Eric Watkins
OGJ Oil Diplomacy Editor

LOS ANGELES, May 12 -- Venezuelan President Hugo Chavez, attempting to bolster his socialist spending programs, has nationalized nearly 40 domestic and international oil services companies operating in his country, with another 20 still under threat.

"This is a revolutionary offensive," Chavez said on national television, adding, "These spaces are now for the people, we have freed them from capitalism, they are for the creation of a new country."

The property seized includes at least 13 oil rigs, 39 terminals, 300 boats, and other installations, including two major gas operations. The seizures come just two months after Chavez sent troops to take over key oil ports in the country (OGJ Online, Mar. 17, 2009).

Apart from adversely affecting current operations, however, Chavez's seizure of the oil service companies this week also is likely to have an adverse effect on future investment, not least, the country's planned Carabobo licensing round.

"This sends very poor signals to prospective investors in the Carabobo block," said Patrick Esteruelas, an analyst with the Eurasia Group in New York.

"Service companies were seen as relatively safe given their critical role, and now [state-run oil firm Petroleos de Venezuela SA (PDVSA)] is sending shots across the bow to the entire services sector," Esteruelas told OGJ.

The takeovers occurred on May 8, a day after their authorization by the Chavez-controlled National Assembly, which said the government will pay book value for the assets or provide bonds in lieu of cash as compensation.

The contractors all operate in the Maracaibo Lake area of Zulia state, a major center of oil production as well as political opposition to the Venezuelan president.

Chavez, newly emboldened by victory in a Feb. 15 referendum that allows him to run for office indefinitely, has since embarked on an aggressive campaign against his political opponents, aiming to consolidate power in his own hands.

Manuel Rosales, the mayor of Maracaibo and the opposition's candidate in the 2006 presidential election, suffered harassment at the hands of the Venezuelan secret police and was recently granted political asylum in Peru, while the National Assembly recently reduced the powers of Antonio Ledezma, the opposition mayor of Caracas.

Apart from wresting power from his opponents, however, Chavez's takeovers also reflect his desire to assume complete control of Venezuela's oil and gas industry, which finances the central government as well as social spending programs that keep Chavez in power.

Faced with the need to maintain spending on those programs, the Chavez government in August 2008 began suspending payments of fees to domestic and foreign oil service contractors, with estimates of the debt ranging from $8-14 billion.

According to Venezuela's El Universal newspaper, which cited a yearend report sent to the National Assembly, PDVSA owed local and foreign contractors nearly $14 billion by yearend 2008.

At the time, contractors began to respond to the problem in a variety of ways: some wrote off the debt, others suspended work, and others began negotiating with PDVSA, which sought discounts of as much as 40%, saying that falling oil prices had slashed the value of contracts along with revenues.

Among the companies seized by Chavez is the Simco consortium, 49.5% owned by the Houston-based Wood Group, which had a 16-year contract with PDVSA for operations and maintenance of water-injection facilities on Lake Maracaibo.

"Simco consortium disappears today," said Chavez, adding, "Now, it belongs to PDVSA." Wood Group confirmed the seizure, saying that that PDVSA took over its operations earlier this year after the consortium submitted a notice of default due to nonpayment and other contractual disputes.

Tulsa-based Williams Cos. Inc., which last month wrote off $241 million in unpaid debt, also confirmed the Venezuelan government seizure of its El Furrial and PIGAP II gas compression projects in eastern Venezuela.

Apart from companies, however, Chavez's takeover has adversely affected Venezuela's labor unions, with one labor leader estimating that 22,000 oil contractors stand to lose their jobs as a result of his action.

"This law does not benefit us," Bernardino Chirinos, leader of the Union of Oil Workers in the western state of Zulia, told El Nacional newspaper.

"There are 35,000 workers on the east coast (of Zulia state) and only 8,000 will be absorbed" into PDVSA, Chirinos said. "There are 22,000 workers without guarantees," he said.

The takeovers could also have an adverse effect on current drilling operations as drillers step up their efforts for back payment, or lacking it, stop work.

Ensco International, which halted drilling offshore Venezuela in January to protest $36 million in unpaid bills, said it would terminate its contract for the rig Ensco 69 by the end of the month unless PDVSA pays the back fees.

Meanwhile, PDVSA said there were no problems in the region on May 12, and that operations in the Maracaibo region were "normal" after the government takeover.

"Operations are completely normal, and we have implemented provisions to respond to anything that comes up," said Oil Minister and PDVSA Pres. Rafael Ramirez, who added that PDVSA is paying contract workers.