Highlights
− France’s Total, Norway’s Statoil-Hydro, and Italy’s Eni, sign new oil deals with Venezuela
− Petróleos de Venezuela, S.A (PDVSA) unable to develop and maintain nation’s oil reserves
− A risky investment climate remains
As Venezuelan President Hugo Chavez continues to deny US oil conglomerates with his right hand, his left hand is once again beginning to encourage investment from other foreign interests. Chavez has begun allowing European oil companies to reinvest in his nation’s vast oil fields. As ExxonMobil and ConocoPhillips continue to legal battles with Venezuela’s Petróleos de Venezuela, S.A. (PDVSA), the Venezuelan state-owned petroleum company, France’s Total, Norway’s Statoil-Hydro, and Italy’s Eni have signed new deals, designed, among other things, to open areas of the Orinoco belt estimated to be worth more than US$ 4 billion.
The Advantage of Investing
The new investment opportunities are mutually advantageous for both the foreign oil companies and PDVSA. Despite Chavez’s aggressive tactics, his country’s vast reserves – measured by experts to be in the vicinity of 80 billion barrels – are among the largest in the world and by some standards, too good an opportunity to pass up.
However, in the not too distant past, foreign oil companies have been hesitant to invest heavily in the country, following numerous expropriations of private investment and constitutional changes altering the framework for foreign investment and private property rights throughout the country. However, considering the steady climb of oil prices, the vast oil potential in Venezuela is a risk that at least some companies are willing to take.
PDVSA is in a general state of decline demonstrated by the country’s overall drop in daily crude oil production since 2003. Although official Venezuelan production figures show the country is producing approximately 3 million barrels per day (bpd), global energy agencies, including the Organization of Petroleum Exporting Countries (OPEC), say Venezuelan production has been around 2.5 million bpd since this time period (Previous Report). The investment of money, resources, and personnel from international oil groups may be the only way PDVSA can lift itself out of production woes, especially in the near-term.
Correspondingly, Chavez relies almost completely on oil revenues to fund his Bolivarian Revolution as he continues to struggle with high inflation rates and shortages of consumer goods. The signing of contracts with Total, Statoil-Hydro, and Eni indicate Chavez’s recognition of PDVSA’s downfalls and depletions, as well as his realization that the Venezuelan government, as it stands, cannot function and provide for the citizenry without consistent oil windfalls.
A Look Forward
It is important to understand that the deals, as written, only commit foreign companies to certify the Orinoco reserves. They are not full-on investment contracts that would require a commitment to exploring or developing the belt, but merely a securing of the possibility of doing so in the future. As such, the companies remain prudent due to Chavez’s track record of nationalization that makes investment in Venezuela very risky.
Chavez, as his previous conduct underscores, exhibits behavior characterized by an erratic and unpredictable leader, thus his previous transgressions, to include actions aimed against foreign investment, contribute to a risky environment for business endeavors. It is more likely that the companies are positioning themselves for the long-term, waiting for a breaking point when Chavez will be forced to loosen the proverbial belt he has tightened about the waist of foreign investment. Perhaps Total, Statoil-Hydro, and Eni are so far-sighted as to see a future government characterized by investment-friendly practices sans Hugo Chavez. Either way, we contend that the deals are neither a sign of an influx in foreign investment into Venezuelan oil, or other industry, nor a lessening of the risks associated with it.
