Oil Companies Hope for New Opportunity in Energy-Rich Venezuela

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One of the biggest headlines recently related to oil companies was news of the passing of Venezuelan President Hugo Chavez.

"El Commandante" as he was affectionately referred to by his countrymen, at least by those who approved of his leftist policies, was 58 and succumbed to a lengthy battle with cancer.

Predictably, news of Chavez's passing has sparked ample speculation about what the future holds for Venezuela's oil industry and those oil companies looking to profit from a possible renaissance there.

Venezuela is South America's largest oil producer and an OPEC member. In what may come as a surprise to some investors, Venezuela could be called the Saudi Arabia of OPEC.

In other words, the South American nation is home to about 300 billion barrels of proven oil reserves, compared to about 270 billion barrels in Saudi Arabia. That is according to OPEC's own estimate.

Not only that, but Venezuela is home to the largest natural gas reserves in the Western Hemisphere.

Given those superlatives, it is easy to understand why some Western oil companies are cautiously optimistic about what the future may hold for them in Venezuela.

A Rosy Scenario for Oil Companies

Despite its embarrassment of oil riches, Venezuela has failed to unlock the profit potential in these reserves.

Due to years of not properly investing in its oil industry resources, production steadily declined by about 25% in the 14 years Chavez was in power, and oil exports fell by nearly 50%. In fact, there were various points during the Chavez years that Venezuela was actually a net importer of crude.

"Venezuela's clout on OPEC and on world oil prices has been greatly diminished because of its inability to exploit its enormous resources," Michael Lynch, president of Strategic Energy and Economic Research, a consultancy, told The New York Times. "In the 1990s, their production was booming and they could thumb their nose at Saudi Arabia and get away with it, but now they have become OPEC's poor cousin."

That is to say even with a regime change, which does not appear imminent, it will take years for output there to jump to the point where Venezuela makes a significant contribution to reserves and profits for major oil companies.

But if there was a change, two major oil companies stand to profit the most...

 

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