Monday, April 24, 2006

Exxon Gets The Shaft In Venezuela

In Hugo Chavez's Venezuela, oil giant Exxon is no longer king of the roost, and its assets are swiftly eroding as the company tries in vain to resist higher taxes and a socialist government bent on new ways of taxing multinationals who enjoy big profits from its rich oilfields.

The strain in Exxon's ties with the Chavez government were well known, but an article from the Dow Jones news agency this morning puts XOM's problems in a new and deeper perspective. The company has been drilling there since 1929, and Venezuela was the site of its first offshore rig, a wood and cement affair.

According to Dow Jones, Exxon is suffering from socialist creep across the board in its operations, is cutting back on staff and facilities, and may not drill any new wells this year in a key producing region.

The news has taken XOM shares down $0.47 this morning, while shares of Chevron, which also has a large stake in Venezuela, are still in the green.

Here is the story from Dow Jones' Peter Millard:


Update: Blogspot's servers were down much of the day, so efforts to post resulted in the posting of multiple stories:

Monday, April 24, 2006

Blogger.com will be down on April 24 2006 from 4 pm PDT to 4:45 pm PDT due to planned maintenance. We’re sorry about the one-two unplanned/planned outage punch today, but we need to do some database maintenance. You will still be able to view your blogs during the outage. Be assured that when Blogger.com comes back, it will be shinier and happier than ever.

Exxon finished trading Monday down $0.5771, and Chevron finished off $0.4778. Our apologies for the multiple posts!

Exxon Cuts Back In Venezuela Amid Fraying Ties
(Updates with comment from Exxon spokeswoman)
By Peter Millard
Of DOW JONES NEWSWIRES


CARACAS (Dow Jones)--In 1929 ExxonMobil Corp. (XOM) was one of the first companies to strike oil in the waters of Venezuela's Lake Maracaibo with a platform made of wood and cement, accelerating the country's initial oil boom and the development of offshore drilling technology elsewhere in the world.

Nearly 90 years later, the largest publicly traded company is reducing its administrative presence in Venezuela, which sits atop some of the world's biggest deposits. Project setbacks and tougher tax and contract terms may well be the reason why.

Exxon sold a stake in one of its two conventional oil fields last December to avoid the harsh terms of a contract overhaul. The state took majority stakes in all the 32 fields under the review and reimbursed the companies for lost value with $900 million in credits toward future investments, not cash.

The government took offense at Exxon's refusal to accept the new business model, and ousted the Irving, Texas-based firm in January from a $2 billion petrochemicals project. "The doors are not closed to Exxon, but relations have weakened due to everything that has happened," said Saul Ameliach, the head of the state petrochemicals firm Pequiven.

Venezuela swiftly found a new partner - it signed a deal this week for an even larger petrochemicals project with Brazil's Braskem S.A. (BAK).

Exxon, a protagonist in developing Venezuelan oil production and refining during the first part of the last century as Standard Oil of New Jersey, shows no signs of trying to win back lost ground.

One Caracas real estate agent says one of the floors Exxon rents in the posh San Ignacio mall in eastern Caracas will come on the market as early as June, and additional office space in December. According to a mall directory, Exxon rents five full floors in the mall's Kepler office tower.

According to another account from a person familiar with Exxon employees, the company is laying off some of its contracted staff after selling the oil field stake to its partner Repsol YPF (REP) in December and losing out on the petrochemicals deal early this year.

An executive at Colina & Tovar, a Caracas-based human resources firm said to have lost a contract with Exxon for around 15 employees this month, could not comment on the situation without authorization from Exxon.

Susan Reeves, an Exxon media advisor for its upstream division, said, "We are not making any significant staff changes in Caracas."

The trimming in staff and office space follows more than a year of strained ties.

Chavez, who accuses previous administrations of enriching international oil firms at the cost of the nation's poor majority, has hiked taxes and royalties, and taken majority stakes in fields private firms used to operate independently under contract.

Exxon, along with five other international oil majors, suffered a royalty hike on heavy crude production in 2004. Exxon was the only company to publicly challenge the move, arguing that Venezuela violated contract sanctity.

Since then, Exxon has slowed investments at Cerro Negro, the 120,000 barrel a day heavy crude project it operates and its most important asset in the country.

Exxon went ahead with planned maintenance at Cerro Negro's oil fields and an associated refinery in March, but executives at drilling firms say it doesn't plan to spud any new wells until 2007 at the earliest.

A report compiled by Franks International, a well casing company, showed Cerro Negro had no active drilling or workover rigs in December. Three other neighboring projects, also run by multinationals such as Chevron Corp. (CVX) and ConocoPhillips (COP), all had two to three rigs running in the same month.

Exxon has put on its best face publicly, saying it still plans on having a "long-term relationship" with Venezuela. The company's chief executive, Rex Tillerson, told investors in March that he is "very pleased" with the Cerro Negro venture, but said the business environment was too uncertain to launch new projects at this time.

Analysts say Exxon is also resisting Venezuela's contract maneuvers for fear that other oil-rich countries will take similar actions if it caves in to Chavez's demands.

Exxon may face tough decisions on the Cerro Negro project soon. Ramirez has asked Congress to hike the income tax on the four Orinoco projects to 50% from 34%, and a second royalty hike could also be in the offing. Some oil companies are already calculating 2006 tax payments according to the 50% rate.

In a worst-case scenario, some analysts speculate that PdVSA may try to take majority stakes in the projects.

The four projects, known as strategic associations, extract extra-heavy crude and convert it into lighter, sweeter crude known as syncrude at specialized refineries. As conventional oil reserves - the vast majority of which are locked up by state-owned companies inside and outside the Middle East - become increasingly difficult to tap, oil companies have focused on extra-heavy reserves located in the Orinoco and Canada's tar sands.

After investing billions in Cerro Negro, Exxon may try to hang on to it, but a new project in the area is unlikely. Exxon, which drilled the first Orinoco exploration well back in 1936, was not included in the list of firms invited to help quantify remaining reserves in the basin, which is viewed as the first step toward new projects in the area.

Uncertainty does not end in the Orinoco river basin.

This March, state oil firm Petroleos de Venezuela S.A. (PVZ.YY) told Exxon to shut down early production at the La Ceiba oil field it operates under an exploration contract signed in the late 1990s, the company's only remaining upstream oil asset apart from Cerro Negro.

PdVSA executives admit the field has abundant resources and could even connect with the giant Tomoporo reservoir under Lake Maracaibo, but the state firm has still refused to declare it commercial until it conducts more reservoir studies. Observers say Venezuela could be causing delays to strong arm Exxon into accepting a smaller stake in the field.

The original contract gives PdVSA the right to a 35% participation if commercial oil is found, but some industry observers expect it to push for at least a 51% stake in a field with excellent potential.



-By Peter Millard, Dow Jones Newswires; 58-212-564-1339;
peter.millard@dowjones.com;
END) Dow Jones Newswires
04-21-06 1633ET

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