In a move reminiscent of Cuban dictator Fidel Castro, Venezuelan President Hugo Chavez's decision in early May to turn majority control of oil rich Orinoco belt region over to the state-run oil company Petroleos de Venezuela (PDVSA) should serve as a strong warning to investors.
The move gave the major private oil companies in the region less than two months to decide whether to accept rising taxes and a minority stake or get out. Oil giants ConocoPhillips and Exxon Mobil Corp. decided on the latter, vacating the region.
Nationalistic moves that have wide ranging economic effects are nothing new; both Cuba and Nicaragua had similar episodes that cost U.S. investors millions of dollars.
Cuba’s nationalization of almost all private property in 1959, under newly-elected dictator Fidel Castro, became the largest uncompensated seizure of U.S.-owned properties in history. Nicaragua found itself in economic ruin after the 1979 revolution during which leftist Sandinistas seized private property and took control of the government, forcing hundreds of thousands to flee.
Venezuela is now faced with the task of replacing two major oil companies in the Orinoco region. According to MarketWatch, ConocoPhillips has cast its eye on Canada as a potential site for gathering crude oil. This move could eventually mean that capital resources originally intended for South America would be shifted north.
According to CareerJournal.com, a shift of skilled labor from Latin America to Canada has already begun. Alberta in particular has taken advantage of the migration, with its Venezuelan population having increased to 3,000, up from just 800 a year ago. The majority of the Venezuelan immigrants are local oil company employees.
Venezuela has seen its oil production steadily declining; some are concerned that PDVSA may not be able to offer the technology or expertise needed to reverse the trend, according to MarketWatch. An economy so dependent on its oil production may have worse times ahead as a dip in production could have potentially devastating effects on the government and its ability to provide support to its people.
Adding these factors up, any investment in Venezuela comes with some significant risk. For the daring investor, however, these recent developments could present an opportunity to buy into a situation from which others are moving away.