Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Venezuela's Gold Crisis Is Spurring Chinese Investment

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

China has had long-standing interests in South America since the Cold War. As times have changed, so has the nature of its involvement turning from the spread of Communism, to foreign direct investment (FDI). Venezuela is a lucrative opportunity mainly because it sits on some of the largest oil deposits in the world, and is the fifth largest supplier of oil to U.S. markets. As a member of OPEC it also has considerable leverage on pricing and supply. 

Ironically, Chavez was against U.S. FDI and nationalized many U.S. oil assets. He also paved the way forward for Chinese FDI with the creation of the Sino-Venezuelan JVs, most notably Sinovensa. These commercial arrangements are part of a greater Sino-Latin American strategy valued in excess of $250 billion. China is here to stay and will be a major force to contend with in regional markets and investments.  

President Nicolás Maduro was well positioned to continue FDI initiatives since he was the former Minister of Foreign Affairs and had created close ties with China's President, Xi Jinping. Venezuela has a full spectrum of joint ventures with China extending to over 300 agreements of cooperation to the creation of three new power plants by 2016. It is also invested heavily in rail and port construction that will enable the production of oil and other goods.

Venezuela is also in a position where it needs to rapidly secure FDI to offset its reliance on gold prices to value its liquid reserves. Currently, 70% of their reserves are pegged to the gold market. "World Gold Council indicate that Venezuela is the most vulnerable country in Latin America to the drop of gold price as two thirds of its international reserves are made up of gold."

A delicate balance
Venezuela has an estimated 297 billion barrels of oil, surpassing Saudi Arabia's reserves of an estimated 265 billion barrels. Continued partnerships between both nations will create an interesting market hedge and leverage against U.S. markets. The U.S. can't upset relations with either nation for fear of creating a backlash that would affect the U.S.'s ability to import oil or other commercial interests.

Already, Maduro is showing signs of continuing the bias against the U.S. In November, two American-owned oil rigs were seized by Venezuelan court order. These rigs were owned by Superior Energy Services (NYSE: SPN  ) . In October, a Panamanian flagged vessel that was under contract with Anadarko Petroleum (NYSE: APC  ) was conducting seismic surveys in the disputed waters between Guyana and Venezuela. It was impounded because it did not have a permit to survey in Venezuelan waters. Meanwhile, China continues to pour money into JV's and increase their growing presence.

Areas of development
China's FDI spans all areas of economic development in Venezuela to include: military, political, energy and infrastructure. The growing preference for the China brand positions Beijing as an extremely influential partner. The more China develops the infrastructure that is critical for E&P the more U.S. markets can rely on Venezuelan oil. The question for investors is this: Will Venezuela or China be in a position to dictate higher prices or hoard commodities?

The recent $14 billion investment of the Junin 10 block in the Orinoco Oil Belt along with an additional $14 billion investment in nearby Junin 1 block show that Sinopec is planning on working closely with the state run oil company Petróleos de Venezuela (PDVSA). It is expected to reach a projected export of 1 million barrels in the coming two years from Venezuelan oil fields to foreign markets where the U.S. is the majority consumer.

What does this mean for U.S. investors?
The demand for oil is growing, and existing supplies are dwindling. ExxonMobil (NYSE: XOM  ) and Chevron (NYSE: CVX  ) have invested greatly in deep-sea drilling to develop previously unattainable oil reserves. While Sinopec and CNOOC have been very successful at securing sites in the interior of Venezuela. The overall investment strategy and the amount of FDI demonstrate a growing Chinese presence and bolstering of the petro-Yuan.

Investors are hoping that post Chavez Venezuela will be more willing to engage FDI. The Orinoco Oil Belt has the largest oil reserves on the planet and has attracted oil majors Eni (NYSE: E  ) and Rosneft. These companies will provide investors alternatives to Beijing-controlled companies. PDVSA is planning on investing $257 billion to double Venezuela's oil output to 5.8 million bpd by 2019. Part of the reforms could be a change to the 60:40 ratio on joint ventures that guaranteed PDSVA the majority share. There has been talk in Venezuela that the JV ratio could be 51:49, a signal to investors that Venezuela is ready to seriously develop its oil reserves for a profit.   

OPEC's worst nightmare?
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2780092, ~/Articles/ArticleHandler.aspx, 9/28/2016 1:49:09 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 4 hours ago Sponsored by:
DOW 18,228.30 133.47 0.74%
S&P 500 2,159.93 13.83 0.64%
NASD 5,305.71 48.22 0.92%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/27/2016 4:00 PM
APC $58.27 Down -0.27 -0.46%
Anadarko Petroleum CAPS Rating: ****
CVX $98.98 Up +0.20 +0.20%
Chevron CAPS Rating: ****
E $27.65 Down -0.20 -0.72%
Eni CAPS Rating: ***
SPN $14.29 Down -0.44 -2.99%
Superior Energy Se… CAPS Rating: ***
XOM $83.24 Up +0.18 +0.22%
ExxonMobil CAPS Rating: ****