Americana: Oil and Gas Investments are Unique in the U.S.
Oil and gas investing is a pursuit woven into the entrepreneurial fabric of the United States. Beginning with the Spindletop gusher in 1901, the rise of the modern petroleum industry is characterized by determination. Captain Anthony F. Lucas ran out of money halfway through the Spindletop drilling project, but he wouldn’t let that stop him. Although all the wells drilled in the area had been unsuccessful, Lucas was able to convince his investors to see the project through. Drilling recommenced, and 564 feet later, the largest gusher the world had ever seen roared for nine days before it was brought under control.
It’s easy to take for granted the opportunity to invest in the oil and gas industry. John D. Rockefeller, founder of Standard Oil Company, once said “I believe in the dignity of labor, whether with head or hand; that the world owes no man a living but that it owes every man an opportunity to make a living.” American decision makers have long defended the right of each individual to seek prosperity in the ways they see fit. However, many people are unaware of how rare privately held oil and gas investments really are. In other parts of the world, some nations aren’t as willing to share a piece of this lucrative industry with private investors. Oil and gas exploration is risky, but these nations obviously think it’s worth the risk. That’s why, not surprisingly, three-quarters of the world’s proven reserves are controlled by state monopolies that severely limit or completely bar private participation.
Even when state-owned oil companies do allow outside investment, it’s their prerogative if they want to change the rules (to their advantage, of course) halfway through the game. This was evidenced recently when Venezuelan President Hugo Chavez directed the government to seize control of operations in the Orinoco River Basin, one of the last fields to be taken over by state-owned Petroleos de Venezuela SA. The Orinoco project was a collaborative effort among six major oil companies, including ConocoPhillips, Exxon Mobile and Chevron. According to MSNBC, “It remains unclear how the companies are being compensated for their losses. The six companies invested more than $17 billion in the Orinoco projects and hold some $4 billion in outstanding debts, but Petroleos de Venezuela SA, also known as PDVSA, would not be assuming those obligations, Oil Minister Ramirez said. ‘Each company is responsible before the banks for its commitments,’ he told reporters.”
Generally speaking, there are three basic risks to oil and gas exploration: geological, mechanical and production. However, recent developments such as the situation in Venezuela discussed in part one underscore the additional risk associated with international projects: political. Part II will cover the potential for new domestic production along with an overview of available tax advantages for private investors.
Published Wednesday, July 11th, 2007 at 6:30 am and filed under Articles.