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A Tale of Two Oil Fortunes

Written by Keith Kohl
Posted August 9, 2017 at 6:38PM

It was the best of times; it was the worst of times... That’s how this story begins, right?

That about sums up the situation over Mexico’s and Venezuela’s oil industries right now. These two countries have been among the world’s top oil exporters

Both countries have faced an oil crisis in the last two decades, and each took a radically different path.

And let’s be clear here: There is no better example of how not to develop your oil resources than Venezuela.

For a country that boasts the largest cache of proven oil reserves on Earth — 297 billion barrels — you would expect that things are going well. After all, Venezuela was a founding member of OPEC. Surely being a part of that cartel of oil exporters comes with certain advantages.

Now, even though I have my own strong reservations regarding the extremely poor quality of those reserves, I’ll save my denigration of the Orinoco Belt for another day.

You and I both know the situation couldn’t be much worse...

And it all started with one fateful decision.

Venezuela: The Poorest Oil-Rich Country on Earth

On May 1, 2007, Venezuela’s President Hugo Chavez seized all foreign oil assets in the country.

To be fair, they were given a warning.

In one swift, catastrophic move, Chavez singlehandedly doomed the future of his country’s oil industry.

He certainly didn’t take any lessons from Saudi Arabia’s government, which took control of the remaining interest in Aramco in 1980. Mind you, this was after buying a 25% stake in the company in 1973 and an additional 35% stake in 1974.

Chavez, on the other hand, ripped control from Big Oil in the blink of an eye.

Rigs, trucks, tools... he grabbed everything he could get his hands on.

His parting words to them were prophetic, “If they do not agree, they are totally free to leave.”

And with PDVSA in complete control of developing Venezuela’s oil resources, what could possibly go wrong?

Well, it turns out a lot.

Look, I can’t blame anyone for believing that nationalizing Venezuela’s oil industry was a good move.

As you can see below, the country’s oil output did rise to about 3 million barrels per day between 2008 and 2014:

chart-1-ven-eac

Of course, crude prices increased dramatically during that time frame.

And make no mistake; extracting the heavy crude from the Orinoco Belt comes at a much higher cost than, say, the tight oil resources in the lower-48 states.

Unfortunately for them, things quickly deteriorated once oil prices crashed in the summer of 2014.

The crisis was two-fold given the severe lack of investment and infrastructure.

Considering the deplorable state of the country today, as well as potential sanctions by the U.S. being placed on Venezuela’s oil industry, there’s no drilling their way out of this crisis.

It’s irreversible at this point.

If only they had taken a lesson from Mexico...

Mexico: Trump’s Wall Money

Flying from Caracas to Mexico City is a short seven and a half hour plane ride.

In the past, my first reaction to Mexico’s oil industry has always been skeptical. Just four years ago, I was sure that the collapse of the Cantarell oil field would be the death of Pemex.

How could I not? Production from what was formerly the world’s second-largest oil field peaked in 2003 at 2.1 million barrels per day.

Oh, how the mighty have fallen, dear reader...

Today, Pemex is spending billions every year in a desperate attempt to keep production above 200,000 barrels per day.

That means production at the Cantarell field has plummeted 90% since peaking!

So my pessimism over Mexico’s oil industry is understandable, isn’t it?

You’re wrong,” I overheard my colleague Christian DeHaemer muttering to himself this morning.

He had heard me discussing the future of Mexico’s oil industry and grunted his disagreement after seeing this chart breaking down its oil production on my computer screen:

mex2charteac

You can see how drastically production from Cantarell has fallen in just 12 years.

Then Chris did something unexpected... he smirked.

That’s the moment I knew I was wrong.

“Those guys have something big up their sleeves,” he told me without a hint of hesitation.

All it took was one massive discovery to turn things around.

You see, Mexico didn’t go down Venezuela’s path...

Instead, Mexico did the opposite and opened up its energy sector to international oil companies. It was a historic decision for a country that had total control over its oil industry for decades.

And it’s paying off handsomely — for both of us!”

Chris’s bullish sentiment wasn’t lost on me.

In fact, what he showed me next left me speechless for several minutes as I digested his latest investment presentation. Once it finished, I found myself reading over the transcript and poring over the details again.

If you haven’t checked out the incredible situation developing in Mexico’s oil industry yet (which includes a tiny company he discovered that is sitting right smack in the middle of this new discovery), I strongly urge you to take just a few moments out of your day and see this for yourself firsthand.

You can learn the full details here.

Until next time,

Keith Kohl Signature

Keith Kohl

follow basic@KeithKohl1 on Twitter

A true insider in the energy markets, Keith is one of few financial reporters to have visited the Alberta oil sands. His research has helped thousands of investors capitalize from the rapidly changing face of energy. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital as well as Investment Director of Angel Publishing's Energy Investor. For years, Keith has been providing in-depth coverage of the Bakken, the Haynesville Shale, and the Marcellus natural gas formations — all ahead of the mainstream media. For more on Keith, go to his editor's page.

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