Chavez Chagrined: Will Oil Companies Return to Venezuela?

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 |  Includes: CVX, RDS.A, TOT
by: Jim Letourneau

It looks like Chavez needs the first string team back on the (oil) field.

Hugo Chavez recently drove Western oil companies out of Venezuela and let national oil companies from Iran, China and Belarus take up the slack. The New York Times is now reporting that the Venezuelan President (not for life… not yet) has been quietly courting companies such as Chevron (NYSE:CVX), Royal Dutch Shell (NYSE:RDS.A), and Total (NYSE:TOT) and promising them access to some of the world’s largest petroleum reserves.

Chavez needs oil money to fund his social programs, and lower prices, natural production declines and a lack of proper maintenance are likely to have lightened his wallet significantly.

Their willingness to even consider investing in Venezuela reflects the scarcity of projects open to foreign companies in other top oil nations, particularly the Middle East.

Oil prices would be considerably lower today if there was uniform access to the global petroleum endowment. The Western majors are very restricted in where they are allowed to operate. Most of their competitors are state-owned. The one advantage Western oil companies had was technical know-how, although they were happily outsourcing innovation to universities and service companies for years. Now companies like Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL) are charged with providing technical expertise and innovation to the majors.

Not long ago Venezuela’s state run oil company PDVSA boasted, "We’re going to create our own firm, called PSVSA Services, We can have our own Halliburton, ours, the Boliviarian one."

The majors have heard this kind of rhetoric before. They know that it is one thing to restrict oil development by political decree. Even an incompetent national oil company can increase production with exclusive access to an underdeveloped basin. It is much more difficult to efficiently produce oil from a well defined petroleum reserve when you don’t have the capacity. The major oil and service companies won’t be replaced anytime soon.

Stock position: None.