The question of whether to leave was made acute by country's
near collapse
By Kejal Vyas and Bradley Olson
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (November 9, 2018).
CARACAS -- For nearly a century, Chevron Corp. has weathered
dictatorships, coups and nationalization drives to keep pumping oil
in Venezuela.
But recently, executives at the last U.S. oil major in the
country have debated whether it may be time to get out, according
to people familiar with their deliberations.
For now, Chevron hopes to hang on and outlast President Nicolás
Maduro, as it did with his late mentor Hugo Chávez and other
rulers.
"We're committed to our position in Venezuela," Clay Neff,
Chevron's president of exploration and production in Africa and
Latin America, said in an interview Thursday following initial
online publication of this story.
Chevron's dilemma is both moral and commercial. The
California-based giant long enjoyed close relations with the
socialist regime that controls the world's largest oil reserves,
and has earned big money in Venezuela -- about $2.8 billion between
2004 and 2014, according to cash-flow estimates by analytics firm
GlobalData.
The company is aware a pullout could trigger a collapse of the
government's finances, because a significant chunk of its scarce
hard currency comes from joint operations with Chevron.
Yet by staying in the country as its economic and humanitarian
crises deepen, the company risks damage to its reputation by being
seen as supporting an authoritarian regime sanctioned by the U.S.
government. It also isn't making much money here anymore.
Chevron has had to put up with many provocations in Venezuela,
including late payments, requests for employees to attend political
rallies and bickering over loans Venezuela sought because it
couldn't afford oil-field maintenance. Chevron's joint ventures
with the state oil company are regularly subjected to what
Venezuelan prosecutors have labeled corrupt overcharging by
vendors. Graft and the risk it will worsen have weighed on
executives as they consider Chevron's position in the country.
It has become harder to stomach since the big money disappeared
from the Venezuela operations, say people familiar with the
company. Chevron operations in Venezuela lost money from 2015 to
2017, according to GlobalData, then eked out a modest profit this
year thanks to higher oil prices. Oil fields are aging, and unless
more reserves are opened up, Chevron's work in Venezuela will run
out of steam in less than five years, GlobalData estimates.
A turning point for foreign companies operating in Venezuela
came in 2006, when Mr. Chávez began nationalizing oil fields
managed by foreign operators and sharply raising taxes.
Rewritten contracts made Petroleos de Venezuela SA, known as
PdVSA, the operator and majority owner of most projects. Chevron's
top U.S. competitors, Exxon Mobil Corp. and ConocoPhillips, balked
at the changes, left, and filed suit. Exxon has yet to recover the
full value of the billions in equipment and other assets it left
behind. ConocoPhillips recently reached a $2 billion
settlement.
Some European oil companies, such as Total SA and Equinor ASA
(then called Statoil), remained but reduced their holdings.
Chevron decided to stay, and -- led by a charismatic
Iranian-American executive named Ali Moshiri -- formed an array of
partnerships with PdVSA. Mr. Moshiri, who was head of Chevron's
business in Latin America and Africa, sometimes appeared in public
with Mr. Chávez, who called him a "dear friend" on one
occasion.
Joint ventures Mr. Moshiri pioneered became a model for foreign
companies doing business in Venezuela. A venture called Petropiar
between Chevron and PdVSA is one of four so-called upgrader
ventures between the state oil company and foreign operators to
blend Venezuela's tar-like heavy crude with lighter oil or other
substances and make it transportable.
Though Chevron's bet paid off financially for years, an
oil-price crash beginning in late 2014 triggered a vicious cycle in
which government revenue fell and then oil production did, too, as
the country placed priority on debt payments over the heavy
reinvestment oil fields need to stay healthy.
Since the end of 2017, Venezuela has defaulted on more than $6
billion in debt payments, according to Fitch Ratings, while its
crude-oil industry has been reduced close to ruins by neglect and
the departure of experienced engineers.
