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Venezuela's Gold Crisis Is Spurring Chinese Investment

By Andrew Foote – Dec 31, 2013 at 8:24PM

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With continued sanctions on Iranian oil, China is forced to look elsewhere for this vital resource. Venezuela is also in need of foreign investment since it is in a liquidity crisis.

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 (SPN). In October, a Panamanian flagged vessel that was under contract with Anadarko Petroleum (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 (XOM -0.35%) and Chevron (CVX -0.29%) 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 (E 1.23%) 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.   

Andrew Foote has no position in any stocks mentioned. The Motley Fool recommends Chevron. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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