Venezuela Oil: The World's Largest Reserves

While energy investors focused on the Arab Spring as a major cause of oil price volatility in 2011, a dramatic event in the Western Hemisphere has been overlooked.

Two months ago the Organization of the Petroleum Exporting Countries (OPEC) declared Venezuela to have the world's largest oil reserves, estimated at 296.5 billion barrels, exceeding even Saudi Arabia.

And the country's leader—President Hugo Chavez is ill, with some speculating upon his demise in two years. Given Venezuela's importance to U.S. energy security, one would think that the news would have received more attention. Venezuela is the fourth largest source of oil imports for the US, at 930,000 bpd, according to the EIA—behind Canada, Mexico and Saudi Arabia.

As for the Venezuelan media, most currently assert that President Chavez will be well enough to run again for the presidency in 2012. But his health forces his retirement or death, what might be the way forward for Venezuela, and what does it mean for its energy clients and global energy prices?

Earlier this year President Chavez startled his electorate by stating that he had undergone emergency surgery in Cuba to remove a tumor. Since then, he has according to the government had four chemotherapy sessions and on 20 October President Chavez stated that his disease was over, telling state media "no abnormal cellular activity exists."

Pictures show a disconcerting image of a bald and bloated President Chavez, both side effects from chemotherapy.

A former physician of Chavez, Dr. Salvador Navarrete Aulestia, said in a recent Mexican newspaper that the Venezuelan President had less than two years to live because of a "very aggressive" pelvic carcinoma.

On October 27 President Chavez said that Dr. Navarrete must have been paid to make the assertions about his health and called him a "liar".

Navarrete has since fled the country and he and 20 colleagues founded the De Frente con Venezuela political bloc, which intends to contest next year's presidential elections, according to el Nacional newspaper.

That's an example of how the political positioning to succeed Chavez has begun in earnest. And with such huge oil reserves strategically located close to the United States, the stakes are high.

Should his illness incapacitate or kill him, the question is how much of Chavez's "Bolivarian Revolution" would survive. While his +-social programs have proven popular with lower middle and working class Venezuelans, they have proven much less so with the country's upper classes.

And the military has yet to be heard from, though it is undoubtedly unhappy with the fact that the U.S. has imposed embargoes on the country’s military equipment.

As the country's politics have yet to throw up a highly visible opposition candidate, then it seems probable that the military would exercise command for an "interim" period to "ensure" social stability.

In such a scenario it is also likely that U.S. political and economic interests would pile the pressure on Caracas to modify or repeal some of Chavez's more controversial policies, particularly in the energy sector by allowing disgruntled energy multinationals to revise or rescind his energy policies asserting state control over the nation’s oil and natural gas reserves.

Doubtless U.S. Secretary of State Hillary Clinton would rubberstamp such efforts and as the Venezuelan economy is heavily dependent on energy exports, it seems unlikely that a post-Chavez leadership would be able to resist such pressure. Washington would undoubtedly welcome such "regime change" by welcoming Venezuela back into the coterie of Western Hemisphere democratic nations.

And the stakes are high for the world's leading owner of oil reserves. Whatever political change occurs in Venezuela, the only certainty is that it will not occur in a vacuum.

How Hot Is This North American Oil Play?

For starters, there's a massive land rush happening. Companies are in a frenzy to secure positions.

And that's great news for one junior with a huge land package in the play. Not only are they quickly accelerating exploration there. . .they're also increasing their 2011 budget by millions to focus on the play.

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Venezuela's political uncertainty fits into a larger pattern of inevitable change throughout the oil exporting world since the beginning of the year. In the world's largest oil exporter, Saudi Arabia, the recent death of 80 year-old Crown Prince Sultan Bin Abdul-Aziz Al Saud has led to the sprightly 78 year-old Prince Nayef being appointed his successor eventually to replace the ailing 87 year-old King Abdullah. To be kind, the Saudi political leadership is all getting rather elderly.

