What's Next for Venezuela's Oil Industry?

Brian Hicks

Written By Brian Hicks

Posted March 11, 2013

The people of Venezuela are mourning their beloved leader and president, Hugo Chavez, who, last Tuesday, passed away after 14 years in power. And while not much is expected to change at the onset, there is concern for the already crumbling Venezuelan oil industry.

It was oil that helped Chavez get elected as oil prices dropped in the 1990s. And when those prices went up as he was in power, he was able to win over the people and reward them with popular programs, and he gained faith and camaraderie with other world powers by offering bargain-rate oil deals.

But he wasn’t reinvesting in Venezuelan oil; efforts weren’t being made for further oil exploitation, and the economy was running like the well would never run dry.

In 2000, Venezuela was producing 3 million barrels per day, but by 2011, it had been whittled down to just 1.7 million barrels per day, as the Washington Post reports—a dramatic fall off by about half.

By 2002, Petroleos de Venezuela SA (PDVSA), which at the time was a world leading oil company, went on strike. From there, Venezuelan oil was in a tail spin; experts, analysts, executives, staff—everyone who helped build PDVSA—was suddenly gone.

President Chavez then started making waves with foreign oil companies who had invested in Venezuelan oil. His idea was to nationalize oil and gas projects by making PDVSA a majority stake holder in those foreign endeavors. When the stakes were raised to 60 percent, some companies restructured their contracts, while others went to court.

Exxon Mobil (NYSE:XOM) was one of those companies, and it found itself turned into Chavez’s political punching bag. In the Venezuelan newspaper Ultimas Noticias, one of its headlines wrote, “Exxon turns oil into blood,” as the Washington Post reports. It was a summation of the tension that had grown between Chavez and some of the outside oil companies.

One oil executive who knew Chavez personally, and who wanted to remain anonymous, told the Washington Post:

“He’s a charmer. He’s a liar. He’s done a lot to improve the lot of his people. He ruined the oil industry.”

Chavez no doubt was a controversial leader, but perhaps that comes with the territory when you’re sitting on top of the world’s largest crude oil reserves.

In the short-term, Venezuela will operate as it has been; projects will go on as scheduled, there may be a slight drop in production by the PDVSA, which gets full instruction from the government, and the markets shouldn’t see much change as Venezuelan oil has been in decline for so long, according to the Washington Post.

Whoever the next leader is—be it vice president Nicolas Maduro or another—the economic state and uncertainty of its future oil industry is vital to Venezuela’s economic health and will be a top priority.

Amid the political uncertainly left by Chavez’s death, countries with interests in Venezuelan oil—including Russia, China and India—are taking a step back and waiting for it to play out. Elections are set to be called in the next 30 days or so.

In the meantime, Venezuela is still a top four supplier to the U.S. and a major supplier to China.

But as the Washington Post reports, the Keystone XL pipeline is raising concern as it nears completion. Right now, refineries in the U.S. have the ability to work with the low grade crude oil that comes out of Venezuela. Once the Keystone XL pipeline is completed, there are fears that Canada will take U.S. demand from Venezuela.

A Reuters report confirms that LUKOIL (PINK: LUKOY) is operating in the Orinoco basin of Venezuela as part of the Junin 6 consortium headed by Russian oil company Rosneft.

Russia has billions of dollars invested with Venezuela, tied up in oil and in weapons. As Bloomberg Businessweek reports, Rosneft and other oil companies will invest $17.6 billion in Venezuela to ensure production is up to 930,000 barrels per day by 2019.

As for PDVSA, it is unclear what direction it will take in the future. Will it invite foreign investors back into the mix, or will it increase its own investments in domestic projects? Chavez always held such command over the company in the past. It could be a time for complete change.

If vice president Nicolas Maduro doesn’t win the coming election, policy on foreign investment and global partnerships could change the face of Venezuela and its oil industry.

Until order is restored, it’s simply speculation, but one thing is for sure: the state of Venezuelan oil and the outlook of the economy are top priority.

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