Venezuela Oil Contractors May Dodge Fight With Chavez (Update1)

By David Wethe

May 13 (Bloomberg) -- Oilfield-services providers in Venezuela that saw their assets nationalized last week will probably opt to see what they can get through negotiation rather than fighting Hugo Chavez’s government in arbitration.

Only 5 percent to 10 percent of the contractors that lost assets in the government seizures will seek compensation in international arbitration, said Wayne Wilson, managing director at consulting firm Protiviti Inc. in Houston. Arbitration is costly, takes an average of three years and would end any chance of doing more business in the country, he said.

Williams Cos. and Tidewater Inc. were among contractors that had operations taken May 8 by state-owned Petroleos de Venezuela SA. Wilson, who has worked more than 16 years in accounting and provides expert testimony on such matters as the value of energy assets, said service providers aren’t in a position to demand anything in negotiations.

“The rule of thumb is that if you want to stay in the country, you’re probably stuck with negotiating,” Wilson said yesterday in a telephone interview. “The concept of negotiation is almost a misnomer for what the process is. It’s a matter of discussing what you are or are not going to get paid.”

Chavez, whose government had pressed for lower service rates after energy prices dropped, didn’t list all of the 60 companies whose assets he said were seized. Schlumberger Ltd. and Halliburton Co., the world’s largest oilfield-services companies, declined to say whether they were affected.

Schlumberger, Halliburton

If they were to lose equipment to nationalization, the two companies would probably negotiate and pull out of the country as soon as possible, said Brian Uhlmer, an analyst at Pritchard Capital Partners LLC in Houston.

“They’ll definitely want to hear what Venezuela wants to offer them,” Uhlmer said. “I don’t think they want to allow other countries to believe this is an appropriate way to gain leverage over companies.”

Cathy Mann, a spokeswoman for Houston-based Halliburton, declined to comment. Stephen Harris, a spokesman for Schlumberger, which is based in Houston and Paris, also declined to comment.

PDVSA, as the state oil company is known, said May 11 that it seized three gas-compressor facilities owned by Williams, a Tulsa, Oklahoma-based pipeline operator that also produces oil and natural gas. The compressor operations had a net book value of $324 million at the end of last year, according to a public filing by Williams.

Exxon Mobil, ConocoPhillips

“We may not receive adequate compensation, or any compensation, if our assets in Venezuela are nationalized,” according to the filing. Williams has said it may pursue “all available options” including negotiation and arbitration.

Exxon Mobil Corp., the world’s largest oil company, and ConocoPhillips, the third-largest U.S. oil company, are still working in international arbitration to be compensated for oil ventures that Chavez seized in 2007. Houston-based ConocoPhillips recorded $4.6 billion in costs that year to reflect the loss of expropriated assets.

Companies that lose assets to nationalization face few options if they want to negotiate, said Protiviti’s Wilson. Threatening to take the case to arbitration will almost surely shut down negotiations.

“Probably the best thing you can do from a leverage standpoint is refuse to provide technical assistance, but that may be a matter of cutting off your nose to spite your face because you may be missing out on potential income,” Wilson said.

Schlumberger and Halliburton would likely decide that they’re better off getting rid of their operations in Venezuela and “not having the hassle,” said Uhlmer of Pritchard Capital.

“This is just more of a thorn in their side,” Uhlmer said. “They have too many assets and too many talented people and too many good relationships in countries where they’re profitable.”

To contact the reporter on this story: David Wethe in Houston at dwethe@bloomberg.net.

Last Updated: May 13, 2009 11:13 EDT