Was Chavez Just Joking? (CVX, STO, TOT, BP, COP, XOM)

Judged by the country’s performance in extracting hydrocarbons, Venezuela under President Hugo Chavez has not been a smashing success. Ten years ago, when Chavez first came to power, the country produced about 3.4 million barrels of oil a day. Production currently runs around 2.3 million barrels a day and is still falling.  This decline makes for tough times in Venezuela. The country relies on oil for more than 90% of its export earnings and more than 60% of the government’s budget. That budget also pays for a lot more social programs now than it did ten years ago. In 2007, Venezuela essentially nationalized its oil industry, raisingroyalty payments and, in some cases, expropriating the oil companies’assets.

Chevron Corporation (NYSE:CVX), StatoilHydro ASA (NYSE:STO),Total S.A. (NYSE:TOT), and BP plc (NYSE:BP) retained minority ownershipof their assets. ConocoPhillips Corporation(NYSE:COP) wrote off morethan $4.5 billion in assets and pulled out. Exxon Mobil Corporation(NYSE:XOM) decided to fight, and about $13 billion in assets is atstill at stake, with Exxon winning the original case, but losing anappeal last year.

Today’s New York Times reportsthat Venezuela may be willing to allow the Western oil companies to bidon new projects in the country. And some of the companies that gotstung a couple of years ago are likely to participate.

Venezuela needs the big Western oil companies with their expertise andlarge stores of cash to invest in and develop a resource that couldexceed 250 billion barrels of oil in place. The national oil company,Petroleos de Venezuela SA (PdVSA), has proved that it does not have theexpertise to run the country’s oil industry. Nor does it have apreemptive claim on enough capital to grow the industry. The governmentspends the oil money faster than PdVSA can make it, and low oil pricesare severely limiting the amount of money available.

For their part, the big oil companies need big projects. The size ofthe resource in Venezuela puts the US outer continental shelf in theshade. Not only that, everyone knows where the oil is, which reducesfinding expenses.

The major downside to investing in Venezuela is obvious: what’s toprevent another nationalization in five or ten years, after theinvestments have been made and the projects are operating? Especiallyif Chavez is still president?

Chavez has introduced a law that would allow him to becomepresident-for-life. Luring the big Western oil companies back into thecountry would represent a solid accomplishment that could help him pushthat law through.

And then there’s OPEC. Venezuela has been the loudest champion forcutting production and even using oil as a weapon. Do the big Westernoil companies want to be in a position where not only can they notproduce as much as possible, but could be forced to participate inproduction cuts that would increase oil prices in their home countries?That’s a political loser if ever there was one.

Venezuela’s offer is tempting but ultimately resistible. If Chavez isthe devil in disguise then why would a company want to do the devil’swork? Exxon’s assets in Venezuela amounted to less than 2% of thecompany’s total reserves. Conoco’s Venezuelan assets amounted to about10% of the company’s reserves. Those levels of new ownership areunlikely to be available.

Chavez was not joking two years ago. He believed then, and he believesnow, that Western oil companies are just greedy capitalists who willsign any deal in order to make money. He will be happy to use them tofurther his political future, but he certainly does not contemplate along-term relationship.

Paul Ausick
January 15, 2009