Libya? With Colonel Gadaffi dead, Libya's Transitional National Council is attempting to forge a new state after 42 years of the Gadaffi regime, but its future composition is unclear and the Transitional National Council has declared that Shar'ia Islamic law will be a prime element in the future governance of the country.

Iraq? The government has requested that U.S. military forces complete their withdrawal by 31 December.

Background

In May the U.S. imposed sanctions on Venezuela's state oil company Petroleos de Venezuela, S.A. (PVDSA), the country’s state-owned oil company and the country’s fiscal crown jewel.

South of the border the issue of the chief executive's health is not limited to Venezuela, as several Latin American presidents have seen their health deteriorate while in power. But none of the above has access to the current and potential fiscal reserves generated by Venezuela's energy sector, and if and when illness incapacitates or kills President Chavez, then the Western Hemisphere's largest oil reserves will undoubtedly become the object of a major international wrangle to secure them on more favorable terms than the administration of President Chavez allowed.

Given the centralized nature of political power in the Middle East, the way forward is murky at best and accordingly could have significant impact on global oil prices. But Venezuela's reserves and its location in the Western Hemisphere have surprisingly attracted minimal attention thus far from Washington.

The health of President Chavez, the country's chief executive since 1999, has apparently been dire for some time, possibly terminal, an event that will undoubtedly shape the country's future energy policy, with enormous implications for Venezuela’s energy sector.

For foreign oil firms, President Chavez committed a mortal sin in 2005 when he handed effective majority control over the country's oil assets to PDVSA.

PDVSA is the world's fourth largest oil company, based on estimates of its proven reserves, production, refining and sales. President Chavez has since used PDVSA revenues to underwrite many of his social programs.

Venezuela's oil industry had been under private control until 1974, when Venezuela nationalized it, setting up PDVSA. Venezuela's oil production is centered in the Orinoco Oil Belt, which analysts believe contain an estimated 300 billion recoverable barrels. In the 1990s PDVSA began a so-called "oil opening", where it allowed more and more foreign private companies to extract oil, via majority shares in joint ventures and the operating agreements.

This sunny picture was interrupted when in February 2007 President Chavez announced a new law nationalizing the last remaining oil production sites under foreign company control, to take effect on 1 May, allowing the foreign companies to negotiate the nationalization terms. Under the new regulations, the earlier joint ventures, involving ExxonMobil, ChevronTexaco, Statoil, ConocoPhillips, and BP, were renegotiated to give PDVSA a minimum 60 percent stake.

The process completed a government initiative begun in 2005 when the Chavez administration transformed earlier "operating agreements" in Venezuela’s older oil fields into joint ventures with a wide variety of foreign companies. Thirty out of thirty-two such operating agreements were transformed by the end of the year, and only two firms challenged the transition in court, and no guesses as to who the companies were. Most foreign companies accepted the new arrangements, including Chevron, Statoil, Total and BP, but ExxonMobil and ConocoPhillips refused, subsequently suing in court.

But the situation is in flux—three months ago, around the time that President Chavez first visited Cuba for medical treatment Venezuelan Energy Minister Rafael Ramirez told journalists, "We've never said we wouldn't pay" the two U.S. multinational corporations Exxon-Mobil and Conoco-Phillips, "the only two that didn't accept our laws and didn't accept (the compensation deal) and took the dispute to the World Bank's International Center for the Settlement of Investment Disputes."

As Ramirez is also the president of PDVSA, his comments should not be taken lightly. Ramirez added that the arbitration processes "are moving forward and we have to defend ourselves because those mechanisms are so perverse that if you don't show up they execute you."

For better or worse, President Chavez has established an executive-heavy control system over PDSVSA and whether it will survive him is anyone’s guess and foreign oil companies are watching events closely.

- By John Daly
Guest Contributor to the Oil & Gas Investments Bulletin