Oil production has fallen to 1.2 million barrels a day from 3.2
million daily in 2006, according to the Organization of the
Petroleum Exporting Countries. A country with vast reserves now
produces roughly as much oil as the U.S. state of North Dakota. As
output has declined, and thus revenue, the country's economic
crisis has worsened.
With supermarket shelves nearly bare and prices soaring,
two-thirds of Venezuelans reported losing 25 pounds of weight in
2017, according to a survey. Violence is rampant, including
atrocities by police and soldiers. Hospitals lack medicine and
clean water, yet the government rejects most humanitarian aid as a
Trojan horse for foreign intervention. More than three million
Venezuelans have fled, leaving those who remain to face crushing
rates of murder, malnutrition and hyperinflation.
Venezuela's energy enterprises are under pressure from expanding
corruption probes in the U.S. and Europe. A U.S. investigation,
centering on allegations that PdVSA officials solicited vendors for
bribes, has netted 15 guilty pleas, including from a number of
PdVSA honchos.
An investigation in the tiny European nation of Andorra has led
to money-laundering charges against 28 people, including former
Venezuelan deputy ministers, who allegedly took $2 billion through
kickbacks-for-contracts schemes from 2007 through 2012.
Zair Mundaray, a former Venezuelan prosecutor now in exile, said
his team uncovered an alleged scheme at the Petropiar joint venture
in which PdVSA executives skipped formal contract bidding and
handpicked the vendors of a wide range of supplies, from oil
equipment to cafeteria coffee, at exorbitant prices. The profits
were distributed among certain Petropiar managers, PdVSA higher-ups
and the suppliers, the charging documents said.
PdVSA and Venezuela's Information Ministry didn't respond to
calls and detailed emails seeking comment.
Venezuelan charging documents and purchasing invoices reviewed
by The Wall Street Journal allege that contractors pilfered more
than $200 million in two years from the joint venture through
markups such as $156,000 for printer/copiers and $9,000 for ink-jet
cartridges.
Among the accused was Manuel Sosa, a former soap-opera actor who
once dated a daughter of Mr. Chávez, whose company supplied the
costly printer/copiers. Mr. Sosa pleaded guilty in December and was
sentenced to four years' house arrest in return for his
cooperation. He couldn't be reached for comment.
"Where were the checks? Where was the accounting?" asked Mr.
Mundaray. "There's absolutely no way that [Chevron] did not know
what was happening." He said he has given the evidence he collected
to the U.S. Justice Department, which declined to comment.
Pedro Burelli, a former PdVSA board member and a Maduro critic,
said Chevron "turned a blind eye to what was going on."
"When you've agreed to work with a majority partner that is
derelict, you're just setting yourself up for a huge risk. You get
deeper and deeper, when you should be hitting the red button, to
get yourself out," said Mr. Burelli.
Chevron said it complies with all applicable laws wherever it
operates and expects its partners to do so as well. It said it
doesn't control the procurement process in the joint venture, in
which Chevron has a 30% nonoperating stake. In oil and gas joint
ventures, the operator typically has primary authority over costs,
though minority partners are generally consulted and sign off on
certain expenses. Chevron said nothing in documents it was shown
suggested any wrongdoing by the U.S. company.
Oversight of the investigation changed hands just as it was
picking up steam. Mr. Mundaray and his team left Venezuela in
August 2017 after their boss, former Attorney General Luisa Ortega,
criticized Mr. Maduro for alleged human-rights abuses. The
president called the prosecutors traitors.
A new attorney general, Tarek William Saab, provided a list of
people accused that lacked some names on Mr. Mundaray's list.
One missing name was that of former Petropiar chief Francisco
Velasquez, who the former prosecutors said splurged on a pink
Ferrari and a villa at the exclusive Casa de Campo resort in the
Dominican Republic while the oil project suffered backlogs and
delays. He couldn't be reached for comment. Mr. Saab didn't respond
to comment requests.
In April, two Chevron employees working at the Petropiar joint
venture were jailed by Venezuelan military intelligence when they
refused to sign a contract for oil-processing equipment priced at
what they considered well above market value. The employees were
released after six weeks of tense negotiations, but not before a
thinly veiled threat from Chevron: free them or we will leave,
people familiar with the confrontation say.
