Related Articles
Forward article link
Share PDF with colleagues

Post-Chávez era holds potential perils and promise

The post-Chávez era holds potential perils and promise for investors from Houston to Beijing to Moscow

The death of Hugo Chávez, who dominated Venezuela’s political scene during his 14 years as the country’s president and reshaped its economy under the banner of “Bolivarian socialist revolution”, heralds a new and uncertain era for the Opec-member’s oil industry.

The direction the industry takes will, to a large extent, depend on who emerges as the country’s next leader. Chávez’s vice president and anointed successor, Nicolás Maduro, has assumed the presidency and will take on leading opposition candidate Henrique Capriles in a special election due on 14 April.

The ruling United Socialist Party of Venezuela (PSUV) wasted no time announcing Maduro, a former union leader who was promoted by Chávez up the government’s ranks, as its candidate. The party was keen to tamp down growing talk that an internal power struggle was threatening to split the party. Maduro reportedly faced a challenge for leadership of the party from the head of the National Assembly, Diosdado Cabello, who has broad support within the military. Publicly, the PSUV has lined up behind Maduro.

Capriles successfully rallied Venezuela’s fractured opposition behind his candidacy last year, winning a primary campaign that gave the opposition its best chance of returning to power in years. In the end, he was handily defeated at the polls by an ailing Chávez. Many in the opposition were disappointed with the campaign. Some said he was not forceful enough in pushing back against Chávez’s attacks. Those on the right wing of the opposition blamed Capriles for offering the electorate little more than a set of “Chávez-lite” policies. Capriles himself has pointed to the policies put in place by Brazil’s centre-left Worker’s Party as a model for Venezuela. He has also pointed to state-run Petrobras as a model for state oil company PdV, though he has said he would not part-privatise PdV in the same way shares in Petrobras were sold to be traded on international markets.

With the short election cycle, Capriles is the opposition’s best chance. Maduro, though, is widely expected to ride a wave of sympathy over the loss of Chávez to victory. Two polls released in February and March showed him with at least a 10-point advantage.

Venezuela’s next leader will inherit an economy sliding towards a crisis. Chávez ramped up social spending last year to boost his election effort, and put the economy on an unsustainable footing in the process. Inflation recently hit 22.6% and economists expect it to climb further still. The country’s fiscal deficit is also growing. According to Morgan Stanley, in 2011, the fiscal deficit was 7.7% of GDP. As of press time, it had risen to 12%. Foreign reserves are running low too. The central bank said reserves stood at $29.9 billion at the end of 2012. At the end of 2008, Venezuela’s foreign reserves totalled $43bn. On top of this, the country has experienced shortages of basic goods. In a recent report, Bank of America Merrill Lynch said the government would need an oil price of nearly $200 a barrel to balance the budget.

This provides ample impetus for any new leader to try to increase oil output as quickly as possible. Production fell from around 3.2m barrels a day (b/d) when Chavez took office in 1999 to around 2.5m b/d now, according to the International Energy Agency (IEA). The government disputes that figure, and Opec puts production at 2.75m b/d. Either way, production has suffered in recent years.

But, as the IEA has pointed out, Maduro – or Capriles, for that matter – will face a sharp dilemma when it comes to dealing with problems in the country’s economy and oil sector. “Venezuela’s next leader faces a Catch-22 situation: current oil policies, namely, the diversion of oil revenues to fund costly social programmes, cannot continue without putting the oil industry - and the country’s entire economy - at considerable risk,” the IEA said in its March oil market report. “But neither can they be reversed without the risk of social unrest and political chaos.”

New leadership

Maduro will probably not set about rolling back spending on popular social programmes as he seeks to consolidate his leadership position, even if faced with an economic crisis. Instead, he will likely feel pressure to do the opposite, increasing spending to bolster his support. If so, he would likely have to squeeze yet more from state-run PdV and the oil sector over the short run. Maduro could also implement a new wave of nationalisations to try to deflect criticism over the government’s handling of the economy and boost his credibility among many of the Chavistas who will see his role as to carry on Chávez’s legacy.

“The future of the Venezuelan oil industry, and of Venezuela itself, may well hinge on finding the right balance between the divergent needs of caring for the population and nursing a long neglected oil sector back to health,” said the IEA.

Predicting what Maduro would do if elected, though, is difficult. Like most who rose to the upper ranks of the government under Chávez, Maduro’s ascent was propelled by loyalty to Chávez and the revolution, not necessarily the strength of his ideas and skills. Western diplomats have said they saw a pragmatic streak in him during his time as the country’s foreign minister. But despite his lengthy tenure in Chávez’s cabinet, Maduro has said and done little to provide any clues as to how he might act as the country’s leader.

