Few companies have had the desire, or the guts, to challenge Venezuela's powerful president, Hugo Chávez, and his increasingly nationalistic and interventionist policies. Now two oil multinationals, ExxonMobil and ConocoPhilips (both US), have refused to acquiesce to the new contract terms demanded by the government as part of its nationalisation of four huge heavy-oil joint ventures in the Orinoco oil basin. The cost to the companies will be high, as they will have to effectively abandon their oil operations in the country.

Venezuela took operational control of the four Orinoco projects on May 1st. However, the six foreign partners in the ventures had until June 27th to agree to the contract terms, which include handing majority ownership to Venezuela's state oil company, Petróleos de Venezuela (PDVSA).

Under the original contracts, signed in the 1990s, the foreign energy firms held majority stakes in the costly projects. Four companies—Chevron (US), Statoil (Norway), Total (France) and BP (UK)—have signed the new agreements, which grant PDVSA an average stake of 78%, up from 39% originally. They will continue their operations in the country. In any case, the government said it would take control of the operations whether the partners agreed or not.

Empty handed

If Exxon and Conoco do abandon Venezuela, as they seem set to do, they may have to go empty handed. The Chávez administration has said that it will not compensate firms with cash for its takeover of their Orinoco assets, or for the US$4bn in debt they incurred in establishing the operations. The six companies reportedly have invested up to US$17bn in the technology and facilities to pump and process the Orinoco's particularly heavy oil. The Orinoco fields generate about 550,000 barrels per day (bpd), or about 20% of Venezuela's overall oil output (which totals an estimated 2.6m to 2.8m bpd at present).

The nationalisation of the oil ventures comes on the heels of the state's takeover earlier this year of other companies deemed strategic: the largest telephone company, CANTV, and the biggest electricity generator, Electricidad de Caracas. Mr Chávez has also recently threatened to nationalise banks and food producers that do not comply with government regulations, such as mandated credit quotas and interest rates, and price controls for basic food products.

Threats to food growers and distributors followed the emergence of shortages of goods such as milk and beef on supermarket shelves, caused, claims the president, by hoarding and speculation, and the refusal by producers to supply goods at the mandated official prices. The government has already embarked on a land reform, taking over large tracts of unused land and handing them over to poor farmers.

Big losses

Assuming the oil companies do indeed withdraw from Venezuela, the losses they incur will be significant. ExxonMobil will give up 2% of its global oil output by exiting Venezuela. ConocoPhilips (the largest private producer in the Orinoco) reportedly will lose as much as 5%. ConocoPhilips says that it is set to write off the entire US$4.5bn value of its two Orinoco projects, although it still hopes to negotiate some kind of compensation from the Chávez government. (The government values ConocoPhilips's investments at around US$3.5bn and ExxonMobil's at US$800m.)

Yet, with or without compensation, both companies clearly see the deals offered by Venezuela as economically and operational unattractive and are willing to walk away and take the losses. (However, it appears that Conoco may retain a role in the natural-gas sector, where it is exploring in the offshore Deltana Platform.)

The departure of ExxonMobil and ConocoPhilips will have other implications as well. For one, if they are not compensated, the feud could result in further tensions with the US government, which is apt to try to protect the interests of the US companies. The companies, with US backing, could seek compensation through international arbitration or litigation. This could potentially target Venezuela's assets in the US, which include the oil company Citgo and its retail and refining operations.

US officials have said they are alarmed by the latest turn of events, and also have hinted that the withdrawal of the two companies could result in some disruption of oil supplies from Venezuela. Industry experts say that this is unlikely, however.

Skills shortage

There is some doubt as to PDVSA's ability to manage all the Orinoco projects without foreign help. The company has been debilitated in terms of both managerial capability and financial strength since Mr Chávez came to office in 1999. Thousands of high- and mid-level employees of the oil company were fired after a failed strike crippled the company for three months starting in December 2002. Moreover, much of PDVSA's revenues has been used to finance hefty government social spending and other programmes, reducing its ability to invest in new exploration, production and technology.

Some of the resulting shortage in technical expertise could be filled by technicians from other state oil companies. Venezuela has for some time been discussing possible co-operation with China's state company, for example. However, experts believe PDVSA will not be able to sustain current output levels without the help of the US companies.

The departure of Exxon and Conoco will also increase the legal uncertainty surrounding foreign investment overall in Venezuela, and could serve to discourage outlays by others looking at the energy sector, in particular. This is a risk that the Venezuelans are obviously willing to take.