For the last 4 years, soaring worldwide oil prices and 9% growth rates have underpinned President Chavez's generous social programs & his (none too successful) campaign to build an international anti-American alliance. The oil windfall saw the socialist government of Venezuela threaten to divert oil exports from the US to competitors in China and India, even though the Asian markets would be costlier to serve. Currently, 60% of Venezuela's production goes to the States.
As if Venezuela were not doing well enough, the government then imposed crippling tax increases & royalties on the IOCs (International Oil Companies) working there. It snapped up majority shares in oil-producing joint ventures, effectively forcing the multinationals to either take smaller roles or leave Venezuela. Now with oil revenues failing due to lack of demand on global markets, Chavez looks as though he is turning his attention to agriculture.
Chavez is hugely popular with Venezuela’s poor due to his heavy spending on social services, however, continued investment in social programmes is not sustainable with the crash in oil prices. Oil accounts for 94 percent of Venezuela’s exports and about half of the national budget. Chavez decided on Wednesday (04/03/09) to take over at least one rice plant owned by Cargill Inc, the largest U.S. agricultural company, extending his grip on food producers as the government seeks to slow inflation.
“We’re going to continue to tighten the screws,” Chavez said during a cabinet meeting that was broadcast on Venezuelan state television. “Begin the process of expropriating Cargill. This is a flagrant violation.”
Chavez, has also threatened to seize all plants run by Empresas Polar SA, Venezuela’s biggest privately owned company, in his push to increase state control of the economy. Venezuela has the highest inflation rate in Latin America, and food prices rose 43.7 percent in January from a year earlier. Over the last four years, following Chavez's re-election as president, Venezuela has increasingly moved to a government-run economy, announcing takeovers in the electricity, cement, telecommunications and now food production industries.
In the 1990s, Venezuela offered discounted taxes and royalties to entice IOCs such as BP, ConocoPhillips (NYSE:COP), Exxon Mobil (NYSE:XOM) & Total (NYSE:TOT) to develop the Orinoco basin deposits. The Orinoco Belt holds over 1.2 trillion barrels of extra-heavy oil which is refined locally. Previous estimates claim that the Orinoco Belt may contain more than 250 bn barrels of recoverable synthetic crude, making Venezuela potentially the biggest source of oil in the world, topping Saudi Arabia. Following more than $16 bn of direct investment, four international "strategic alliances" began producing synthetic crude in 2001. Production now totals about 600,000 barrels a day, roughly one-quarter of Venezuela's total output.
In May 2007, Chavez announced the nationalisation of oil assets in the Orinoco belt, prompting Exxon Mobil Corp. and ConocoPhillips to pull out of the country and seek international arbitration. Total remained & is still attempting to work under tough government constraints, which saw its stake in the Sincor project reduced from 47% to 30%. Massive revenues generated by high oil prices have managed to mask years of economic mismanagement. Currently, inflation stands at 35%, capital is fleeing the country & unemployment is rampant. Continued rhetoric about revolution, socialism and expropriation has caused foreign investment, which is vital to the oil industry, to dry up. Venezuela's private sector recorded zero growth in 2008, according to the central bank.
Back to today & a reliance on his populist support seems to have forced Chavez to maintain his 2007 pledge that the government would secure supplies of basic food staples, as the country experienced widespread shortages of milk, beans and rice. Chavez issued a raft of decrees last year, increasing government control over food storage and distribution and allowing the state to jail company owners for hoarding. This week, he set new production quotas for food makers to boost supply of price- controlled foods. The Cargill seizure follows troops being deployed in rice plants across the country, in a blaze of publicity, claiming that private owned companies are hoarding rice stocks in order to manipulate prices.
“Cargill is committed to the production of food in Venezuela that complies with all laws and regulations,” Mark Klein, a spokesman for the Minnetonka, Minnesota-based company, said by email late yesterday. “Cargill expects the opportunity to clarify the situation with the government and is respectful of the Venezuelan government decision.”
Chavez hasn't specified whether the Cargill expropriation order would apply to all of the company’s plants in Venezuela. According to Cargill’s Web site, it has operated in Venezuela since 1986, and runs 13 plants that produce foods including rice, pasta, flour and juice.
Meanwhile, Venezuela is courting Asian countries for FDI for future growth in the oil industry, recently China & Venezuela announced a $12B pact for a JV in the Orinoco belt, part of China's ongoing spree of buying into national projects. Vietnam, via its state owned oil company PetroVietnam has also entered into a JV with Petrolos de Venezuela, where the expectation is to extract 200,000 barrels per day for export to Vietnamese refineries, as previously discussed. This follows inconclusive talks with neighbour Brazil regarding an accord with Petrobras (NYSE:PBR), which would have seen the Brazilian giant investing 40% into the construction of a $4Bn / 200,000 barrel a day refining operation.
With this latest bout of "nationalisation", Venezuela is surely set to lose more friends in the West & also on its doorstep. Chavez has been pouring billions into local economies to shore up Latin American support for his Bolivista government, but now the revnues have dried up, he is seen as a political blusterer. It is clear that Asian nations that are starved of natural resources will make deals at favourable rates right now whilst oil prices are in a slump, however, it will be interesting to see which rabbit Chavez will pull out of the hat when oil goes back over $70 a barrel.
View my stock portfolio on kaChing.
Disclosure: Author holds long position in PBR.