When Maduro was head of the National Assembly, the journalist Rory Carroll writes in Comandante, a new book about the Chávez years, he was, above all else, pliant. “Whatever hour Chávez phoned, whatever law he wanted amended or revoked, Maduro assented,” Carroll said. Maduro then moved on to become foreign minister. “He crisscrossed the world following Chávez’s orders and reading Chávez’s script, never deviating, never ad-libbing, never proposing his own initiatives,” he added.

When it comes to the oil industry, early indications are that Maduro would follow Chávez’s script



When it comes to the oil industry, early indications are that Maduro would follow Chávez’s script, keeping resource nationalist policies in place, at least for the time being. “The tax and legal framework were set out clearly by president Chávez,” Rafael Ramírez, Venezuela’s oil minister and the head of PdV, told Reuters in March. “While our government is here and the people remain in charge, our oil policy will remain unchanged.”

Many, though, say Maduro will be forced to make changes in the industry if the economy continues to deteriorate. “Venezuelans did not hold Chávez accountable for the malaise of the country but they will not be as forgiving with his successor,” Luisa Palacios, a senior analyst at Medley Global Advisors, claims.

Investors will be watching state-run PdV for signs of how Maduro plans to manage the oil industry. An early indicator for the future of the industry will be who he chooses to run the company. Most believe he will keep his ally Ramírez, a close Chávez confidante, at the helm. Such a move, analysts say, would signal a strong degree of continuity from the Chávez era. “Any changes at the helm of PdV... will not [be seen as positive]. This would be highly problematic for oil production and for the governability of PdV but, for now, such a risk is low,” said Palacios.

Analysts also say that Maduro will, at some point have to start addressing PdV’s financial woes. The company’s debt has rocketed in recent years as Chávez diverted a growing share of its revenues away from investment in its operations towards social programmes. PdV’s debt hit $40bn in 2012, up 15% from the year before and nearly twice the company’s 2009 debt of $21bn.

It is not just social spending that is depriving PdV of much-needed funds. Venezuela sends between 100,000 b/d and 200,000 b/d of oil to countries throughout the Caribbean and Central America at cut rates as part of the PetroCaribe programme. A further 600,000 b/d are sent to China, much of which is used to cover payments under the terms of the countries’ oil-for-loans agreements. Most recently, PdV has been forced to buy refined petroleum products on the international market and sell them at heavily subsidised prices in the domestic market.

The Petrocaribe programme has never been particularly popular in Venezuela, and has become even less so as the economy has worsened. Many analysts think it is unlikely to survive long under the next government. Maduro, though, is close to the Castro brothers in Cuba and could seek to continue supplying the island nation cheap oil, which has been a vital lifeline for its struggling economy.

One short-term measure that could boost output, and provide a much-needed cash injection for PdV, would be to shift investment from the capital-intensive Orinoco projects to Venezuela’s long neglected mature fields.

Upgrading infrastructure and working over some of the workhorse fields in Maracaibo, in the west of the country, does not hold the long-term growth potential of Orinoco projects, but it could deliver quick, substantial production gains. Such a strategy, though, would come at the expense of further delays to projects in the Orinoco belt. It could also prove an embarrassing backtrack for PdV, which has put the Orinoco projects at the forefront of its growth strategy for the past decade with little to show for it.

Western companies are watching closely for signs of a reopening of Venezuela’s oil sector. They hope Maduro will offer more attractive investment terms in a bid to attract fresh capital and expertise. Under Chávez, the government take from oil projects rose to over 90%, making it one of the least attractive investment environments in the world for major Western oil companies. After the 2006 nationalisations, some companies - notably ExxonMobil and ConocoPhillips - decided to exit the country. And those that stayed, sat on their reserves while investing as little as possible in the hope the government would liberalise its policies.

Policy changes

Venezuela’s huge heavy-oil reserves have long been coveted by Western oil companies, and will still attract significant interest. Western investors, though, have repeatedly been burned in Venezuela, where in the last 40 years policy has swung unpredictably between the extremes of resource nationalism and a more liberal energy policy framework. Even if the doors are flung open once again, Western companies could be slower to come back in than in the past.

Venezuela also faces a growing challenge in attracting Western companies from new tight-oil projects. Orinoco heavy-oil barrels are some of the most expensive in the world to develop. Goldman Sachs estimates a commercial break-even price of around $90 a barrel for new Orinoco projects, compared to around $70/b for new tight oil projects. Western companies could decide that entering emerging tight-oil plays elsewhere is a better investment.

Although the operating environment could improve somewhat for Western companies, Caracas is likely to keep its eyes fixed firmly to the east. The centrepiece of Chávez’s petro-diplomacy was re-orientating the country’s oil exports from the US to China. And that policy is likely to stay in place, no matter who leads Venezuela.

The decision was driven purely by politics - Chávez’s favourite bogeyman was el imperialismo yanqui, Yankee imperialism. But as a resurgent oil industry and falling demand have seen US oil imports plummet, the policy has gained a strong commercial logic. China is likely to emerge in the next year or two as the world’s largest oil importer.

