What Hugo Chavez's Death Means For Venezuela's Oil Market
The delays currently afflicting the planned $233-billion development of oil fields, pipelines and refineries in the country's Orinoco Belt, which according to a US Geological Survey study may hold more crude reserves than Saudi Arabia, are a prime example of this mismanagement.
Until now, PDVSA has given no indication as to whether it will invite more foreign investment or increase its own investment in new production; however, the late president held such sway over the company's direction that his death could dramatically alter not only the future of the company, but also of the entire sector.
Questionable investment environmentDespite the country's obvious potential, investors have been cautious to back companies operating in the region. This reticence is largely due to Chavez's past moves to make PDVSA the majority stakeholder in all Venezuelan projects by nationalizing oil and gas assets owned by international oil companies. Moves like that prompted ExxonMobil (NYSE:XOM) and a number of other companies to abandon work in the country; in turn, that reduced Venezuela's access to oil and gas technology and expertise. In what many analysts feel was the “fatal blow,” in 2007 Chavez essentially renationalized the industry, kicking out a number of foreign oil companies that refused to renegotiate their contracts, namely ExxonMobil and ConocoPhilips (NYSE:COP), which until that point had invested billions of dollars into Venezuela's oil sector, according to CNNMoney. The new rulings require foreign investors to essentially sign over 60 percent of their operations to PDVSA. However, under these terms, the foreign entity, which holds the remaining 40 percent, is still required to fund 100 percent of the investment - hardly an enticing prospect. Additionally, whatever profit is made by the foreign entity is subject to a 50-percent tax rate and a 33-percent royalty, and any disputes concerning ownership are only allowed to be heard in Venezuelan courts.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV