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For Exxon, More Is at Stake than Venezuelan Oil

Venezuela's decision this week to halt oil sales to ExxonMobil is likely to hurt the struggling South American country more than the global oil giant.

With much of the world's most valuable natural resources under the control of national governments, Exxon likely believes it has no other choice than to stand firm in its escalating battle with Venezuela.

Still, some analysts are questioning Exxon's hardline strategy in the dispute over compensation for Venezuela's nationalization of foreign oil operations last year. There's worry that it will affect the oil company's dealings with other foreign governments in the future.

"I'm not sure what the outcome will be, and I'm not sure that in and of itself is important," said Mark Gilman, an oil and gas analyst at The Benchmark Company. Gilman said it far more important that Exxon does not compromise its ability to do business in the future by looking like a difficult partner to have.

"I applaud them for taking the moral high ground and standing up for contract integrity, which is an essential part of doing business in any country," Gilman added. "The point is: what does it get them?...It does more for others than it does for them."

The tensions between Venezuela and Exxon began last year, but came to a head last week after Exxon won court orders in the U.K and other countries freezing $12 billion in overseas assets of state-run Petroleos de Venezuela, or PDVSA. Now PDVSA claims it has halted shipments of crude to Exxon, the world's largest publicly traded oil company.

Exxon declines to comment on the situation.

Exxon secured the court orders as part of its lawsuit seeking compensation for the Venezuelan government's decision last year to take a majority stake in four Western oil company ventures.

Although other foreign oil companies involved accepted Venezuela's decision to grant them minority stakes in the oil projects, Exxon and ConocoPhillips walked away. Exxon then sought to settle the dispute with Venezuela in the courts, while ConocoPhillips continued to work with Venezuela to determine the proper compensation.

The courtroom battle has the potential to strengthen international contract law and could potentially win Exxon a bigger share of the project or larger compensation for the rights it has lost.

But with so much at stake, the fight with Exxon has prompted President Hugo Chavez to make broader threats to cut off shipments of Venezuela's thick, sludge-like crude to U.S. Oil analysts suspect such a move is likely to directly hurt Venezuela more than it will Exxon. In addition, Chavez has made this threat before, only to back away.

Still, given tight oil supplies and tense global political relations, Chavez's threat has driven up the price of crude oil.

"The cutoff of the oil to Exxon really isn't the big deal," said Chris Edmonds, a managing principal at FIG Partners. "The big deal is: does he (Chavez) get even more irrational."

Shuffling Barrels

"Exxon and all the major refiners don't live on only one type of crude," said Fadel Gheit, an analyst at Oppenheimer. Gheit expects the situation will be harder on Venezuela, which will have a more difficult time finding refiners that can accept the low-grade of crude oil that comes from the country.

With oil exports making up the bulk of Venezuela's state finances, the country is heavily dependent on this income.

"(Chavez) has to find a buyer for his heavy crude oil, and that's the U.S. So if he does stop the shipments, I can't image that it would be for a very long time," said Raymond Carbone, an oil trader and president of Paramount Options.

One way around this situation would be for Venezuela to ship its heavy crude to third parties who could then sell it to Exxon.

John Kilduff, an energy analyst at MF Global, suspects that the fight with Exxon could be helpful to Chavez politically. With widespread shortages of milk and other staples at home, Chavez's popularity has been slipping.

"He can use this as a rallying cry to cover up his mismanagement of the Venezuelan economy," Kilduff said.

Christina Cheddar Berk is a News Editor at CNBC.com. She can be reached at christina.cheddar-berk@nbcuni.com.

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