When in doubt, just take it all.
If someone complains, take it anyway.
At least, that’s been Hugo Chavez’s mantra towards foreign oil companies. And if you think he’s done, guess again. This time, however, the consequences of his sweeping nationalizations could very well be a blessing to your oil investments. (I’ll get to that in a minute.)
You see, an interesting question came from one of my readers late last week. Right away, a strange feeling hit me.
The question was, “Where would you rather have your oil investments operating, Nigeria or Venezuela?”
“The answer”, I told him, “is neither.” That was a no-brainer. Quite frankly, the mere thought of operating in either of those countries is enough to make me cringe.
Naturally, he sent back a quick reply saying he couldn’t agree more. He went on to answer the question I was ruminating on for the better part of a day — I knew I’d been asked that question before.
At the end of his message, he mentioned that this wasn’t the first time he asked me that. Being an email pack rat (I have an odd habit of never throwing away old emails), I soon found out he was true to his word. It turns out this gentleman sent me the exact same question nearly two years ago. On an interesting side-note, my response back in 2007 was nearly identical.
Some of you might remember the May Day takeover. In May 2007, Chavez seized operations in the Orinoco River Basin oil field from six major companies. The move effectively gave Chavez control over the remaining private oil fields in Venezuela.
At the time, Chavez said the May Day takeover was the “last step” in taking national control over its domestic resources.
I guess he changed his mind.
Chavez Seizes Oil Service Companies
Chavez further tightened his grip on Venezuela’s oil industry after wresting control and seizing the assets of oil service contractors. The law was passed on May 7, and assets were stripped the next day. A total of 30 barges, 13 drilling rigs, 399 boats, and 39 terminals belonging to approximately 60 companies were taken.
I’d bet a lot of you saw this coming from a mile away.
Once crude prices began to tumble from a high of $147 per barrel, PdVSA (Venezuela’s state-run oil company) stopped paying oil service companies. By the end of 2008, nearly $14 billion was due. And Venezuelan oil production hasn’t been pretty.
Despite the fact that the country claims it produces over three million barrels per day, that amount has fallen to under 2.3 million barrels per day. Also remember we’re talking about heavy and very sour oil.
And even though these companies will be compensated for their loss, can we really expect them to get a good deal? On the matter of being adequately paid for their assets, I’d like to note that two major oil companies are still negotiating the proper compensation for the May Day takeover in 2007.
In other words, those companies might as well take what they’re given. It’s simply not worth their trouble.
And don’t think that Chavez is finished.
He’s already set his sights on his next target. Chavez was quick to report, “All companies performing gas-injection services for oil wells will be seized formally.”
It’s futile to think Chavez won’t continue to strong-arm the oil industry, especially when an overwhelming amount of his social programs are paid for with oil revenues. Oil accounts for approximately 90% of Venezuela’s export revenue.
Chavez’s greed, however, doesn’t have to be all bad news.
The Reason Chavez Could be Worth a Look
Okay, so Chavez’s latest decision was inevitable, especially once you take into account that these oil service companies weren’t even getting paid in the first place.
But if we look at this move in the long term, it’s nothing but a win-win situation for us.
Taking complete control over their oil industry is going to put Venezuela in a very tight spot within the next few years. The country is already forced to spend billions of dollars each year just to maintain current production. And like the Canadian oil sands industry, the latest oil price shock is going to take a deep toll on developing those heavy oil assets.
This latest move on Chavez’s part certainly won’t encourage foreign investments.
Unless some miracle happens, Venezuela’s production will continue falling (their production is already at 1997 levels).
Now, take into account the fact that over a million barrels of oil are shipped to the U.S. on a daily basis. According to the EIA, Venezuela is sending us about the same amount as Saudi Arabia (the Saudis edge out Venezuela by a small margin).
With Mexico soon to be out of the oil exporting business and Venezuela struggling to produce the heavy oil in the Orinoco Belt, the U.S. is going to have to find a few million barrels of oil from somewhere new.
Only a fool believes the world’s economy will never recover. When it does, whether it’s in 2009 or even another two years from now, demand will inevitably pick up. You’ll be able to ride Chavez’s greed all the way to the bank as more prospective oil regions become more vital to global production.
It’s only a matter of time, so why wouldn’t you position yourself while you still can?
Until next time,
Investor’s Note: Chavez’s greed knows no bounds. And it certainly doesn’t bode well for oil production growth in Venezuela. That fact is even more pronounced since his second May Day takeover, which will severely hinder future production. That threat means your oil investments will be even more important to the years to come. But rather than waiting for companies to trade at record prices again, perhaps it’s time you took the next energy bull by the horns. Simply click here if you’re interested in taking advantage of these new oil investments today.