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).

PDVSA accumulated the debt as oil prices took a dramatic slide from over $147 a barrel last July to less than $35 a barrel in February.

PDVSA has attempted to slash expenditures 60% by reducing salaries for managers by 20% and imposing a wage freeze on the majority of its employees. But the company still owed contractors and suppliers $13.9 billion by the end of last year, according to The Wall Street Journal. The majority of that total remains unpaid and some of the debt dates back to last August.
Irate over a growing backlog of invoices, many of the companies threatened to halt operations – something PDVSA and Chavez can ill-afford. The company is 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.

“We will not pay contractors that have tried to speculate and don’t care about our company,” PDVSA President Rafael Ramirez said in April. “We have to renegotiate what we pay them.”

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.

“To God what is God’s, and to Caesar what is Caesar’s,” Chavez told a throng of supporters, the FT reported. “Today we also say: To the people what is the people’s.”

Tulsa, Okla.-based Williams Cos. (NYSE: WMB) was among the firms that saw its assets taken. The firm said last week that it would write down a $241 million payment default by PDVSA. Drilling contractor Helmerich & Payne Inc. (NYSE: HP) is due $116 million from PDVSA, and is idling seven of its 11 operating rigs in the Andean country while it negotiates payment.

“Chavez has sent a shot across the bow for the entire oil service sector,” Patrick Esteruelas, an analyst with political risk consulting firm Eurasia Group, told the Journal.  “This is a very strong message for oil rig companies playing hardball and reluctant to agree on a write-down of their bills.”

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

Venezuela’s oil production fell to 2.36 million barrels per day (bpd) in 2008, after climbing as high as 3.18 million bpd in 1997, according to the International Energy Agency (IEA). The Organization of Petroleum Exporting Countries (OPEC) estimated the country’s output was about 2.24 million bpd in December.

The expropriation of the oil service companies “increases the risk of additional declines in oil production since PDVSA is not likely to be as efficient an operator of these businesses and assets as the private sector contractors,” Goldman Sachs Group Inc. (NYSE: GS) said in a report.

The seizures “might turn into an expedient and quick political solution to the current large payment arrears to suppliers, they might also entail large medium-term costs in terms of foregone production and overall economic efficiency,” the report said.

The expropriations will also crimp badly needed investment, which in Venezuela is declining almost as quickly as output. Private investment in the nation’s oil sector fell to $500 million last year from twice that level in 2007, BusinessWeek reported.

“Venezuela’s aggressive fiscal terms and the country’s persistent trend toward nationalization of oil industry activities will make it more and more difficult to attract foreign investment and competitive bids from qualified operators,” David Voght, a director at IPD Latin America, which advises several international oil companies operating in Venezuela, told the FT.

PDVSA has slashed investment in new energy projects by $10 billion. And now the company, which is already overburdened by Chavez’s political and social agendas, will have to absorb 8,000 new workers into a permanent payroll that already exceeds 75,500 employees – nearly twice the number employed when Chavez took office a decade ago, according to the Journal.

And without adequate investment, there’s little hope that Venezuela’s output will reverse course anytime soon.

“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.”

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

According to Bloomberg: “Gustav is expected to reach Louisiana next week, passing through a region home to a quarter of U.S. oil output and 14% of natural gas production.”

Hurricanes pass. But over the long term, says energy and oil expert Byron King, we are facing a “profound change” in the future availability of oil. That’s because Western oil companies are being kept away from resources by uncooperative states…

This from Byron’s Energy and Oil blog:

The key strategic development in the first decade of the 2000s has been, arguably, the concept of “resource nationalism.” That is, in the many nations that were formerly friendly toward Western companies, the attitudes toward foreign investment have fundamentally changed. Western oil companies have found themselves squeezed in resource-rich areas.

Western companies have experienced outright nationalizations, such as what occurred with Exxon Mobil and ConocoPhillips (NYSE:COP) in Venezuela. Or Western companies have been shown the door through intimidation and bullying legal tactics under the guise of “tax laws” or “environmental enforcement,” such as what happened with Shell Oil Co. (NYSE: RDS.A / RDS.B) at its Sakhalin project in Russia.

Even Brazil has shown its nationalistic teeth to foreign investment. Recently, Brazil withdrew numerous areas from prospective lease sales after it became apparent that the odds of finding oil were quite good. Why not just save it for Petrobras (NYSE:PBR)?

Whatever the case might be, Western companies have been shunted aside or, in the best cases, forced to renegotiate contracts on less favorable terms. The traditional model of resource development, in which Western companies obtain legal title and control over oil and gas deposits in the ground, is fighting a losing battle. Assertive host governments are gaming the rules to favor their state-owned national oil companies (NOCs).

As recently as the late 1970s, Western oil companies controlled well over half of the world’s oil production. But now the NOCs – such as Saudi Aramco, National Iranian Oil Co., Kuwait Oil Co., Petroleos de Venezuela, Petroleos Mexicanos (Pemex), etc. – control over 85% of the world’s oil resources. Western majors control about 7% of the world’s oil resource base.

All the while, oil output from mature regions is in decline. From the North Sea to the Alaska North Slope, the Western oil companies are faced with lower volumes from existing oil holdings. And there is a much thinner book of potential business elsewhere in the world. According to Amy Myers Jaffe, who studies the oil business from her chair at Rice University, “This is an industry in crisis.”

This sense of crisis also helps explain why Western oil companies are fighting to expand their options for offshore drilling in the U.S., as well as to expand access to areas like northern Alaska. The U.S. offshore, and other frontier areas such as the Arctic National Wildlife Refuge (ANWR) are among the few options remaining for Western oil companies.

So one key point that the Western oil industry makes is that its resource base and reserves are in decline. And over the medium to long term, this means that the economic importance of the Western companies will erode. Despite any plans or efforts at conservation and efficiency, as well as a large-scale shift to alternative energy sources, the Western world will become increasingly dependent on NOCs for oil.

From the standpoint of energy and strategy, this will not be a good thing for the West.

Source: Peak Oil, Politics, and U.S. Energy Supply

New world record, for both longest well bore and extended reach.

As the Senators insulted the oil executives, I was wondering if the politicians would prefer to trade managements with the National Oil Companies of other countries. Would you trade the guys who run Exxon for the guys who run Pemex? How about trading the Chevron leadership for the fine people at Petroleos de Venezuela (PdVSA)?

BWK

Source: Oil Service Companies Doing Well…

• Canadian fund manager Sprott Asset Management Inc. is planning to sell about $200 million of its stock to in an upcoming initial public offering. The IPO could value the firm at nearly $1.5 million and would reduce founder Eric Sprott’s stake in the company from 78% to 67%, Reuters reported.

• Intel Corp. (INTC) has formed a $500 million fund that will target investments in China, the world’s biggest semiconductor market, Bloomberg reported. The fund will more than triple the Intel’s investments in China, with Holdfast Online Technology Co. and Newauto Video Technology Inc. being two of the businesses targeted by Intel. “We want to foster innovation and entrepreneurship in China,” Arvind Sodhani, president of Intel Capital, said at a briefing in Beijing today.

• The National Association of Realtors’ seasonally adjusted index of pending sales for existing homes fell to 84.6 from January’s upwardly revised reading of 86.2, the Associated Press reported. The index registered 107.6 in February 2007. A reading of 100 is equal to the average level of sales activity in 2001, when the index started. The previous low was August’s reading of 85.8.

• Levi Strauss & Co. said yesterday (Tuesday) that its profit rose 12% in the first quarter thanks to a lower tax rate and a drop in interest expenses. The company said income grew to $97 million from $87 million year-over-year. Revenue climbed 4% to $1.08 billion, up from $1.04 billion. Levi attributed the increase in revenue to foreign currency exchange rates and strong overseas sales.

• Petroleos de Venezuela SA, announced it would take a 60% stake in a joint venture with Oil and Natural Gas Corp., India’s top petroleum exploration company. Venezuela estimates that over the next 25 years, the venture will yield 232 million barrels of crude from the San Cristobal oil field, which spans 62 square miles. Production is expected to begin within three years, the Associated Press reported.

• Shares of USEC Inc. (USU) the only uranium enrichment company in the United States, rose yesterday (Tuesday) after an analyst raised his earnings estimates on the company. Jefferies & Co. Inc. analyst Laurence Alexander said in a client note that he expected the company to post full-year 2008 earnings per share of 25 cents, up from his previous estimate of 20 cents, the Associated Press reported. He also raised his 2009 earnings per share estimate from 50 cents to 65 cents.

• The main Japanese opposition party backed the government’s third pick for Bank of Japan governor yesterday (Tuesday), ending a standoff that left the world’s second largest economy without a permanent central bank chief for three weeks, Reuters reported. Masaaki Shirakawa, the current acting governor, will be formally voted on in Parliament today (Wednesday).

• Lehman Brothers Holding Co. (LEH) upgraded Freddie Mac (FRE) and Fannie Mae (FNM) yesterday (Tuesday), saying recent developments – including moves by the Federal Reserve – will likely help boost results at the government-backed lenders. Analyst Bruce Harting upgraded both companies to “Overweight” from “Equal weight.” Harting has a $46 price target on Fannie Mae and a $45 target on Freddie Mac, BusinessWeek reported.