The country of Venezuela has a long history with the petroleum industry. For centuries, both indigenous tribes and Spanish colonists had found the crude bubbling up to the surface to be beneficial in medicines and candles. In 1914, the first oil company to arrive in Venezuela discovered success at their first well with no need for drilling (Briscoe, 2006). Opportunities are still available in Venezuela for an enterprising petroleum company to take advantage of. These opportunities offer risks and benefits, both in the long and short term. To be successful will require interaction with local governments and organizations.
The oil-related opportunities in Venezuela are abundant. Venezuela is the largest exporter of oil in the Western Hemisphere. The country currently sits on top of 80 billion barrels of oil reserves. Existing fields currently produce 2.8 million barrels per day (bbl/d), although 2.2 million bbl/d are exported (Energy Information Administration, 2007). For a petroleum company seeking to expand its drilling portfolio, Venezuela offers an abundant supply of crude.
In the short term, there are benefits and risks to any oil venture into Venezuela. One benefits is the proven track record of the Venezuelan fields. Although these fields are quickly maturing, there is plenty of reserves left in the short term (EIA, 2007). Unfortunately, the current government under the leadership of President Hugo Chavez presents an unpredictable situation. Fund managers are currently avoiding investment in Venezuela because the political situation there is too risky (Greenhalgh, 2008). This coincides with the Chavez regime’s recent expropriation of western interests in current Venezuelan petroleum projects and deals with leading Russion oil companies including with TNK-BP, Lukoil, and Gazprom (Tippee, 2008). Although the short term benefits of the rich oil fields in Venezuela are extremely attractive, the risk is extreme.
Unfortunately, the long term outlook is no better than the short term. The Energy Information Administration (2007) reports that the fields in Venezuelas four major production areas are maturing rapidly. This means production is on the decline and more effort is required to produce in these fields. The state-run oil company Petroleos de Venezuela S.A. (PdVSA) has begun injecting natural gas into these aging fields in order to increase the pressue and production (EIA, 2007). It is also widely believed the elections in Venezuela are rigged. The result of this is that the unstable presidency of Chavez may not be ended without military intervention (Tippee, 2008).
Any oil company wishing to do business in Venezuela must deal with the government and its oil company, PdVSA. Venezuelan law requires foreign operators to form joint ventures with PdVSA or its subsidiary, Corporacion Venezolana de Petroleo (CVP), in order to operate within the country. This joint venture requirements means that any foreign oil company will have to deal directly with PdVSA or CVP in order to negotiation agreement. Although this has not deterred many multinational oil companies from investing in Venezuela, recent changes in these joint venture contracts has increased the Venezuelan corporation’s holdings in the projects (EIA, 2007). Future investors will need to take care when entering into any venture in Venezuela.
Although there are ample opportunities in oil-rich Venezuela, foreign oil companies must proceed cautiously. The short term benefits are tremendous in terms of production, but the risks, both short and long term, outweigh them. The instability of the government and its oil companies make any venture into Venezuela a risky proposition.
Briscoe, I. (2006). The spoils of oil. (Cover story). New Internationalist, pp. 8,9. Retrieved October 10, 2008, from Academic Search Premier database.
Energy Information Administration. (2007). Venezuela energy data, statistics and analysis: Oil, gas, electricity, coal. Retrieved October 10, 2008.
Greenhalgh, H. (2008). Lifted by consumer boom in Brazil. Financial Times,13. Retrieved October 10, 2008, from ABI/INFORM Global database. (Document ID: 1545639241).
Tippee, B. (2008, August). High oil prices form weak base for state power. Oil & Gas Journal, 106(29), 76. Retrieved October 10, 2008, from ABI/INFORM Global database. (Document ID: 1529788771).
Ferrell, O. C., Freadrich, J., & Ferrell, L.. (2008). Business ethics: Ethical decision making and cases (7th ed.). Boston: Houghton Mifflin.