Monday, July 23rd, 2007
Iran-Venezuela Partnership Presents New Challenges in the Global Oil Sector
By Jason Simpkins
Just weeks after two U.S. oil giants were forced out of Venezuela, Venezuelan President Hugo Chavez and Mahmoud Ahmadinejad, President of Iran, are forging multi-billion dollar oil deals that will further cement relations between the two anti-American nations. The two leaders’ rapidly evolving relationship will also further reduce the American oil industry’s involvement in both South America and the Middle East.
For investors who have traditionally looked upon U.S. oil stocks as safe-and-steady investments, this deal and the developments that preceded it may demand a shift in investment strategy [for a Money Morning report on special-situation plays in the energy sector, click here].
Just days ago, Chavez and Ahmadinejad put the finishing touches on a $4 billion deal to develop a block of the Venezuela’s Orinoco Reserve. The project will capitalize on the “Ayacucho 7 Block,” which is believed to hold more than 30 billion barrels of oil, making it one of the largest reserves in Venezuela. Plans call for the actual production of oil to start in two years.
The deal stipulates that, over the next year, Iran will build four oilrigs off the coast of Venezuela. The announcement comes less than two weeks after the PDVSA, Venezuela’s national oil company, announced it had taken complete control of all the country’s oil production, including two large projects operated by U.S. giants ConocoPhillips (NYSE: COP) and ExxonMobil Corp. (NYSE: XOM).
ConocoPhillips and Exxon were ousted as part of Venezuela’s sweeping nationalization initiative, because they refused to accept diminished roles in the development of the country’s oil reserves. The PDVSA now has complete control over Venezuela’s lucrative Orinioco belt, which holds the world’s largest reserves of extractable crude and currently produces 418,000 barrels of oil per day. Estimates suggest it holds as much as 230 billion barrels of extra heavy oil. The renovation of Venezuela’s oil production is part of an extensive nationalization effort that includes several of the country’s leading industries including oil, electricity, and telecommunications.
When the announcement was made, a number of internationally known oil-sector analysts said Venezuela had bought itself substantial trouble with the move, because the country is now faced with the task of getting the most production out of its reserves without the industry-leading oil-extraction technologies, or the lavish financing deep-pockets and business connections U.S. companies’ bring to the table. But taking a lesson from the ongoing global private-equity boom, Venezuela and Iran will be working even closer together to establish a multibillion-dollar investment fund to finance projects in countries, that up to now, have been dependent upon U.S. funding.
“It will permit us to underpin investments, above all in those countries whose governments are making efforts to liberate themselves from the (US) imperialist yoke,” Chavez said in January. “This fund, my brother,” the Venezuelan president said, referring affectionately to Ahmadinejad, “will become a mechanism for liberation. Death to US imperialism!”
The United States has long considered Iran and Venezuela as global points of contention. Chavez, the Venezuelan president, has repeatedly accused the United States of having imperialist designs on poorer countries and of sponsoring opposition groups to topple his regime. And Iran is a member of the infamous “Axis of Evil,” and has repeatedly bristled United States policy makers with its supposed nuclear ambitions. This newest Venezuela-Iran deal is the latest in a series of steps that Chavez and Ahmadinejad, have taken in spearheading what Iran’s Kayhan daily newspaper has labeled as a “Global Anti-Imperialism Wave.”
For instance, just this month, Chavez and Ahmadinejad launched the construction of a joint petrochemical plant in Iran, with plans to build another in Venezuela. Each are estimated to cost between $650 million and $700 million and take four years to complete. Many of the official posters near the worksites are alleged to have read: “Iran and Venezuela – the Axis of Unity.” Ahmadinejad hailed this latest deal as a step towards cementing “brotherly” ties between the two “revolutionary” nations, while Chavez referred to it as “the unity of the Persian Gulf and the Caribbean Sea.”
In 2006, Venezuela was the sixth largest oil exporter in the world, casting off 2.2 million barrels per day, a figure that is expected to rise as high as 3.2 million barrels per day this year. Iran, whose production has been hampered by U.S. imposed sanctions, was still the fourth largest exporter of crude in the world, shipping out 2.5 million barrels per day. Both nations are members of the Organization of Petroleum Exporting Countries, which produces more than a third of the world’s crude.
Joint projects such as these will help Iran to access the growing markets of Latin America and will bring Venezuela closer to the markets of India and Pakistan. However, these developments are also evidence of thickening ties between two prominent oil-producing nations that boast a strong anti-American agenda. In addition to Venezuela, Ahmadinejad is also visiting Bolivia, Ecuador, and Nicaragua in the hopes of cementing relationships with their respective leaders. Washington is no doubt dismayed by the prospect of having that much anti-American sentiment take up residence in its own backyard.
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