On May 1, Chávez made good on his declaration.

Under the new law, PDVSA will own a 60-percent minimum in the joint ventures that will run the four operations of Petrozuata, Sincor, Cerro Negro, and Hamaca, and the natural gas operations in the Gulf of Paria. The Orinoco now produces about 600,000 barrels of oil per day. The law also covers affiliate firms that take part in the production chain.

The foreign oil firms accepting the measure signed a memorandum of understanding, under which they transferred their operations in the area effective April 25th. They include Total, Chevron, CNPC, Statoil, ExxonMobil, and BP. ConocoPhillips, involved in two of the four projects, was the only company that refused to sign the agreement.

Back in February, Chávez declared that "oil privatization in Venezuela is over. This is the real nationalization of oil….We are going to rescue all of these oilfields, and we are going to raise the national flag on all of these oilfields. We do not want the oil firms to leave, but to stay here as minority partners."

But it’s not at all clear just how happy the multinationals will be with minority-partner status. The companies and Venezuelan authorities are now locked in testy negotiations, and the multinationals have until June 26 to negotiate the new contract terms that will stipulate compensation and participation in future profits. After the presumed signing there will be an additional two-month period in which to file the relevant documents with the Venezuelan legislature.

While PDVSA and Chávez appear to have the upper hand, the companies still claim some leverage. Producing heavy oil is a challenging exercise and PDVSA is extremely short of technical personnel, particularly in the wake of the mass PDVSA firings in early 2003. The foreign companies are sounding a defiant tone. “Total fears that the Venezuelan government’s takeover of foreign projects in the Orinoco Belt may bring operational problems,” said Total’s chairman, Thierry Desmarest. “What bothers us today is the Venezuelan state’s desire to hold majority control over operations such as Sincor, with all of the operational limits it involves."

Chevron boss David O’Reilly said his company’s future in Venezuela "will depend to a great extent on how we are treated” during the negotiations.

However, the multinationals and PDVSA clearly need each other. Chávez needs the multinationals’ money and technology to turn the heavy oil into an exportable product. Although Chávez claims that oil companies from China, India and elsewhere could participate at the Orinoco Belt, industry experts doubt that they are up to the task.

As for the multinationals, leaving the Orinoco could mean huge losses. They have invested upwards of $17 billion in projects estimated to be worth over $30 billion. And they need the oil. Shut out of reserves in many other countries, they can scarcely afford to walk away from the largest oil reserves in the western hemisphere. Venezuela has offered to compensate the oil companies with crude oil or, if they stay, with deferred taxes. But the latter isn’t much of an offer, given that Venezuela has dramatically increased taxes over the last few years. Furthermore, there are doubts whether Chávez has sufficient funds to fully compensate the multinationals should they decide to leave.

Of course if an agreement is reached, the multinationals will have a whole new range of issues to manage. PDVSA is plagued by problems, from persistent industrial accidents to crumbling infrastructure, lack of maintenance, and an ongoing shortage of cash for re-investment. That money is now funneled to Chávez’s social programs. That may be good for the short-term and it may keep Chávez in power, but it won’t do anything for Venezuela’s long-term oil production or financial health.