Oil Politics

By MARY ANASTASIA O'GRADY
September 10, 2007 - WSJ

"Iran and Nicaragua, two revolutionary countries and peoples, will always be together side by side since they share goals and ideals."
-- Iranian President Mahmoud Ahmadinejad,Tehran, Sept. 4
When former Sandinista dictator Daniel Ortega won the Nicaraguan presidential election last November, he said he was a changed man. The new Ortega was supposed to have vanquished his inner Marxist and replaced it with a desire to maintain constructive relations with the U.S. and respect for private investment.

But old habits die hard. In mid-August Mr. Ortega seized an ExxonMobil storage facility on Nicaragua's west coast and after a trip to Iran this summer, he announced a deepening of bilateral ties with the Islamic fundamentalist government, including the opening of an Iranian embassy in Managua. Last week when the Iranian president welcomed Mr. Ortega's foreign minister to his capital, his comments were a veiled reference to the shared revolutionary history of the two parties, both of which first came to power in 1979.

Hanging out with Mr. Ahmadinejad is not the policy agenda of a pro-market democrat and it's worth asking what's going on, especially since Americans are being encouraged to invest in Nicaragua on the basis that Mr. Ortega is a new man. The answer seems to be that the wily old revolutionary is practicing oil politics as a method of generating funds for his party. To pull it off, he needs the help of Venezuelan President Hugo Chávez, which means kowtowing to the wishes of Caracas. For Nicaragua, that means giving Managua real estate to Tehran.

The master of oil politics is Mr. Chávez, who is riding high largely because he has an unaudited income stream coming from the state-owned oil company PdVSA, which is being used to liberally grease the chavista machine. Mr. Ortega, who may have shed Marxism but still has an insatiable appetite for power, wants to extend the Chávez model to Nicaragua. This explains the trouble for ExxonMobil and it may explain similar problems for multinational oil companies around the region. It can be no coincidence that wherever Hugo and PdVSA have turned up as "partners" -- Nicaragua, Argentina and the Dominican Republic -- foreign oil companies have come under attack in what looks like an attempt to make room for friends of the president. It's all done under the guise of "the law" but there is no mistaking the common thread.

Consider recent developments in Nicaragua, one of 16 Caribbean countries belonging to Petrocaribe, a Venezuelan pact that entitles members to PdVSA oil and gasoline on preferential terms.

Mr. Ortega wants to import through Petrocaribe and distribute through the state-owned energy company Petronic. But Petronic doesn't have the storage tanks it needs to run a monopoly-distribution operation with imported PdVSA product. Esso Nicaragua, which has operated in the country for more than five decades, does. That's why it seemed more than coincidental when Nicaraguan customs authorities took over the tanks on Aug. 17, alleging that the company had evaded taxes on the import of crude oil. ExxonMobil denies the charges.

The assault on the Esso facility has given Mr. Ortega's "investor-friendly" Nicaragua a black eye and one wonders why he would risk such bad publicity. His critics say it is because the scheme will allow him to create a political slush fund. If Petronic handles all PdVSA shipments to Nicaragua, the company can easily fiddle with inventory. With the president of Petronic also holding the post of treasurer of the Sandinista Party, it's not hard to imagine why many Nicaraguans are crying foul.

This is not the only Ortega effort to dislodge investors. Four private-sector deep-water exploratory concessions, granted by a former administration and insured by the U.S. government agency OPIC, have been ruled invalid by the Sandinista-controlled Supreme Court, raising more doubts about property rights in the country.

In the DR, which is also a beneficiary of Mr. Chávez's oil generosity, it looks like there is an attempt to copy Mr. Ortega's creativity. A political scandal erupted earlier this summer when it was revealed that a group close to President Leonel Fernández was aggressively bidding to buy the assets of Shell, which is divesting its Caribbean holdings. The DR press was outraged about the deal because it would essentially give a monopoly in the distribution of Petrocaribe product coming from Venezuela to Mr. Fernández's buddies. Government accusations, denied by the company, that Shell is a tax cheat and that it has disrupted Petrocaribe shipments suggest that the firm is under pressure to sell to this bidder.

In Argentina, Shell is being harassed by the government of President Nestór Kirchner, which has created a new state-owned energy company -- Enarsa -- to partner with PdVSA. (A few weeks ago customs officials in Buenos Aires discovered $800,000 in a suitcase that had been on an Enarsa-hired plane carrying Argentine and PdVSA officials from Caracas. It's still unclear where that money came from or where it was going.) Shell has been under attack by the government for raising its prices and it has been fined for supposedly not maintaining adequate supplies in the marketplace. It has also been refused the right to export its product and on Wednesday one of its refineries was closed by the government on charges of environmental violations, which Shell denies.

Argentina's El Clarin newspaper reported on Sept. 1 that Esso Argentina has hired J.P. Morgan to look for a buyer for its Argentine facilities. ExxonMobil says that it won't comment on speculation and is "continuing to run our business in Argentina as usual, developing and executing initiatives and projects as planned." What is clear is that in the land of the Peronists, the business environment for oil companies is strained.

It is doubtful that Argentina, the DR or Nicaragua would move so aggressively against private property if their energy needs were not being underwritten by Mr. Chávez. It is also foolish to think there is no political quid pro quo. The price Nicaraguans are paying is to cozy up to Iran; by making such a deal, Mr. Ortega is showing that he would readily sell the whole country down the river if it means that he can stay in power.

In the meantime U.S. investors might note that OPIC says it "has suspended support for any new investments in Nicaragua until the [oil exploration] concession issue has been resolved." The alarm bells don't ring much louder than that.