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Raymond J. Learsy Headshot

Vladimir Inspired by Hugo's Oil Drama. Should We Be Watching?

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This April the Chavez government seized oil fields operated by two European oil giants- Italy's ENI and France's Total.

This, after the two companies declined to convert their contracts to joint ventures with the state. "These two multinational companies resist adjusting to our law. Our sovereignty isn't under negotiation", bellowed Rafael Ramirez Venezuela's oil minister. Chevron and Shell and fourteen other companies did agree to the terms giving Venezuela's state oil company, PDVSA, at least a 60 percent stake. .

The Venezuelan government is continuing discussions on operating agreements with foreign stakeholders with the objective of giving Petroleos de Venezuela SA a majority stake in upstream operations, raising royalty rates and is even considering bringing criminal charges against former officials who crafted 1990's era policies that encouraged private investment.

Simultaneously, according to the International Herald Tribune, Venezuela recently announced that it is significantly boosting trade with Russia, establishing joint ventures ranging from oil to agriculture. A total of 23 Russian oil companies offered services and technological help in areas from drilling to processing of heavy crude deposits.

While Venezuelan/Russian cooperation accelerates, the Russians are learning and acting upon the Venezuelan example. On the pretext of environmental concerns, Russiais threatening to halt work on the $20 billion Sakhalin Island energy project run by Royal Dutch Shell by moving to revoke an environmental permit. Russia's concern for Sakhalin salmon and the grey whale seems eminently suspect given the lack of concern for the threatened extinction of Russia's famed sturgeon. More to the point perhaps are the complaints from Russia's natural resources ministry that Sakhalin 2 and similar agreements signed with other major oil companies in the mid 1990's are far too generous to the western oil companies.

The situation has become so acute that a few days ago Foreign Minister Sergey Lavrov sought to reassure Western governments, by putting forward a disclaimer that had the markings foreshadowing the the deed to come: "Satements about some sort of revision of production sharing agreements and especially about squeezing out of foreigners from the Russian fuel and energy sector are groundless". And along with these assurances Russian prosecutors were threatening to suspend the exploration license for TNK-BP to develop the massive gas field in Eastern Siberia.

So that there is no mistaking of the direction of eventsPresident Vladimir Putin this past week urged Russian officials To punish companies that violate licensing agreements putting pressure on regulators as they probe several Western oil giants.

Can we learn anything from Chavez and Putin? For all of his grandstanding Chavez may have a point. When being taken to the cleaners, by the oil conglomerates he, at least in this instance, acts in the interests of his nation. By contrast we have given away the nations wealth to the oil companies by a government seduced by the oil industry's lavishing hundreds of millions, all for the purpose of gaining influence in our Congress and Executive branch. It has permitted the oil companies to gain access to the nation's underlying oil and gas rights for a pittance while pushing through super generous depletion allowances, favorable tax incentives and royalty relief giveaways.

According to the Government Accountability Office, the investigative arm of Congress, the Treasury could lose upwards of $20 billion over the next 20 years. And how does our government react? The Interior Department advised Thursday a week ago that they would not try to recover the more than a billion dollars in royalties lost to date as a result of flawed oil and gas leases it signed in the late1990's. Rep. George Miller (D. California) was moved to comment "If things keep going like this we're going to need two sets of handcuffs; one for the oil companies and one for the bureaucrats"

In damning testimony before a House subcommittee Earl Devaney, Interior Department's Inspector General accused top officials in his agency of fostering a culture of "managerial irresponsibility" that tolerated conflicts of interest, cronyism "short of crime, anything goes at the highest levels of the Department of the Interior".

In my post "The Oil and Gas On Federal Lands Belong to Us!" 03/24/06 argued for a national oil trust to develop the oil and gas on national lands and ocean shelf for the benefit of all Americans. That the trust's profits would go to funding alternative fuel programs, hybrid car credits, mass transportation and on.

Perhaps when dealing with the oil companies this is Hugo's "he made the trains run on time" moment. And perhaps the time has come that we took a page from his timetable.