Should Big Oil Return to Venezuela?

Hugo Chávez may be rethinking his position on 'Big Oil' in Venezuela. (image: hacer.org)

An article in the Houston Chronicle this week reports that Venezuela has recently “put out feelers for the majors to consider new projects in the country’s oil-rich Orinoco Belt.”  The question the article raises is this: Should Big Oil accept the invitation?
When crude was selling for $120 a barrel, Venezuela’s socialist president Hugo Chávez made life miserable for large publicly-traded international oil companies, or IOC’s, doing business in his country. His well-publicized tactics included nationalizing the oil fields, ordering tax raids on the IOC’s offices and levying steep royalty charges. Giants like Exxon Mobil and ConocoPhillips were forced to leave and Venezuela’s vast oil reserves were turned over to small national oil companies, or NOC’s. But when the big boys left, their expertise, money and efficiencies of scale – things the NOC’s largely lacked — went with them.
As long as crude stayed in the triple-digit price range, the shortcomings of the NOC’s weren’t all that noticeable. But when the price of oil began falling, eventually dropping below $60 a barrel – the minimum figure upon which the Venezuelan economy is based – the wisdom of the new order was called into question.  As recently as January of this year, an editor’s blog on LatinPetroleum.com said, “With the pull back in oil prices, Chávez’ recent invites, mainly state oil companies, will be put to the test quickly. That is to say, will they be able to bring the technology, experience, and more importantly the capital that Venezuela needs to push forward with its mega-hydrocarbon projects or will Chávez and Company have to revert to Big Oil? Only time will tell.”
It didn’t take long.  But the IOCs are facing a conundrum. If they return to Venezuela and oil prices soar again, won’t there  be a major temptation for Chavez to put the squeeze on them once more?  There’s evidently no shortage of skepticism among the Big Oil pundits. The Chronicle article quotes Gary Adams, vice chairman of consulting firm Deloitte’s oil and gas group as saying, “I would be very tentative if I were an IOC structuring a deal going forward.” And BP’s CEO, Tony Hayward, said, “The world’s not changed.”  But both agreed that the lower the price goes, the stronger the position of the IOC’s and the weaker that of the NOC’s.

With the strengths and ready cash of the IOC’s making them look better every day, Chávez may make them an offer they can’t refuse.