The post-Chavez Venezuela has created a time of political uncertainty under President Maduro. A recent seizure of U.S.-owned oil rigs is a strong sign to U.S. oil companies that their interests are at risk under this new administration.
In early November, Venezuelan courts ordered the seizure of U.S.-owned oil rigs, declaring the vital role they play in the development of Venezuela. Grandstanding tactics that were focused on securing physical assets were common under Chavez. Such a bold step is the first move of this type by Maduro, leading many to wonder if this will be more common as his administration matures.
Two rigs owned by Superior Energy Services (NYSE:SPN), a company based out of Houston, had its offices seized by members of the Venezuelan state police and National Guard. The Washington Times noted that "their argument was that we were practically sabotaging national production." Ownership of the rigs was assumed by the Venezuela-owned oil company Petroleos de Venezuela. The two units were hydraulic snubbing units from its facility in Anaco, Venezuela. Snubbing units are essential for drilling operations and are an alternative to wireline and coiled-tubing drilling techniques.
This is not the first time under Maduro that a U.S. oil company has had its exploration and production disrupted. In October, ships conducting a seismic survey off the coast of Venezuela were seized. These ships were under contract with Anadarko Petroleum (NYSE:APC). The ships were flying under a Panamanian flag and were sailing in disputed waters that are claimed by both Guyana and Venezuela. The ships were escorted by the Navy to nearby Margarita Island. The crew was held on-board while an investigation was conducted. Venezuelan authorities claimed the ship was conducting unauthorized geographic surveys in their waters.
Under maritime law a nation has the right to safeguard its sovereignty in maritime areas. Anadarko was under concession with the Guyanese government to conduct the surveys. This move could reopen long-standing rivalries between the two nations. In contrast to Venezuela's vast oil wealth, Guyana is a poor nation that is not as capable of enforcing their borders or interests.
Venezuela is the fifth-largest exporter of oil to the U.S. While under Chazev, ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX), and ConocoPhillips (NYSE:COP) had their assets nationalized -- operations still run smoothly. Venezuela plays a crucial role in exporting oil to the U.S. In 2012, U.S. companies bought 984,000 barrels of oil per day from state-owned PDVSA.
Other foreign oil companies in Venezuela
Rosneft has been expanding its presence in Venezuela for some time. For the next five years, Rosneft is planning on investing $13 billion in five projects. Lukoil, Russia's second-largest oil company, will sell shares of its Junin six block in the Orinoco Oil Belt. It is uncertain if Rosneft will buy all of the block in a joint venture with Gazprom Neft or just 8%. Either way, PDSVA will be a key partner in the operations of this block. The map below shows the location of the Orinoco Oil Belt.
Rosneft entered into a joint venture with Corporacion Venezolana del Petroleo, a subsidiary of PDVSA, paying $16 billion to pursue E&P operations. The Carabobo-2 field in the Orinoco Oil Belt is expected to produce up to 400,000 barrels per day by 2018. This is in addition to $20 billion invested in Venezuela by Russian state-owned companies.
China has also invested $48 billion in E&P since 2008, when the Sino-Venezuelan project Sinovensa -- a joint venture between PDVSA and China National Petroleum -- was formed. Many of its operations are in the Junin 6 block. Sinopec has signaled continued interest in oil speculation with a commitment to invest $14 billion in the Junin 1 field, which is expected to produce 200,000 barrels per day of oil. Development of the Junin 10 block is also anticipated to produce 220,000 barrels per day for an investment of $14 billion.
China's investments in Venezuela have extended to the further development of facilities that will ensure oil exports. Recently, Export-Import Bank of China agreed to loan state-owned Venezuelan petrochemicals company Pequiven $390 million for a new port. This is in addition to $40 billion already loaned by China for other projects. The increasingly uncertain supply of oil from Iran has made the development of E&P in Venezuela essential for Chinese growth.
Chavez was critical of US FDI and openly courted foreign investors from China and Russia. Many of Rosneft and Sinopec's deals were the result of growing ties between Chavez and Russia and China. The increased presence of these two nations poses a growing risk to U.S. companies and exports to U.S. markets.
When Maduro took office, he wanted to open Venezuela up to more FDI in an attempt to offset the perception that Chavez had perpetrated. The recent problems that Superior Energy and Anadarko have experienced are more characteristic of previous regimes' strong-arm tactics and contrary to the purported direction Maduro is attempting to take. Will Venezuela revert to an older bias against America?
Investors should take into account that relations between China and Russia are stronger with Venezuela than with the U.S. The strong presence of Sinopec and Rosneft would create a formidable market hedge in crude oil pricing. This could inflate the value of the commodity, creating a bubble based on export bias. The unpredictability of Maduro could further complicate export pricing for U.S. markets.
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