms which they say simply aren’t viable at current oil prices. Still, there is plenty of time for the government to relax the terms, with negotiations ongoing.
Just as worrying are the broader implications for Venezuela’s economy, which depends on oil production for over 90 per cent of its export revenues and over half of government spending. Sinking production levels mean a shrinking pool of dollar assets, on which the government depends to maintain its heavily overvalued currency. Sooner or later, the government may be forced to devalue the bolivar – officially or de facto – which could have dire consequences for the inflation rate, which is already one of the highest in the world.