Venezuela oil service grab risks output slump

By Brian Ellsworth - Analysis

CARACAS (Reuters) - Leftist President Hugo Chavez's abrupt takeover of Venezuelan oil service companies risks reducing the OPEC nation's crude output by spooking investors and weakening crucial oilfield operations.

Last week's nationalization of foreign assets and a swath of small local companies puts state oil company PDVSA in charge of a range of key services as it is struggling to cope with low oil prices and growing debts with contractors.

The move may increase the perception that Venezuela is a risky place to invest as the nation seeks billions of dollars from private companies to develop new projects after a decade of underinvestment that has left oil output in a slump.

"In the long run, I think this will hurt Venezuela because some service companies may stay out of the country," said Roger Tissot, a consultant with Gas Energy Latin America.

"It will be difficult for PDVSA to stay up to date with technology -- in recent years the bulk of innovation has come from service companies, not from oil companies."

PDVSA now controls several transport companies in oil-rich Lake Maracaibo, a water reinjection facility in the same area and two gas compression projects in eastern Venezuela that boost output of the country's most valuable crude.

Any slowdown of these operations during the transition to state control, particularly the gas reinjection projects once run by Williams Companies (WMB.N), would translate into quick production losses for Venezuela.

Official production figures show its output near 3 million barrels per day (bpd), but observers such as the U.S. Department of Energy put output near 2.3 million bpd.

Service giants that escaped takeover, including Halliburton (HAL.N) and Schlumberger (SLB.N), now fear they face the same fate soon as PDVSA continues to build up debts. Providers as of last year were owed a total of $14 billion, according to local media.

FUTURE INVESTMENT

The takeover also adds to Venezuela's already robust risk profile as PDVSA seeks investors to provide up to 40 percent stakes in three multibillion-dollar heavy oil projects in the Carabobo region of the Orinoco belt.

As PDVSA talks up the projects that could produce up to 1.2 million barrels per day in total, Venezuela may face litigation by Williams, which says the seized projects were worth at least $324 million.

Britain's Wood Group (WG.L), part owner of a seized water injection project, may sue as well, adding to existing lawsuits by ConocoPhillips (COP.N) and Exxon Mobil (XOM.N) over the nationalization of their Orinoco belt holdings in 2007.

"This sends very poor signals to prospective investors investors in the Carabobo block," said Patrick Esteruelas, an analyst with the Eurasia Group in New York.

"Service companies were seen as relatively safe given their critical role, and now PDVSA is sending shots across the bow to the entire services sector," he added.