Is Big Oil overextended into political territory it can’t control?

Big Oil is used to working in dicey political situations, but it seems like it might be getting tired of it. This is not a good thing; it implies that the risk/reward balance just isn’t cutting it anymore. And if it isn’t cutting it at $70 a barrel, investors?particularly those investing in oil companies?better pay attention. What the heck is going on here?

Let’s look at what’s been happening in the past few weeks and months. We had Gazprom, the Russian gas monopoly, take control of BP’s stake in a Siberian natural gas deposit. Royal Dutch Shell was, for all intents and purposes, pushed out last December. Remember Shell’s reduction of its investment in Nigeria? It looks like Venezuela is the next oil asylum headed for lunatic rule.

Hugo Chavez has been eyeing the creamy filling from the Orinoco oil reserve as a way to finance his expanding socialist programs at home. Those “free” services like nationalized health care ain’t free, and taxation alone isn’t going to keep pace; the answer is oil. But the contracts the big foreign oil companies originally negotiated gave them large slices of the oil pie. Chavez demanded that they be renegotiated, or else.

The Norwegian oil company Statoil agreed to reduce its interest in the big Orinoco Sincor project from 15% to roughly 10%. BP, Chevron and Total are also reducing their pieces of existing projects. Details aren’t all that clear right now, but the assumption is that they’re selling their pieces back on the cheap. We can assume that because Exxon and Conoco are having none of it. Conoco is walking away from two projects in the Orinoco oil reserve which amounted to 4% of its total production in 2006. Exxon had a 42% stake in the Cerro Negro project, which equaled roughly 1% of the company’s total daily production of oil. They’ll be relying on an arbitration process to get some sort of fair compensation. Between the walkouts and the other companies’ reductions, it looks like Petróleos de Venezuela SA (PdVSA) will be controlling 78% of the production in the Orinoco oil reserve.

Oil companies are used to working in all kinds of political environments, because let’s face it, most of the oil lies in politically interesting areas of the world. Nationalization of natural resources is nothing new?there was a wave of it in the 1970s in the Middle East, and even here in the U.S., loads of mineral and forestry assets are technically owned by the government (we just don’t run the actual operations). What changed this time? Perhaps the high price of crude oil has made it more attractive to work in more friendly environments even though the oil may be harder to pull out of the ground.

An interesting side note is that Chavez may be making his life more difficult. Already faced with huge labor problems, skilled oil workers simply may not hang around. With its oil sands and politically stable government, Canada can be an attractive alternative to the heat of Venezuela. Put together the reported flight of talent to Canada with the not-insignificant experience gained from pulling out the extra-heavy crude from the Orinoco region, and the Venezuelan adventure might not be the loss it seems.

Indeed, the end result of these tin-pot dictators flexing their political muscle may be newfound investment in alternatives … not just ethanol and biodiesel, but oil sands, oil shale, clean coal and tar sands that happen to be located in more politically benign environments. With oil prices high, it’s increasingly looking like that’s the case.

Exxon, Conoco Exit Venezuela Under Pressure WSJ, June 27, 2007

Safer plays key for Conoco after Venezuela exit Reuters, June 27, 2007

Statoil says Venezuelan oil deal satisfactory Reuters, June 27, 2007 2:47 a.m.

WRAPUP 3 – Chavez drives Exxon, ConocoPhillips from Venezuela Reuters, June 26, 2006 6:30 p.m.

Fleeing Chávez, Oil Workers Flock To Frigid Alberta WSJ, June 26, 2007