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Venezuela’s election hots up with energy policy visions

As Venezuela’s October election nears, president Hugo Chavez and his challenger Henrique Capriles Rodonski have started to outline different visions for the future of the country’s oil sector

President Chavez has staunchly defended his record managing the oil sector, which has included a campaign to nationalise much of the industry and transform state-run oil giant PdVSA into a champion of his social policies. And he has shown no intention of changing course.

“We must retain control of our oil resources for the people,” Chavez said at a rally in Caracas where he formally launched his bid for a fourth term as president.

Critics argue that his policies have hobbled PdVSA and left an oil sector that has struggled to translate world-beating oil reserves into higher production.

Debt at PdVSA has soared – reaching $32 billion last year – and investment has lagged, even as the company has entered the capital-intensive stage of developing massive heavy-oil deposits in the Orinoco Belt. Contributions to social programmes have outpaced investment in oil and gas operations. Social spending in 2011 was more than $30bn, while investment was around $17.5bn.

The head of PdVSA and longtime confidant of Chavez, oil minister Rafael Ramirez, argues that the company is in a strong financial position backed by tens of billions of barrels of oil reserves. He also says that Venezuela’s oil production has not risen because of the country’s position in Opec – not because of the company’s inability to bring new projects online.

But the Chavez administration has repeatedly proclaimed rosy production projections – without meeting them. In 2005, Chavez announced the Oil Sowing Plan, which set out a plan to increase Venezuela’s production capacity to 5.4m barrels per day (b/d) from around 2.5m b/d. Venezuelan oil production averaged 2.51m b/d in the first quarter of this year, according to the International Energy Agency.

In launching his election campaign last week, Chavez has put out another ambitious long-term plan for the industry – dubbed Plan Chavez. If re-elected, Chavez says that oil production will reach 4m b/d by 2014 and 6m b/d, more than twice current production, by 2019.

Nearly all of that new production is to come from the Orinoco heavy-oil belt, where PdVSA is working with a host of western oil majors and state-run oil companies from politically-allied countries such as China, Russia and Vietnam.

Chavez’s latest plan does not put a price tag on the expansion. But PdVSA has said that it will have to invest $236bn on more than 500 projects between 2013 and 2018 to hit the 2019 6m b/d target. Debt would have to rise yet further and foreign partners would have to stump up more of the funding.

Capriles, Chavez’s most formidable electoral foe since he came to power in 1998, has by comparison issued only vague plans for the oil sector. His 30-page election manifesto mentions the oil industry, Venezuela’s dominant sector, only once in passing, saying he would work to reduce the economy’s reliance on petroleum.

But in comments on the election trail, Capriles has hinted at a different vision.

Like Chavez, he has called for Venezuela to double its oil production this decade. “We can be a country that produces 6m b/d,” Capriles said in a speech last month.

But he has set out some important changes. He has vowed to end expropriations in the sector and to review previous decisions as part of a raft of measures including the easing of import restrictions and foreign-exchange controls aimed at restoring foreign investor confidence in the country.

Capriles has denied charges from the Chavez camp that he plans to privatise PdVSA. Instead, he says, he wants to “de-politicise” PdVSA and make the state-run oil giant a company “for all Venezuelans”, claiming that workers have been under political pressure. He points to Petrobras’ private-public model as a possible blueprint for PdVSA.

Perhaps most significantly for the company’s finances, Capriles says he would end PdVSA’s direct contributions to social programmes set up by Chavez. Between 2005 and 2011, PdVSA spent $77bn on such schemes. That figure is expected to rise sharply this year as Chavez accelerates spending ahead of October’s election.

Chavez holds double-digit leads in most opinion polls, but ill health and declining oil prices could yet dramatically alter the electoral landscape. Chavez, who announced that he had been diagnosed with an unspecified cancer last year, has been mostly absent from the campaign trail, leading to rumours that his health is worse than his campaign has admitted.

Dan Rather, a US journalist, recently sent the rumour mill into overdrive with a report saying that “Chavez is now not expected to live ‘more than a couple of months at most’”, quoting a source he claimed was in a position to know Chavez’s medical condition and history.

Meanwhile, Chavez’s efforts to boost spending ahead of the election could be hit by falling oil prices. Since March, the price Venezuela gets for its oil has fallen by more than 20%, from an average of $116.47 a barrel to $92.06/b in mid-June. Last year, the IEA estimated that Venezuela needed oil prices of around $100/b to fund its budget, while others have put the figure as high as $115 a barrel.

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