Hugo Chavez's New Friends in Big Oil

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It's frequently hard to tell whether you're coming or going in the South American oil scene.

Take Venezuela, for instance. Just a couple of years ago, the country's President Hugo Chavez nationalized its oil industry -- along with several other sectors -- booting such members of Big Oil as ExxonMobil (NYSE: XOM  ) and ConocoPhillips (NYSE: COP  ) from operating positions in the Orinoco basin, which produces a heavy oil that's hard to produce and refine. But now things have turned around, and the western companies apparently have become Hugo's friends again.

Next month, as they also prepare for a new round of bidding in Iraq, such major oil companies as BP (NYSE: BP  ) , Chevron (NYSE: CVX  ) , and France's Total (NYSE: TOT  ) will bid for blocks of heavy oil in the eastern Orinoco area. Winning bidders will walk away with 40% of a given project, with the remaining majority going to the state oil company, PdVSA.

The objective will be to stem the country's declining oil output by adding about 1.2 million barrels per day during the next few years. Venezuela currently claims to produce about 3.1 million barrels each day. However, the U.S. Department of Energy's Energy Information Administration says that amount has declined to just above 2.6 million daily barrels as recently as last year.

Last week the country's government sent out the terms for what is being called the Carabobo project to companies that had expressed an interest in participating in it. A Chevron executive said he was encouraged by the terms and by PdVSA's willingness to alter them on the basis of the companies' concerns along the way.

But those who come away having captured blocks in the bidding won't find their efforts inexpensive. Because of the heavy crude nature of the oil, winning bidders will need to employ special equipment like an upgrader. The work on each block will require an initial investment of $9 billion, and could ultimately cost as much as $19 billion over 25 years.

So how should the Carabobo project affect the investments of Fools with a bent for energy? I say it shouldn't -- materially. But while all the companies mentioned above are generally solid, I maintain a progressively softer spot in my heart for BP. It's an extremely well-managed company, and as noted, it'll be part of the January bidding process. For my money, it deserves your careful attention.

Motley Fool CAPS players rate BP a top-of-the-line five-star company. Why not add your assessment?

Total SA is a Motley Fool Income Investor selection. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor David Lee Smith doesn't own shares in any of the companies named above. He welcomes your comments. The Fool has a disclosure policy that's mightier than Big Oil.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 07, 2009, at 4:48 PM, Bamafan68 wrote:

    As a BP shareholder, I am disturbed that the board would consider working a deal with Chavez given what he pulled on XOM and COP. I may have to consider lightening my position and picking up more XOM.

  • Report this Comment On December 07, 2009, at 4:48 PM, captainccs wrote:

    First, let's get some facts straight. Hugo Chavez did not nationalize the oil industry in Venezuela, that was done some 30 years ago and the oil companies were properly compensated for their properties. After the nationalization, Venezuela went into a mixed mode of operation using private contractors, both local and foreign, to run the industry.

    Hugo Chavez has expropriated several businesses in the oil industry without proper compensation. He has breached contacts right and left. I really don't understand why oil companies want to do business with such a crook. They are setting themselves up for a royal screwing. Just ask Exxon!

  • Report this Comment On December 08, 2009, at 9:34 AM, lemoneater wrote:

    What's to stop Chavez from letting the companies come in and upgrade the equipment and then re-nationalize the oil businesses again?

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