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Hugo Chavez presses for denationalization of Venezuela's oil industry

By Miguel Octavio | The Devil's Excrement

03.10.05 | Today President Chavez Chavez once again told foreign oil companies that are part of the service agreements that if they don't convert before the end of the year to a partnership, they can leave the country.

As way of background, in the 90's PDVSA sold off the rights to exploit certain oil fields in an auction that brought in over US$ 2 billion to the country. These agreements, were "service agreements", the company would produce oil and sell it to PDVSA. In order to give these companies an incentive to invest, PDVSA fixed benchmarks above which the service companies would be paid an extra amount.

Chavez campaigned against this so called "oil opening" claiming that the country was giving up its sovereignty in the process. In May, the government called on all these agreements to convert to a partnership under the new hydrocarbons law. In these partnerships, PDVSA would hold at least 51% of the company and the company holding the service agreement would have a percentage based on how much it invested in the field since the original agreements were signed.

Problem is, PDVSA has no money. So how would PDVSA capitalize its stake in the company? The amazing answer is that the companies will OWN the reserves in the field. For the first time since the oil nationalization bill of 1976, a Government is giving away what that bill says is 100 percent owned by Venezuela and the Venezuelans. Talk about sovereignty!

This is only happening to please Chavez' ego and get rid of the agreements under the oil opening, as promised in his campaign. But what this represents is truly giving up sovereignty as these oil companies will be able to register their reserves in their balance sheets and Venezuelans will lose ownership of their oil from a Government that claims to defend "their" interests.

So, why is it that these companies don't want to convert to a partnership? Easy, in order to convert, you give up your rights to the earlier contract which the companies won in an auction paying a bonus which ran in most cases in the hundred million dollar level, and sign another "interim" contract, which no longer contains a clause of international arbitration. Then, you will negotiate with PDVSA how much your investment is worth and the percentages of the new partnership will be decided. Thus, some companies don't want to take the risk of losing arbitration and have PDVSA determine a percentage of the partnership that would be worse financially than the current arrangement. Remarkably, one of the companies that has refused to sign the agreement is none other than Petrobras, the oil company of what Chavez considers to be his friendliest state after Cuba. But more remarkably, is that the law in Venezuela does not require that you adapt retroactively to a new law, the new law only applies to events after it is enacted.

In the words of oil expert from Central University Mazhar Al-Shereida "I do not understand who is the genius that reached the conclusion that it is better to convert some companies (..) That have simple service contracts, where you pay them for the work done, but has to hand over the oil to its owner who is the Venezuelan state, into partners of 49% of the oil produced. Sovereign control in Saudi Arabia and Kuwait is 100% and we that are searching for a new form of socialism are facilitating these multinationals conditions that they can not find anywhere". Adds Al-Shereida: "What does the country gain from this? Why isn't this being debated like it used to occur in the IVth. Republic." He also says that Caldera's oil opening was preferable, because no sovereignty was given up.

Similar thoughts are given by Heinz Sonntag, the former Head of the Sociology Center at Central University, who questions the "opportunism" of the 'brains' behind all this, Vice-Minister Bernard Mommer. Sonntag claims Mommer told him he changed nationalities in order to become Vice-Minister and says Sonntag: "If we have to talk about an assault on the oil industry, which Mommer opposed in the opening led by Giusti, the current maximum leader of the Bolivarian revolution appears to be committing one of a more compelling gravity than the one proposed by Luis Giusti (the former Head of PDVSA)"

Thus, the revolution, led by Chavez denationalizes the oil industry for no reason other than fulfill Chavez' dream and promise of getting rid of the oil opening. Of course, how it is done is irrelevant, even if it goes against the principles of those that support Chavez. That is the way autocracies work, the autocrat does what he wants, as long as he can get away with it. Unfortunately for all, he can get away with it in this case. And those that follow him, accept it because Chavez wants it, even if they disagree with it. They will tell us later, they did not understand. But we do.

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