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Venezuela Oil Crisis

Brian Hicks

Written By Brian Hicks

Posted March 14, 2013

Vice President Nicholas Maduro is expected to become the next leader of Venezuela after the death of Hugo Chavez. And it is highly probable that Maduro will continue the status quo in managing the nation’s oil reserves.

Include the fact that Rafael Ramirez, head of the Energy Ministry, will continue to oversee the oil sector, as reported by Reuters. The International Energy Agency’s monthly analysis maintains that Ramirez’ stay will only solidify current energy policy. Though Maduro was a Chavez acolyte, no one truly knows what he plans to do with the national oil market.

There is every indication that he may preserve the current system, or he could steer to the left of Chavez. However, there is a slim chance of Maduro recognizing the realities of his country’s impending energy problem—something that could make him more conciliatory in seeking new business aboard.

But regardless of the direction he chooses, the current trajectory of Venezuelan oil policy is unsustainable.

Chavez used oil funds from state-run oil company Petroleum of Venezuela (PDVSA) to maintain the country’s robust social programs, according to Reuters. These programs are not cheap, and now there is an added problem of a decline oil production from the time Chavez took office in 1998.

During Chavez’ tenure, oil output dropped from 3.5 million barrels per day to 2.34 bpd in the last month. According to projections, Venezuelan oil output will only move up to 2.8 million bpd in the next few years.

Venezuela is the largest producer of oil in South America because of the Orinoco belt region on the eastern side. But this region lacks the necessary investment to increase the country’s oil produce.

The Orinoco belt has more than enough oil reserves, so it is only reasonable to surmise that divestment of funds and lack of priority are two main factors behind Venezuela’s looming oil problems.

From CNN:

“OPEC confirmed that Venezuela’s Orinoco belt contained tar sand deposits equivalent to around 300 million barrels of oil, enough to fulfill current world demand for 10 years. That would mean Venezuela would have the largest oil reserves on the planet, outstripping Saudi Arabia’s 260 billion barrel oil stash.”

Foreign investment has not exactly been smooth-sailing since Chavez nationalized the oil fields in 2007. Outside oil companies were encouraged to continue drilling, but the PDVSA would take 60% of the profits, according to CNN.

This forced a number of oil companies to pull out of contract agreements, including oil giants ConcoPhillips (NYSE:COP) and ExxonMobil (NYSE: XOM).

Regardless of new leadership, Venezuelan energy policy caused many investors to leave on bad terms. And the nation’s leaders are failing to acknowledge the need for foreign business to boost oil production and national profit.

However, foreign investment is unlikely to happen any time soon because of Venezuela’s rocky reputation among oil companies, and the current political situation shows little reform in the energy sector.

Forbes mentions center-right candidate Henrique Capriles as the only legitimate opposition to Venezuela’s socialist party, and someone who could open new doors for outside investment. However, his candidacy is considered a long-shot during a time of mourning for Chavez, and even if there was a Capriles victory and forthcoming policy change, investors would still remain hesitant in doing business with Venezuela based on its history.

Unless Venezuela is able to secure more loans and drilling operations from some of its allies—including Vietnam, China, Russia, and Cuba—Venezuela’s energy crisis is inevitable. Foreign companies like India’s Oil and Natural Gas Corporation are holding off on drilling until the current political situation is fully assessed, as reported by CNN. Venezuela’s energy outlook does not appear stable, but the transition of leadership could affect what little foreign investment there is left in the nation.

It is no longer enough for the PDVSA to be the primary nurturer of Venezuela’s social programs. Diversion of funds only prevents the oil company from launching further explorations in the Orinoco region.

If Venezuela hopes to sustain its social programs, it must get oil production up to 4 million bpd, according to Reuters. If not 4 million bpd, Venezuela should at least strive for a pre-Chavez volume of 3.5 bpd.

The PDVSA will not be enough to help the Venezuelan population if oil production numbers remain stagnant and if investment in the Orinoco region remains lackluster. With little foreign business, there must be more funds for the PDVSA to conduct drilling operations; however, the government’s staunch dedication to providing social help will likely remain top priority.

One may think that the PDVSA is booming because of its virtual monopoly over the Orinoco belt, but the state-run company is undergoing a crisis of its own. Forbes reported that Chavez sought loans through the PDVSA from the Chinese Development Bank for $4 billion dollars and another $2 billion from Chevron (NYSE: CVX)—one of the few outside oil companies remaining in Venezuela.

Forbes also mentioned a devastating gas leak fire in the Venezuelan Amuay refinery last year. The fire raged on for days, leaving 40 people dead. In the aftermath of the tragedy, the western oil refinery had to contend with leaking underground pipelines. This incident may have derived from negligence or an avoidable accident, but it certainly does not boost the PDVSA’s reputation as a competent oil company.

The seeking of outside help to fund the PDVSA, and the Amuay incident, are weighing signs that Venezuela’s oil giant has plenty of internal problems to sort out.

The first order of business is to allow the PDVSA to be an oil company instead of a cash vehicle for supporting government initiatives.

There must be a balance between funding programs and recognizing the need for investment in order to keep these programs alive in the future. If not, Venezuela may face the prospect of austerity cuts, a dreaded term in any socialist country—Greece being a prime example.

An official election will take place in Venezuela on April 14th, according to Bloomberg. Maduro’s current position as interim president will be a great help in securing a possible path to victory.

No one has a crystal ball when it comes to predicting politics in any region, but current signs reflect serious energy peril if Venezuela does not get its affairs in order. If Venezuelan leaders hope to encourage more investment in the future, they may have to do more than other nations in gaining the trust of investors.

Until Next Time,

Jon Carter


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