Tuesday, May 16, 2006

Where Does This Stop?

Ecuador Revokes Occidental Pact Over Sale of Local Drilling Rights

That’s the headline from today’s Wall Street Journal, regarding yet another hostile takeover of precious energy reserves by a restive Latin American government.

The move by the small, coastal nation, Latin America's fifth-biggest oil producer, came after a long-running legal dispute over whether the California-based firm had broken local laws in selling some of its local oil-drilling rights to a Canadian firm, Encana Corp., without government approval.

Whatever the specific excuse, the trend is clear: precious energy reserves are moving from private hands to whoever happens to be in power at the country in question.

Ecuadorean Energy Minister Ivan Rodriguez said Occidental's contract had been revoked and the company would have to hand over its local operations to state-owned oil company Petroecuador.

Meanwhile, Western Bankers including Morgan Stanley are preparing the initial public offering of Rosneft, the Russian state oil company that ranks just beyond Exxon Mobil, reserve-wise.

Potential investors in what is expected to be a very highly anticipated deal might want to consider the fate of companies in Venezuela, Bolivia and, now, Ecuador, before they plunk down their hard-earned US dollars for oil and gas reserves located in—literally—Outer Siberia, among other places.

Occidental has denied wrongdoing, and said in a statement that the company remained “committed to an amicable settlement of this dispute.” The company, which relies on its Ecuador operations for 7% of its global production, said it was reviewing a 33-page document it received from the government and was considering its legal options.

Not many legal options come to mind when a sovereign government decides they want their black gold back.

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


GreenviewKid said...

You know what the best way is for poor countries that are resource rich to stay poor? For its government to be a kleptocracy that imposes confiscation risk on foreign investors and excessive regulation on its home grown entrepreneurs. Evo and Hugo, well done.

Effern said...

Here's an idea: How about we develop something else and cut oil out of the equation? I know that's moonbat talk, but hey.

I get your point about investors wanting stability. However, the tone of your posts about foreign oil inspires me to ask, how did OUR oil end up under their soil?

Assuming that bio-diesel is really viable, for example, theoretically that shifts the balance of power in the energy markets from OPEC to say, ADM. Not sure if that is an improvement per se, but they should be private enough for you?

cdub said...

How many of these governments are capable of efficiently, or even effectively, running the operations of recently confiscated plants, fields, etc.? It seems like they could run into some serious problems if prices for oil and/or natural gas decline. With high prices, they can afford to run their new state owned companies like Byrne runs OSTK.

Peter King Rocks said...

I know you didn't print my comment a few posts back - but the fact remains, how long before the corporation has to start it's own military force to protect it's assets. And then how long before they become more powerful than governments loaded down with the weight of an huge aging population.

SafetyFirst said...

"Where does it stop"

History tells us when commodities rise like this, it usually ends in a World War!

RDS said...

Let's not forget the upside to the Latino confiscation trend- at least Miami real estate markets will remain boyant.

Bigun1 said...

Didn't Latin America go through this in the 1930's in Mexico? Also this populist spasm with Peron? Didn't they ever learn? I am not up on populist Latin American history-anyone else see the "wheel turning again?"

BelowTheCrowd said...

With regards to the Russians, they've already made clear that they will confiscate the assets of any entity that gets big enough to challenge government. Or did we already forget Yukos?

[And no, I don't buy the official line that it was a "penalty" for "failure to pay taxes" or any other such BS. Putin wanted Yukos for himself and his cronies. He made it happen. And nothing will stop him from making it happen again with the same assets.]

ADM a "private" company? Isn't this the same company whose CEO justified their endless subsidies and supports by telling all the rest of us that the free market was an illusion anyway?

The reason we can't have cheaper ethanol in this country is that unlike Brazil, we refuse to liberalize our sugar markets, and thus make it economically unfeasible to efficiently produce ethanol from sugar, and instead do it less efficiently and more expensively from corn.

Agribusiness is worse than defense contractors OR big oil.

DaleW said...

Assuming that bio-diesel is really viable, for example, theoretically that shifts the balance of power in the energy markets from OPEC to say, ADM. Not sure if that is an improvement per se, but they should be private enough for you?

Do you know how many calories of energy it takes to produce a ton of corn. Biodiesel = moonbat.

Shookrun.com said...

"We inherited some energy-related assets in Russia, via Salomon Brothers, a number of years ago. The authorities were happy to let us invest when we were drilling the holes. But when the time came to take the oil out, they weren’t so crazy about us being investors."

-- Warren Buffett, Berkshire Hathaway's 2006 annual meeting

mrs. bailey said...

hey there, peter king, what say you rent "the wages of fear" (criterion collection, 1953) while we're waiting out this selloff. get some popcorn, a tasty beverage, settle back, and, when it's finished, check to see if you've got any vestige of a soul in there.

Aaron Koral said...

Jeff - does it matter, really, what Ecuador does with its oil? Does the US really get that much oil to begin with from Ecuador anyway? Aren't Mexico and Canada the two largest suppliers of oil imports to the US (I am not making this up - look at the figures from report 51 on the EIA website for net imports of crude products)? The lesson, sadly, must be learned yet again by American companies doing business in countries that have no respect for individual, private property rights (and again, I could be wrong...)

Peter King Rocks said...

Mrs. Bailey.

Love Wages of Fear (love Clouzot actually and Diabolique is equally awesome) but I'm not sure what that movie has to do with what I wrote.

I would think that if these thug governments continually start taking over invested assets, you think companies are just going to pack up and go home?

And if corporations get bigger and richer - when do they surpass the government in money and power and actually listen to them?

First the church was powerful, then the kings and now may be the time for the corporation state to emerge.

Sure this might be moonbat territory and I can't tell you whether the black helicopters hovering by my apartment are real or not - there probably is some veracity to my premise.

Plus, why do I need a soul? Or vestiges of one? I don't necessarily want the corporation to own armies?

Weird ...