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Hugo Chávez retains power in Venezuelan election

As Hugo Chávez retains power in Venezuela, what do the next six years hold for the country’s energy sector?

Venezuelan president Hugo Chávez swept to victory at the polls on 7 October, overcoming a spirited campaign from challenger Henrique Capriles and giving the socialist leader six more years in office to continue his Bolivarian socialist revolution.

For the energy industry, Chávez’s victory means a continuation of the policies that have transformed Venezuela’s oil industry and state-run PdV over the past decade.

Chávez will continue to lean heavily on the oil industry as a source of funds to further his revolution. The president has relied on a flood of petrodollars over the past decade to maintain his grip on Venezuela’s institutions and extend social programmes such as the popular misiones, which fund local projects aimed at providing services to the country’s poor – a major reason for his success in the polls.

That means Venezuela’s punishing fiscal regime, which includes a 95% windfall tax when oil prices are higher than $100 a barrel, will stay in place.

Foreign investors will likely take the chance to re-evaluate their Orinoco heavy-oil projects after the election, and not all may choose to stick around.

“Though Orinoco Belt green field development, including front end engineering and design on upstream projects, showed certain progress before elections, final investment decisions have yet to be made,” says David Voght, managing director of IPD Latin America, a firm that advises oil and gas companies working in Venezuela.  “We are not convinced that all the foreign investors currently involved in these developments will proceed if the government does not revise certain tax policies, like windfall tax, and procurement practices.”

Chávez’s re-election also means that a sizable chunk of state-run oil company PdV’s cash flow will continue to go towards social projects. In 2011 alone PdV spent more than $30 billion on social projects on top of the taxes and royalties it paid to the government, easily outpacing investment in operations of around $17.5bn. That figure is almost certainly going to be higher for 2012 as the government accelerated spending on the vote-winning social projects ahead of the presidential election.

Some of PdV’s foreign partners, which complain that the state-run oil company has not been able to fund its part of key projects, might hope that PdV will refocus on its operations now that the  presidential election is over. With elections for key state and local posts throughout the country around the corner, spending on social programmes is likely to stay high. “We have a number of elections coming up, which does not bode well for PdV’s bottom line,” says an industry source. 

If that proves to be true it will make it very difficult for Venezuela to reverse the oil industries declining fortunes. Oil output has fallen under Chávez even as the country has claimed the world’s largest oil reserves, at nearly 300 billion barrels. The International Energy Agency (IEA) puts production at around 2.5m barrels a day (b/d), slightly below where it was a decade ago. That is because the country has seen declines at its maturing fields and has struggled to progress development of the Orinoco heavy-oil belt, one of the largest (and largely untapped) oil deposits in the world.

The slow progress in the Orinoco belt contrasts with Canada’s experience developing its own oil-sands deposits in Alberta. In Canada, companies have taken advantage of a decade of higher oil prices to fund development of the capital-intensive heavy-oil projects, and as a result a number of projects have come on stream. Production from the Canadian oil sands, last year around 1.6m b/d is forecast to double by 2020. By contrast, output from the Orinoco has been stagnant, with the government putting production at around 1m b/d, nearly all of which comes from projects that started development in the mid-1990’s and came onstream early in Chávez’s first term.

Slow growth in the Orinoco Belt has several reasons. But the problems start at PdV, which has been heavily politicised under Chávez. The company lost a deep well of industry expertise after an exodus of workers following the 2002 oil workers strike that brought the industry to its knees. And as it has been asked to spend increasing amounts of money on political projects, it has seen its debt mount and its investment in operations fail to keep up with the industry’s needs.

Many see the deadly explosion that rocked the Amuay refinery on 25 August, which killed 42 people and knocked the country’s largest refinery offline for more than a week, as a symbol of the company’s problems. A report by RJG Risk Engineering, a consultancy for insurer QBE, which was leaked after the accident, faulted PdV for failing to follow through on a number of recommendations it had made for improving safety at the plant.

Chávez, though, still has big plans for the industry. As part of his election manifesto, he pledged to lift oil production to 4m b/d by 2014 and 6m b/d, more than twice current production, by 2019. It is the latest in a string of ambitious production growth targets, and few see it as a realistic goal.

The domestic message of rapid production growth runs counter to the line taken by Venezuela at Opec meetings. Venezuela has consistently sided with Opec’s price hawks, arguing that production increases from Saudi Arabia and other Gulf countries have been unnecessary and have hurt oil producers by pushing prices lower.

Chávez knows how important high oil prices are to his future. The IEA has estimated that Venezuela needs oil prices of over $100/b to balance its budget. Most long-term price forecasts indicate that Chávez has little to worry about.

But the country is walking a knife’s edge. A sustained period of lower prices at any point over the coming years would be devastating for PdV and Chávez’s petro-dollar fuelled revolution. Venezuela has struggled to make progress on its Orinoco Belt projects even with oil prices above $100/b. If oil prices were to fall below $80/b PdV and its foreign partners would be unlikely to develop those projects economically. The hit to revenues would also make it very difficult for PdV to continue servicing its debt, which totalled more than $30bn in 2012 and is expected to continue rising.

Just as Chávez is expected to continue his policies at home, he will likely do the same abroad. That means that Venezuela will continue to look to deepen its ties with international allies such as China, which Chávez wants to see replace the US as Venezuela’s largest oil customer. Russia, too, will continue to be an important ally. In a bold show of support for Chávez, the head of state-controlled Rosneft, Igor Sechin, visited a project it is developing alongside PdV in the Orinoco Belt just a week before the election to herald the countries’ close ties. 

Closer to home, though, there are signs that Chávez will not be able to exert the same level of influence as he has in the past. His brand of resource nationalism had proven attractive to leaders in countries such as Ecuador and Bolivia that sought a counterweight to the US-led neoliberalism in the region. He has also won support across the Caribbean with generously subsidised fuel sales to sympathetic countries. Problems at home, such as sky-high inflation and one of the highest murder rates in the world, though, have tarnished the Chávez brand, and leaders that have come to power more recently, such as Ollanta Humala in Peru, have proven more likely to look to Brazil and others for a path to follow.

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