China and Russia Are Cozying up to Venezuela's Oil Industry

The Orinoco oil belt holds the majority of the oil reserves for Venezuela. Many international oil companies have invested billions of dollars in creating infrastructure and E&P assets in joint ventures with Venezuelan state oil company Petroleos de Venezuela (PDVSA). It is a hope that the expertise that these foreign oil companies bring will further expedite the development of this vital resource and begin to show an increased profit for Venezuela. Under Hugo Chavez, FDI was not always welcomed. But, there is a growing sense of hope that under the new administration led by Maduro, new opportunities will be made available.

Junin 6 consortium
Russian E&P majors have created a consortium around the Junin 6 block in the Orinoco oil belt. The Russian oil consortium entered into a JV with the PDVSA in 2010. In a series of calculated sales, the representation of Russian business in Venezuela has shifted from a public-private mix to publicly owned oil companies.

Rosneft has taken lead for the development of this block. Surgutneftegas, one of the largest Russian oil and gas companies that was privately owned, sold its 20% stake in the Junin 6 block to Rosneft. Lukoil (NASDAQOTH: LUKOY) was soon to follow when it sold their stake to Rosneft for $10 billion. Lukoil's sale was a signal that privately owned Russian E&P companies would no longer be operating as members of the consortium. Gazprom Neft is also a significant stakeholder in the Junin 6 block. Currently, the companies that are involved in this consortium are all state owned either by Russia or Venezuela. The Junin 6 block has an estimated 52.6 billion barrels of oil.

Lukoil was looking for a way out of Venezuela for some time. It was concerned that the political atmospherics in the new administration were not as favorable toward privately owned companies as they would be for state owned companies. Given that many of the other companies that are successful in Venezuela are state owned... primarily from China, a trend showing that Maduro still views Venezuela's oil resources as critical to national development and security. In short, his administration would rather do business on a political nation-state level, rather than a purely commercial level. PDVSA still remains the majority stakeholder with 60% ownership of the Junin 6 block.

Foreign investment
Yet, this has not totally deterred commercial development in the oil sector. Italian company Eni (NYSE: E  ) , along with Spanish company Respol, is very interested in what the future has in store for FDI in Venezuela. Maduro has been more open to courting foreign investment. This is a considerable change from the policy trends under Hugo Chavez.

Reliance Petroleum Limited has entered into an agreement with PDSVA to upgrade to refineries. The Cabruta refinery located along the Orinoco river in Las Mercedes Municipality is expected to produce 400,000 bbl/day. Yet, it is uncertain when this project will be completed. It is also looking into increasing the capacity of the Petroanzoategui refinery that was once owned by Conoco (NYSE: COP  ) .

Investors should watch...
Venezuelan oil is shipped around the world to many markets. Even though the US relies significantly on this resource, it is uncertain if U.S. owned oil companies will have any significant role in Venezuelan oil production and extraction.

What is certain is that Venezuela is rapidly developing their oil sector and has strong ties with state owned, Chinese and Russian companies, as well as companies that are EU- and Indian based. There are many opportunities for investors to get involved through one of those companies... Many of which have very prosperous joint ventures with U.S. oil majors and projects around the world.

For the time being, opportunities in the oil and gas sector in Venezuela will be more dictated by politics than profit margins. This is most strongly seen in Venezuela's preference for doing business with state owned oil companies over that of privately owned oil companies. As long as U.S. relations are somewhat strong between Russia and China, investment opportunities for U.S.-based clients should be favorable.

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  • Report this Comment On February 21, 2014, at 3:17 AM, amvet wrote:

    US companies are naturally handicapped in Venezuela because of the long running regime change program that the US has run in the country.

    Regarding relations between the US and Russia, the US has totally poisoned them with the current regime change campaign in the Ukraine. Overturning a freely elected government because they do not like his foriegn policy is not admired in most of the world.

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