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Oil industry watches as Venezuelan drama unfolds

President Hugo Chávez's health crisis is providing uncertainty for Venezuela

Oil, the lifeblood of Venezuela's economy, continues to flow as president Hugo Chávez's health crisis unfolds. But investors in the Opec-member's oil industry have been left guessing over the future direction the country may take as they weigh up the future of billions of dollars of investment in new projects.

Chávez went to Havana, Cuba, in mid-December for his fourth round of treatment since his cancer diagnosis was announced in July 2011. The normally loquacious Chávez himself has not spoken in public since December, and little is known about his condition. The void left by the official silence has been filled by rumour, much of which has speculated that the Chávez era is coming to an end.

But the fact remains that few outside Chávez's inner circle know anything more than the limited details the Venezuelan government has released. Information minister Ernesto Villegas confirmed on 3 January that Chávez was suffering a "severe" respiratory infection after his surgery and was having trouble breathing.

After Chávez did not make it to his 10 January inauguration ceremony, when he was to be sworn in for his third six-year term as president, government officials downplayed the importance of the date. Attorney General Cilia Flores said that Chávez could be sworn in by the country's Supreme Court after 10 January and in any location, essentially arguing that Chávez can continue as president without the formal swearing in.

That position is hotly debated. The opposition has argued that the succession plan laid out in the country's constitution should have been triggered when Chávez was unable to make it to the 10 January inauguration. The deputy head of the opposition coalition, Ramon Jose Medina, equated the government's position to a "coup d'Etat".

 Venezuela has now entered uncharted territory, making it very difficult to see where the country is headed. Chávez could still stage a comeback - and the government strategy now seems aimed at buying as much time as possible for that to happen. But if Chávez dies or the government is forced to recognise that he will not be able to return to power, the succession plan calls for the head of the National Assembly, Diosdado Cabello, who served in the military alongside Chávez during his failed 1992 coup attempt, to temporarily take power. Cabello would then have 30 days to call a new election. Vice president Nicolás Maduro, who Chávez anointed as his successor to lead the United Socialist Party of Venezuela (PSUV) days before he was hospitalised in December, would likely stand in the election.

That is if the Chavismo movement does not split in the absence of Chávez. Although Cabello and Maduro have presented a united front in their public appearances together, many see a power struggle brewing within the PSUV that could pit the two against one another. Either Maduro or Cabello would likely face Henrique Capriles, who garnered the backing of a diverse coalition of opposition parties in last year's election. He lost that election, but a strong showing might help him hold the coalition together, though there are no guarantees. Chávez has been the centre of Venezuelan politics for so long that no one is quite sure what will happen if he goes.

For now PSUV unity is holding, and the opposition has few cards to play. Chávez allies control virtually all levers of power in Venezuela and still enjoys broad public support. In addition to the executive branch, Chávez's PSUV dominates the National Assembly. Over the course of his 12 years in power he has packed the Supreme Court, which will play a crucial role if the opposition were to bring a constitutional challenge to the court, with supporters. Capriles warned that the impasse could lead to "anarchy".

Impact on oil

The crisis has the oil industry on edge. Although there appears to be little threat to existing production, big decisions that need to be made in the oil sector are unlikely to be taken given the uncertainty at present. Most importantly, there are a string of multi-billion barrel heavy-oil projects in the Orinoco Belt awaiting final investment decisions from state-run PdV and its foreign partners. Those projects are central to the government's plans to boost oil production over the coming years.

During last year's campaign, Chávez pledged to more than double production from around 2.5m barrels a day (b/d) to 6m b/d, a bold prediction considering that oil output has fallen since Chávez took power in 1999.

It might, however, be wise for industry to watch the situation closely. Many economists see an inevitable economic crisis on the horizon. "President Chávez has bequeathed the nation an economic crisis of historic proportions," Moisés Naím, a former minister of trade and industry for Venezuela, wrote recently. In spite of a huge windfall from high oil prices in recent years - oil exports accounted for 96% of foreign currency earnings in 2012, according to the Central Bank - Venezuela's deficit and debt has surged at a rate considered unsustainable by many economists.

Righting the ship would require harsh austerity measures that a new post-Chavez PSUV leader trying to consolidate power would find unpalatable. Instead a new leader could choose to double down on the policies of Chávez's '21st century socialism', possibly launching a new wave of nationalisations and putting harsher fiscal terms in place for foreign investors. The steps would prove politically popular with many over the short term, but would do nothing to deal with the country's long-term economic problems. Those moves would almost certainly be directed at the oil industry.

The oil market, too, is watching events in Venezuela unfold. The crisis, though, has had no effect on oil prices and likely will not unless a potential transition descends into violence that threatens oil exports. Venezuela has large untapped oil reserves and a better managed oil industry would almost certainly yield higher production - or at least higher production capacity, if the country chose to hold back production in line with Opec's production quota - but the market will have to wait and see what a post-Chávez oil industry looks like.

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