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Maduro's presidency leaves little hope for oil companies

When a stagnant economy and a moribund energy sector, Venezuela needs pragmatism rather than politics. But Maduro's elevation to the presidency leaves little room for hope

If oil companies were hoping for clarity from Venezuela’s 14 April presidential election, they were left disappointed. Nicolas Maduro, the late-president Hugo Chávez’s hand-picked successor, was expected to romp to victory over challenger Henrique Capriles, and earn a clear mandate to carry the torch for Chavismo. Maduro won the vote, but  only by the slightest of margins, edging out Capriles by 50.8% to 49%.

Capriles, though, has rejected the result. Alleging ballot stuffing, voter intimidation and other irregularities in the vote he demanded a full recount. Maduro initially acceded, but quickly backtracked. The national election commission, by contrast, initially resisted a full recount of the vote. However, it relented after opposition-led street protests descended into bloody clashes between demonstrators and the National Guard, leaving seven people dead. Amid the confusion, Maduro was sworn into office on 19 April, just five days after the vote.

As of press time, Capriles had not conceded and a full recount was under way. Capriles finds himself in a political fight with state institutions that are stacked with Chávez supporters. It is a fight few expect him to win. Yet the opposition  has been re-energised by the election. 

Maduro, on the other hand, limps into office. He bled support in the later stages of the month-long election. Chávez handily defeated Capriles in October, winning that poll by 11%. Two weeks before this election, opinion polls showed that Maduro had held onto most of that support, but a week before the vote, the polls narrowed, showing Maduro with a lead of around 6%. By election day Maduro had lost nearly all of the advantage he inherited from Chávez. Maduro did little to define himself, choosing to campaign in the dead leader’s shadow. In his victory speech, he called the election “Resurrection Day”. But if the election proved anything, it was that Chavismo is less potent without Chávez.

Some observers believe Maduro will struggle to see out his full six-year term. The emboldened opposition is likely to pounce on any opportunity to seek his ouster. They will have to tread carefully, though. The opposition did itself a lot of damage with the failed coup in 2002 and an unsuccessful bid for a recall referendum to oust Chávez in 2004. 

Maduro could also face resistance from within his own United Socialist Party (PSUV). The party rallied behind him in the wake of Chávez’s death, but his poor performance in the election exposed the cracks the party tried to paper over. Diosdado Cabello, the leader of National Assembly and most likely challenger to Maduro from within the PSUV, said the results should prompt “deep self-criticism” for the government.

Maduro is in an almost impossible position. He has to be pragmatic to deal with the country’s mounting economic problems. He also needs to establish, if not a friendly, at least a working relationship with the investors, and foreign oil companies, he needs to help revive the main driver of Venezuela’s economy, the energy sector. At the same time he has pledged to continue Chávez’s revolutionary policies, and clearly has much work to do to establish his support among Chávez’s base.

As it stands, analysts are generally agreed that the election result does not spell good news for the country’s moribund oil sector. “It’s the worst possible scenario for the industry: a whole new level of volatility,” Carlos Bellorin, an analyst at IHS told Bloomberg. “I don’t see any oil company committing a lot of resources to Venezuela right now.”

In his first days in office, Maduro has shown no sign of making nice with foreign investors. After the Spanish government publicly supported Capriles’ call for a recount, Maduro threatened Repsol’s business in the country. The company is developing a major offshore gas project, which Venezuela desperately needs to move forward to address its electricity crisis, and a heavy-oil project in the Orinoco belt. Rafael Ramirez, reappointed oil minister and head of state oil company PdV by Maduro, said after the election that “American multinationals” are the main enemy of Venezuela’s oil policy. “They want our oil.”

That may be true, but Venezuela’s oil sector desperately needs foreign investment. Oil production is declining. The latest figures from the International Energy Agency put production at 2.5m barrels a day (b/d), around 700,000 b/d lower than when Chávez took office in 1999. The Orinoco belt, which holds tens of billions of barrels of undeveloped heavy-oil reserves, offers the best hope for Venezuela to turn around its oil fortunes.

Chávez’s oil plan envisioned a string of new Orinoco belt projects lifting oil production capacity to 5.9m b/d by 2019. All  indications are that Maduro intends to stick with that plan. Early small-scale production has started from some of those projects, with output being trucked to existing heavy-oil upgrading infrastructure, but all are way behind schedule. The government is free to squeeze every penny possible out of foreign companies, but it has to have a fiscal regime in place that makes the expensive and complex heavy-oil projects attractive. The government eased the windfall profit tax last year, and it will need to offer further incentives to get the Orinoco belt projects on track.

Maduro will also need to make changes at PdV. The company is the engine of Venezuela’s economy, but it is sputtering. Debt has soared in recent years, production is declining, the company has lost much of its managerial and technical expertise and an increasing amount of its revenues are being siphoned off by the government. PdV should contribute significantly to the country’s coffers, and all Venezuelans should share in the country’s oil wealth. But the firm should not be used as a piggy bank to fund politically beneficial - but economically dubious - social projects.

Like Venezuelan leaders before him, Maduro’s fate largely rests in the hands of the oil market. Oil exports account for about 97% of Venezuela’s foreign income. After decades of economic stagnation, Venezuela produces little else the world wants. An economic crisis brought on by low oil prices made Chávez’s rise to power possible, and an unprecedented rise in prices helped to keep him in power.

Perhaps, then, the most important event taking place was not on the streets but in the market. The price Venezuela’s oil attracts on the market has fallen 10% from around $107 a barrel in February to $96.51/b in mid April. Maduro will need a lot of petrodollars to win over his many doubters. A Bank of America Merrill Lynch analysis estimated Venezuela would need an oil price of nearly $200/b to sustain Chávez’s level of spending.

If the flow of petrodollars starts to dry up, Maduro may find it increasingly difficult to hold onto his tenuous grip on power.

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