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What Hugo Chavez's Death Means For Venezuela's Oil Market

"Venezuela is a weak OPEC hawk, as it has no sufficient production to influence prices," Gustavo Coronel, a founding member of the board of PDVSA, told CNBC last week. "Venezuela is no longer a factor that can really upset the markets as it was the case 20 years ago."

Can foreign investors be lured back?

While political analysts admit it is difficult to predict what — if anything — will change in Venezuela's oil industry in the short term, the fact remains that the country is nearing an investment breaking point in relation to oil production. Regardless of what successor is chosen, the president will know that the national government cannot continue to rely on PDVSA to bankroll its plans and that there is a serious need to embrace foreign partners with real experience.

For junior companies, there will be little change in the short term. While many are eager to obtain even a small portion of the country's oil reserves, the majority will wait for well-funded majors to test the new political and investment climate — if indeed that materializes.

However, in order to lure the global talent needed to get the sector back on track, Chavez's successor will need to make some very real changes to the country's ownership and tax laws. The government will also need to include terms that abide by international dispute resolution systems, offer competitive terms and respect contract law. Investors and companies will not rush back to Venezuela until a more hospitable and stable investment climate is created. Further, even if that environment is built, it will likely be some time before investors see any notable production shifts. Chavez has effectively obliterated the nation's credibility, and it will take time for Venezuela to earn back that trust.

 

Securities Disclosure: I, Adam Currie, hold no direct investment interest in any company mentioned in this article.

Related reading: 

What Hugo Chavez's Illness Means for Venezuelan Mining

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