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

Discovering lots of oil and gas is great. There is one hitch, though. You have to get it to market. You have to bring it to the consumers. Hence, we are experiencing a boom in getting oil and gas from Point A to Point B. That means lots of pipelines. Miles and miles of pipelines.

Big pipeline projects are in the works all over North America. Recently, oil behemoths ConocoPhillips (NYSE:COP) and BP approved a $25 billion project to build a pipeline from Alaska to Canada and the lower 48. It will be the largest private-sector pipeline built in North America.

In the southeastern U.S., over 25 pipeline projects are in the works. In the Rockies, a group of companies plans a 1,678-mile pipeline – the longest ever.

Such a beehive of projects and ambition led Phil Wright, president of the Gas Pipeline division of Williams (NYSE:WMB), to say “[Pipeline construction] is at the highest level I’ve seen in 30 years.” One energy observer said: “What we are seeing is the biggest global boom in steel pipes for at least 40 years.” Bentek Energy, a consulting firm, topped ‘em both, writing that it’s the busiest time for pipelines since the 1950s. When you’ve got the graybeards trying to top each other for how far back you have to go to find an equivalent, you know you’re onto something special.

But it all makes sense. As we venture out to more remote areas, we have to build the infrastructure to follow. New sources of supply drive the need for pipelines. Pipelines are like the roads and highways of the energy world.

That’s why I like investments in the companies that own and build pipelines. They pay high yields, based on a growing stream of fees earned from their pipeline assets. They’re like toll operators, collecting cash as oil and gas flow through their pipelines.

Chris says a correction in Master Limited Partnerships (MLP) stocks means they could rally soon, making them a bargain at the current price:

An MLP allows a company to avoid paying income taxes as long as it pays out the bulk of its earnings to its shareholders (unitholders). MLPs are like lesser-known cousins of real estate investment trusts (REITs).

MLPs, as a group, were hit hard in the credit crisis. The Alerian MLP Index – a common benchmark for this species of financial fish – fell 20% off its high. The 7% fall in March was the worst monthly decline the index has ever suffered (it’s still near those sell off levels).

Since MLPs pay out most of their earnings in cash, they depend on access to the credit and equity markets to fund any large expansion efforts. So, the market reasons, since the credit markets shut down, it will be harder for MLPs to grow.

Of course, some MLPs are in better shape than others. And in the grand scheme of things, I think the credit markets will look more favorably toward financing the tangible assets and cash flow of pipelines than funky mortgages. Besides the credit crisis concerns, a lot of new MLPs have been hitting the market. It will take some time for the market to digest all that supply – probably six months or so.

In any event, the selloff creates a rare opportunity to grab them cheap. The yield on the Alerian MLP Index went over 7% recently. That’s nearly four points above the 10-year Treasury. The widest gap ever was 4.25 points, back in November 2002. After that, they doubled over the next five years while paying higher and higher distributions.

They were great investments then… And thanks to the recent credit problems, they’re great investments now. If you’re looking to add some energy to your income portfolio, it’s a good time to check out MLPs.

Brian Hunt adds the chart for the Alerian MLP Index, and says the movement towards natural gas in the US will ensure plenty of pipeline building ahead…

MLPs enjoyed a big rally last year. They got a little “ahead of themselves”… so the credit crunch served up a 20% correction in these boring stocks. Given the bullish case here, this correction is offering income investors a gift.

Most U.S. pipelines transport natural gas – the “clean cousin” of coal and crude oil. We guess the rising green movement will provide a strong tailwind for this fuel and the infrastructure that goes with it… a tailwind that will boost cash flows and asset prices for MLPs.

Source: An Extraordinary Income Opportunity in the Energy Market