In Venezuela, oil and idealism won't mix forever

Venezuela's oil is too big for major energy companies to ignore and too risky to plunge into. Eventually, post-Chávez Venezuela will choose pragmatism over idealism.  

On Tuesday, the government of Venezuela announced that President Hugo Chavez had died from cancer. Recently re-elected, Chavez had long used the country's vast reserves of oil for his "Bolivarian Socialist Revolution."  His successor will face many challenges in continuing Venezuela's status as a major oil producer, largely due to the legacy of Chavez over the last decade.

Venezuela ranks as the country with the number one, two, or three oil reserves in the world, depending on who's doing the counting, along with Saudi Arabia and Canada. These reserves led the country to be a founding member of OPEC, and one of the petro monopoly's most ardent supporters. However, its oil has more in common with the heavy tar sands oil of Canada than the light, sweet crude of the Persian Gulf.  Future production in the country will require new investment capital and expertise in the heavy oil of the Orinoco belt.

When Chavez came to power, PdVSA, the national monopoly oil producer, was widely admired as one of the most professional in the world. Over the last decade, however, Chavez has wrung the golden goose to pay for the social spending  that has underwritten his social programs. The company is showing the stress resulting from poor management and underinvestment.

The Amuay refinery fire in August of 2012, killing 48, was symptomatic of the problems faced by the company. And, in a country in which about 95% of export revenue and 50% of the budget is due to profits from oil, the importance of PdVSA can not be overstated. Perhaps an even stronger symptom of the problems faced by PdVSA was that in September, it was forced to pay contracts with IOUs, not cash. It was widely speculated that the company's coffers were emptied in the lead-up to the October 7 election, in which Chavez was reelected.

An additional problem has been that Chavez has mixed his unique foreign policy with PdVSA's business, midwifing partnerships (with various degrees of success) with Russia's Rosneft and Iran's Petropars in projects in the Orinoco belt, and with China's CNPC in developing a refinery in China's Guangzhou Province. Meanwhile, Chavez had expropriated holdings from PdVSA's joint ventures with Exxon and Conoco-Phillips in 2007 - a process that dragged through international courts until 2012.

The major oil companies know that Venezuela is too large of a prize to leave because of political risk. At the same time that Exxon and Conoco-Phillips were kicked out of the country, other majors, like Chevron, Shell, Total, and BP renegotiated their partnerships, leaving them operating in the country. Releases from the Wikileaks cables, however, showed that these companies were not reinvesting their profits - largely out of concern about future returns.

If Chavez's successor wants to continue his aggressive foreign policy and the social spending of his domestic policy, increased revenues from PdVSA will be needed. However, the nationalism that undergirds these policies also makes it difficult for the government to accept that the capital and heavy oil expertise that it needs can only come from the western majors. Like Mexico's "will-they, won't they" push to bring in private investment, Venezuela is likely to face the same questions.

Ultimately, I believe that the economic argument will win, and new partnerships will begin. The companies most likely to benefit are those already operating in the country, particularly Chevron, ENI, or Total

– This article originally appeared in Energy Trends Report, a free subscriber-only newsletter that identifies and analyzes financial trends in the energy sector. It's published by Energy Trends Insider.