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PdV: still struggling amid political changes

Venezuela's state firm controls one of the world's biggest oil resources. Hamstrung by politics, it has failed to capitalise on it

The death of Hugo Chavez in March and controversial election of his hand-picked successor Nicolás Maduro has plunged Venezuela's politics into a state of turmoil. The country is as bitterly divided as ever. The opposition has yet to concede the election, and many view Maduro's presidency as illegitimate. Meanwhile, Maduro has his work cut out for him tackling the country's deep economic and security challenges. 

But for state-run oil company PdV the political transition has so far been marked by a high degree of continuity. Many analysts and commentators had predicted Maduro would use the transition to institute some much-needed reforms for PdV and the country's oil sector, which is the engine of the country's economy and accounts for more than 90% of its foreign income. Maduro, though, has not yet put his stamp on the national oil company or the oil sector, instead leaving incumbent Rafael Ramirez at the helm of PdV and the energy ministry and continuing Chavez's resource nationalist oil policies.

Frontline

Yet Venezuela's extended election campaign has left its mark on the company. Chavez and Maduro put PdV at the frontline of the ruling United Socialist Party of Venezuela's (PSUV) election effort. Ramirez was put in charge of Maduro's get-out-the-vote campaign and the company's employees were mobilised to help secure victory for Maduro.

The government also leaned heavily on the company to fund popular social programmes, diverting cash away from its operations. In 2011 alone, PdV contributed more than $30 billion to social programmes and the opaque national development fund Fonden. That figure fell in 2012 as the election campaign wound down, with PdV contributing around $17.3bn, bringing the total over a two year period to more than $47bn. At the same time, the company's debt has grown from $21.3bn in 2010 to $40bn in 2012.

PdV will remain an important part of the government's political strategy and a crucial source of funds, but with the extended election season now over the company should be able to re-focus on its core mission of developing the country's oil and gas resources. 

Much as Brazil's Petrobras is shifting its resources towards the huge offshore pre-salt play and Argentina's YPF is orienting its strategy around the Vaca Muerta shale play, PdV is focused on the Orinoco heavy-oil belt.

Spread out over a 55,000 sq km area in the heart of the country, the Orinoco belt holds around 256bn barrels of recoverable oil, according to the state company, making it one of the largest underdeveloped oil deposits in the world.

Yet decades of concerted effort from PdV to develop the Orinoco Belt has yielded little. Year after year targets have been set and missed. In 2006, the Chavez government aimed to ramp up production to 5.8m barrels a day (b/d) by 2012 on the back of new Orinoco output. But new barrels from the area never materialised, and the country's output fell from 2.73m b/d to 2.47m b/d over the period, according to the US Energy Information Administration. (Venezuela government figures put production around 3m b/d)

Now government officials confidently predict production will hit 6m b/d by 2019. Others are not so sanguine. The International Energy Agency forecasts the country will add around 400,000 b/d of new production by 2018.

Key to progress will be a handful of joint ventures in the Orinoco Belt. There PdV has attracted billions of dollars in investment and is working with state-run Chinese, Russian and Indian companies as well as international oil companies Chevron, Eni and Repsol. So far this year, PdV has signed around $10bn in energy deals with its Chinese and Russian partners as well as Chevron. Translating that cash into new production is the challenge for PdV.

Gas connections

One area where Maduro appears to have pushed PdV in a new direction is in its gas business. Chronic power shortages have badly damaged PdV's credibility. The country has by far the largest conventional gas reserves in Latin America, yet it struggles to reliably keep the lights on and air conditioners humming. Western Venezuela, home to the country's mature oil- and gasfields, relies on imports from neighbouring Colombia.

Over the past few months the government has renewed its push to develop the country's natural gas resources. Maduro even took part in a meeting of the Gas Exporting Countries Forum, which bills itself as the Opec of gas producers, in Moscow this year. Maduro must have felt somewhat out of place. In spite of ambitious plans that have been on the table for decades to turn itself into a major gas exporter, Venezuela has not done so.

As in the oil sector, PdV has a long queue of delayed gas projects. In 2011, the company shelved long-held plans to develop the huge Mariscal Sucre and nearby gas discoveries off the country's east coast to feed the domestic market and a major liquefied natural gas export plant. A revolving door of potential foreign partners have come and gone for the project over the years.

But the plans are being dusted off again after PdV and Russia's Rosneft signed a deal earlier this year to jointly develop the offshore gas project. Ramirez said that investment in the project would be "at least" $5bn.

Further along in development is the major Perla offshore gas project - discovered in 2009 in the Gulf of Venezuela near the border with Colombia - where PdV is working with Repsol and Eni.

But even that project is now far behind schedule. Initially expected to start production in late 2012, gas is not expected to start flowing from the Perla field until late 2014, according to Eni chief executive Paolo Scaroni. At its peak, the field is expected to supply the domestic market with 300m cubic feet a day, which would boost the country's total gas production by about 10%.

In its refining business, PdV is working to overcome last year's devastating explosion at the Amuay refinery. The disaster killed 48 people and knocked out a significant amount of PdV's domestic refining capacity, forcing the country to import an increased amount of refined fuels from the US.  The plant is back running at full capacity, but the incident raised serious questions about PdV's management of its domestic refining infrastructure.

The company has stakes in refineries around the world, including in the US Gulf Coast, across the Caribbean and in Europe. It is also participating in new projects in China, Ecuador and Brazil, though the company has struggled to raise its share of financing for the projects.

Venezuela's PdV clearly has no shortage of resources or plans to grow. But turning those plans into reality will be the company's primary challenge over the coming years. 

Table 1: PdV by the numbers
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