China has been frustrated by the slow pace of development at its Orinoco projects



Under Chávez, China and Venezuela deepened their relationship through nearly $40bn worth of oil-for-loans deals. Long-term supply deals with Chinese buyers and a PdV-Sinopec joint project to build refining capacity in China capable of processing Venezuela’s heavy crudes has put Venezuela in a strong position to become a major supplier to the country. China’s state-run oil companies PetroChina, Sinopec and China National Offshore Oil Corporation (Cnooc) have also gained access to Orinoco belt projects through the deals.

The relationship, though, has been difficult at times. China has been frustrated by the slow pace of development at its Orinoco projects and the fact that Venezuela has not followed through on more of its broader infrastructure development recommendations, which could provide opportunities for Chinese engineering and construction companies. Chávez’s prolonged illness and the uncertainty that has surrounded the leadership transition has also proved challenging for China.

It has been a learning experience for China’s oil companies, which have had little past experience in Venezuela. “I think they went into the deals a little unprepared. And all you have to do is look at the number of Latin America experts in China and you get a sense of how very little they know about the region generally, and when you talk about Venezuela specifically it is even less,” Margaret Myers, director of the China and Latin America programme at the Washington-based Inter-American Dialogue, told Petroleum Economist.

Ultimately, though, China is in the country to secure a steady supply of oil and it will do what it can to ensure the oil continues to flow. “The Chinese are very pragmatic. Whether it is Chávez or someone else, they are going to want their deals to go through,” said Myers.

Maduro sought to soothe concerns at a meeting with Chinese officials in early March. “The best tribute that we could give to our comandante Chávez is to deepen our strategic relationship with our beloved China,” Maduro said after the meeting. Venezuela plans to increase exports to China to 1m b/d by 2015.

Russia too, has emerged as an important investor in the country’s upstream and is seeking to secure its role in post-Chávez Venezuela. Russia sent Igor Sechin, the head of state-run Rosneft, to lead the Russian delegation to Chávez’s funeral, showing that the countries’ energy ties are at the top of the bilateral agenda.

Sechin has been the architect of the burgeoning Russia-Venezuela energy relationship, and has put Venezuela at the heart of his strategy to make Rosneft a more prominent player on the international stage. Rosneft and other Russian companies, including Lukoil, Gazprom and TNK-BP, plan to invest nearly $18bn in its Venezuelan oil projects to raise their production in the country to 930,000 b/d by 2019.

Unlike the Chinese, Russia’s relationship with Venezuela, though, appears more contingent on Maduro winning April’s election. Earlier this year, a manager at Gazprom told Bloomberg his company was concerned that the opposition would not support its deals. Russia is also worried that a warming of relations between Venezuela and the US, especially in the event of an opposition victory at the polls, could see Russian companies squeezed out in favour of Western companies with more experience developing heavy-oil reserves.

The future of Venezuela-US ties, though, is unclear. The countries reportedly held meetings aimed at improving long-strained relations late last year. But hopes of improving ties were dashed when Maduro kicked two US diplomats out of the country, accusing them of plotting to destabilise Venezuela in the wake of Chávez’s death.

The US responded in kind by expelling a pair of Venezuelan diplomats. Maduro then insinuated that the US was behind a plot to kill his opponent Capriles to provide a pretence for a military coup. The US denied the accusation, calling it “absurd”. The events followed a familiar pattern of claim and counter-claim which saw the antagonism between the US and Chávez escalate.

It is unclear whether the rhetoric is a sign of things to come, or an effort by Maduro to bolster his anti-US credentials ahead of the election.

If the countries do re-engage, it will be on very different terms than in the past. The US is not as reliant on Venezuelan oil imports as it once was. Imports have fallen about 30% from around 1.3m b/d in 2004 to 906,000 b/d in 2012, and that trend is likely to continue as US domestic production rises and Venezuela increases exports to China. Rather, it is Venezuela that is growing increasingly dependent on oil product imports from the US. Those imports hit a record-high 85,000 b/d in November last year, according to the US Energy Information Administration.

Although the US is less reliant on Venezuelan crude supplies, it will have a keen interest in opening the oil industry to more Western investment and encouraging Venezuela to increase production, which could over time help push international crude prices lower.

Also in this section
Saudi Arabia's Vision 2030 looks blurry in Khashoggi aftermath
18 October 2018
International reaction to the disappearance of prominent Saudi journalist Jamal Khashoggi will lead, at very least, to delays to the kingdom’s ambitious reform programme
South Africa urgently seeking gas as energy transition stalls
18 October 2018
South Africa’s power sector plans envisage a big role for gas, but first the country needs to find the feedstock
Senegal and Guinea-Bissau deal faces domestic pressures
17 October 2018
Guinea-Bissau is eager to kick start exploration in acreage shared with oil-rich Senegal, but it’s slow going