Venezuela’s DIY folly

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A classic rhetorical question in business is why buy the cow if you can get the milk for free. In Hugo Chávez’s Venezuela, it might more aptly be phrased: why steal the cow when you’ve been drinking its milk for free? It makes sense, at least initially, if the milkman stops showing up. With the state-owned oil company Petróleos de Venezuela having amassed debts of nearly $14bn to oilfield services companies, several had stopped drilling and pumping. Rebuffing payment requests, Mr Chávez ordered the seizure of 60 companies’ assets last week, brashly claiming that he does not need the mostly foreign contractors and that he would “bury capitalism in Venezuela”.

He may well bury his creaking economy instead. Repudiating large debts and transferring hundreds of millions of dollars in property to PdVSA may be a good short-term move. But trying to take over complex operations could have far worse and quicker repercussions than earlier expropriations of heavy oil projects from foreign producers. Venezuela’s mature western fields have rapid decline rates, making competent and ongoing services such as pressure pumping vital. With Venezuela’s output about 2.3m barrels a day, down 1m since Mr Chávez came to power, the sector that produces above 90 per cent of foreign currency revenue may soon slump at the worst time. As during a disastrous strike five years ago, some fields may never recover.

Will large companies still providing services, such as Schlumberger and Halliburton, stay involved in hopes of appeasing a big client? Can PdVSA effectively absorb new equipment and personnel? And how will this affect investor interest in Venezuela’s huge Orinoco fields that it cannot develop without foreign capital and expertise? These questions, as well as the oil price, will determine whether Mr Chávez can keep his “Bolivarian Revolution” going. Given his recent inability to pay vital contractors, the signs are not promising.

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