Chevron confirmed two employees were arrested in April and
released in June but said, "We have no further information to share
on this matter."
A dwindling number of foreign companies are still doing business
with the Maduro administration, which is facing threats of tougher
sanctions by Washington. The U.S. has sanctioned dozens of
Venezuelans, including Mr. Maduro, for allegations varying from
corruption to human-rights abuses to drug trafficking. The
sanctions bar American citizens and companies from doing business
with them.
Mr. Maduro has said he wants foreign oil partners to use a
cryptocurrency called the petro his government designed to evade
U.S. sanctions on Venezuelan debt. The U.S. in March barred
Americans from using the petro.
By staying in Venezuela, Chevron risks exposing itself to legal
penalties under U.S. anti-corruption laws, some analysts say.
Chevron said it "abides by a strict code of business ethics under
which the company complies with all applicable international, U.S.
and Venezuelan laws."
Its managers' meetings with government and PdVSA officials
"comply with all applicable laws and regulations, including the
U.S. sanctions directed towards Venezuela," Chevron said.
About 700,000 daily barrels of the country's oil production
comes from joint ventures between PdVSA and foreign companies,
consultants say. That includes about 200,000 to 250,000 barrels a
day from Chevron ventures.
Joint-venture output has generated far more cash for the
government in recent years than oil pumped by PdVSA alone, because
the state company's production has gone to repay debts to allies
such as China and Russia or to be processed into gasoline the
government provides almost free. That means a Chevron withdrawal
would take a big bite out of government's revenue.
Another foreign company, Royal Dutch Shell PLC, is weighing an
exit from most of its remaining operations in Venezuela through a
sale of its stake in a joint venture, according to people familiar
with its plans. A spokeswoman for Shell said such a deal wouldn't
amount to a total exit, as the company is working to develop
Venezuelan gas assets offshore that would supply nearby Trinidad
and Tobago.
Some analysts believe other Western companies operating in
Venezuela, such as France's Total or Norway's Equinor, might feel
pressure to follow a departure or partial exit by either Shell or
Chevron. At the same time, according to GlobalData, those that stay
might be able to gain access to new fields or renegotiate contracts
for better terms. Chinese or Russian companies such as PAO Rosneft
could be beneficiaries of any such departures in the long run,
analysts say.
Total, Equinor and Rosneft officials either declined to comment
or didn't respond to questions.
Signs of a troubled relationship between Chevron and the
Venezuelan government emerged a year ago when Mr. Moshiri's
successor as head of Chevron's Latin American and African
operations, Mr. Neff, sat down for a meeting with Mr. Maduro and
other Venezuelan officials.
Venezuelan officials snapped a photo without Chevron's consent
and publicized it. At Chevron headquarters in San Ramon, Calif.,
concerns grew that the company was being duped into making an
appearance in Venezuelan propaganda, people familiar with the
matter said.
While such photo ops had occurred before, the country's
worsening economic collapse, plus U.S. sanctions, are making them
harder to tolerate, the people said. Chevron declined to discuss
the Caracas meeting.
The company's closeness with the government is generating rancor
among PdVSA's workers, who have been quitting in droves amid
hyperinflation that has pummeled their salaries to the equivalent
of less than $10 a month.
Jose Bodas, a union leader in eastern Venezuela where Petropiar
is located, said photos of sports cars and European vacations
posted on social media by managers angers workers who sometimes
lack boots and hardhats.
"I'm not opposed to people having Ferraris and mansions, but
this is all corruption," Mr. Bodas said. "I don't mind saying it --
if you're a multinational working with this government, you're an
accomplice to what's going on."
--Ginette Gonzalez and Samuel Rubenfeld contributed to this
article.
Write to Kejal Vyas at kejal.vyas@wsj.com and Bradley Olson at
Bradley.Olson@wsj.com
(END) Dow Jones Newswires
November 09, 2018 02:47 ET (07:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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