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When you are in a hole, stop digging -- no expression better exemplifies the situation in Venezuela caused by Hugo Chavez and his government. Obviously, this is not something they understand, as the current administration keeps digging the Venezuelan economy into a deeper hole, intensified by its attempt to nationalize rigs owned by a U.S.-based company.
On Wednesday, Venezuelan Oil Minister Rafael Ramirez issued a statement that Petroleos de Venezuela SA, the state oil company, was going to nationalize 11 oil rigs owned by Helmerich & Payne, a Tulsa, Oklahoma-based drilling company.
Helmerich & Payne has been working in the country for 52 years, but apparently this is how the government has decided to resolve a conflict with the company now. It is not all that complicated, Helmerich & Payne expects to get paid for the work it's done and the government does not want to pay. And despite not paying it, the government still wants the drilling company to re-activate wells that have been idle for more than a year.
We are not talking chump change here. The invoice is for $100 million and that is not in dispute. For some reason, the Venezuelan government thinks that enslaving its own people to work for nothing is some kind of enticement to foreigners to do the same.
In most places, this form of dispute resolution might be viewed as stealing. However, "in the name of the people" you can get away with quite a lot as many authoritarians have been known to do. The people, of course, know nothing about managing the rigs they have taken. This leads me to believe they should invest in large quantities of galvanizing paint and RustOleum so that the rigs can be maintained until another government comes along that is the wiser, maybe.
This seems to be a reoccurring theme. I wrote about Cemex (CX) being in the same bind in 2008. ExxonMobil (XOM) took the Venezuelan government to the international court, and won a judgment against it. What are the odds this led to getting paid? Even supermarkets have been seized, and to some degree run into the ground by incompetence.
Chavez has done so much for the people that in January he was able to help them with exports by graciously devaluing the currency by 50%!
It is no surprise that Venezuela has had trouble paying its bills. Chavez has been ignoring basic economic principles during his entire tenure. He has settled many disputes in the same fashion with the same results. Look for more devaluations in the not to distant future.
If you are investing in companies with significant international presence it might be worth examining the political risk and consider whether you are being sufficiently rewarded.
While I have doubts about the Chavez government's ability to drill, clearly it had no trouble digging. Someone close to Chavez should inform him the two are not the same.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture and planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: He does not own shares of the companies mentioned at the time of this post.
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Reader Comments (Page 1 of 1)
6-25-2010 @ 11:04AM
Frank said...
same hole obummer is digging for the USA. i mean after all our "president" loves this guy and admires him. he loves chavez ideology. obummer is practicing that same type of marxist/communist ideology in America. ENSLAVING PEOPLE TO WORK OF THE GOVERNEMENT IS OBUMMERS DREAM SCENARION. OBUMMER WANTS TO BE DICTATOR FOR LIFE. be scared America be very scared. JOIN GRASSFIRE.ORG
6-25-2010 @ 12:08PM
Mike O said...
@Frank - You're an idiot if you believe Obama is anything like Chavez.
Chavez is a jackass. If I were the president, I would tell any firm whose rigs were to be seized to get out the welding torches, weld up the rigs so they are useless, and get the first ticket out.
Let Chavez and his cronies figure out how to get them working again.
6-25-2010 @ 1:08PM
apercu001 said...
Venezuela has aligned itself with Russia. Russia intends to build her coiffers by controlling oil. I wouldn't be surprised if Chavez doesn't attempt to oust the oil company without paying them a penny and completely takes over the rigs and wells. He has Russia to help him out technology wise.
6-25-2010 @ 1:18PM
richard said...
This is why you need a tough country and tougher President...not that pu_ _ y obummer. In this world we live in, do you actually think someone other than your immediately family is going to be nice to you?
Better get ready to rumble ! !
6-25-2010 @ 1:40PM
Parabellum said...
But this flies in the face of what the enlightened Sean Penn has been telling us.
6-25-2010 @ 2:46PM
JDW said...
The oil company knew the risk before they did business with Venezuela. So stop crying in your spilt milk. This oil company dishes out tough love all the time so why in hell should we fell sorry for them when someone returns a little tough love. Besides it is their country so they can do what every they want. Regarding the 50% degrading of their money,,, Hello! Hello ! ! ! Our US dollar is worth 50% of what it was worth 20 yearsa ago. WHOHA! Wake up you dumb people. Both inflation and deflation are worst than any lying report the smike and mirror government report issues! Dumb!
6-25-2010 @ 6:40PM
Corey Katir said...
They will eventually pay for this injustice. Corey Katir
6-25-2010 @ 9:44PM
william lindblad said...
Seems like there a few un-happy campers here. For what it is worth Hugo is Hugo and Mamhoud is Mamhoud. I don't see a great deal of difference between the big V and the Big I. They both have leaders that are trying to snow the population and both have risen to these positions on the backs of the poor. Ever notice that they even have similar rhetoric - blame someone else? (usually the U.S.) As to the blog, old Hugo has been on the nationalization kick for quite some time. I think that this scheme has essentially backfired as it was his supposition that putting his people in charge would be good for his country. As it stands at present it would appear that Venezuela's economy is on the brink. I guess that all should remember that oil was a major part for many years past. I think that all should be aware that Russia's oil business was in total decay at the fall of Communism - and it is still catching up.
Nat. gas is their big gun - not oil. South America is a long way across the sea and counting on the Russians to jump over and make things right is pure nonsense. This has been tried - show me where there was success!
I wonder if Hugo is going to still provide cheap fuel oil to some of his supporters in N.Y.C. this winter? (It was a charity thing, more political than anything else)
6-27-2010 @ 6:16PM
skisdlc said...
Maybe Obama should take his mandatory 40 hours of retraining in Venezuela.