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Chevron (NYSE: CVX) plans to invest more than $7 billion in Venezuela over the next five years, potentially more than doubling its oil production there to about 600,000 barrels per day. ExxonMobil (NYSE: XOM), meanwhile, isn't interested in rushing back into Venezuela. And quite frankly, I think ExxonMobil may have the better strategy.
Chevron isn't starting from scratch. The company has operated in Venezuela for more than a century and maintained a presence, even as political instability and economic turmoil have driven other international oil companies away. In fact, in September, Chevron announced agreements providing improved fiscal, commercial, and legal terms for its Venezuelan operations. It also secured additional acreage in the Orinoco Belt.
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Management believes it can expand production while keeping total costs below $20 per barrel. Indeed, that's a pretty attractive proposition.
Chevron already has infrastructure, local relationships, and operating experience. Expanding existing production is considerably different from building an entirely new business in a country with Venezuela's history. And if oil prices remain favorable, Chevron could generate substantial additional cash flow without taking on the same level of risk as a newcomer.
Exxon has good reasons to be skeptical. The company has had its Venezuelan assets seized twice, most recently in 2007 under former President Hugo Chávez. CEO Darren Woods has indicated that Exxon would consider returning, but only with stronger legal protections and investment terms that justify the risks. I don't blame him.
Venezuela's oil infrastructure needs substantial investment, political uncertainty remains high, and there's no guarantee future governments will honor today's agreements. And there's also reason to consider long-term oil demand.
There are varying projections on this. The IEA projects that global oil demand could plateau around 2030. Wood Mackenzie has that plateau hitting in 2032. TotalEnergies (NYSE: TTE) has it between 2035 and 2040, while OPEC suggests "robust global oil demand growth prospects to 2050, with no signs of oil demand peaking over the forecast period." But even with OPEC's optimistic scenario, 2050 is only about 23 years away.
Of course, even if demand levels off, existing oil fields will continue declining. The industry will still need replacement production. But if demand growth slows while producers keep expanding capacity, oil prices could face additional pressure. Under these conditions, spending billions on politically risky projects becomes harder to justify.
Chevron's expansion isn't necessarily a mistake. Its existing operations, relatively low production costs, and improved contractual terms could make Venezuela a profitable source of additional oil production. But ExxonMobil doesn't have the same advantages. It would potentially need to commit substantial capital to rebuild operations in a country that has already confiscated its assets.
The company has other places to invest, including Guyana and the Permian Basin, where it has established operations and greater confidence in its ability to generate returns. Overall, ExxonMobil's strategy just makes sense. Yes, Chevron could make plenty of money in Venezuela. But ExxonMobil is demonstrating that having the financial resources to pursue an opportunity doesn't mean you should. Sometimes the better investment decision is knowing when to walk away.
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Jeff Siegel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.
Chevron Is Doubling Venezuela Production. ExxonMobil Says It's Not in a Rush. Who's Right? was originally published by The Motley Fool
