Big Oil: Who Needs Venezuela?

Venezuelan President Hugo Chávez must have the nerves of a riverboat gambler. Or, he just may be incredibly stupid. He has decided to nationalize the energy industry in his country and has demanded that large oil companies turn over 60% of the ownership in their projects there.

The largest oil company with assets in Venezuela, ConocoPhillips (COP) told Hugo to go fly a kite, leaving as much as $10 billion of assets in the country. The oil firm will look to international arbitration to seek satisfaction. Venezuela has certain assets in the US that could be seized in a judgment.

According to The Wall Street Journal, several huge oil companies with about $31 billion in assets in the South American country have to decide whether to take Hugo’s deal or leave. Those companies include Exxon (XOM) and BP (BP). It is safe to assume that they would also take their cases to arbitration and most of Venezuela’s overseas energy operations could end up in the hands of private oil companies.

But Hugo is playing with fire. If large international oil companies pull out of the country, it is unlikely that he has the capital or workforce expertise to keep the tremendous infrastructure for drilling and transporting oil in place. Much of the capex for the projects almost certainly come from the oil companies that do business there. He will end up with an aging set of plants and equipment and no friends in the oil business.

It is a classic case of iron will over intelligence, and it is bound to get worse.

Douglas A. McIntyre can be reached at [email protected]. He does not own securities in companies that he writes about.