Oil and Gas in the Capitals

Vol. 232 No. 9

The revelation of Venezuelan President Hugo Chavez’s cancer in June raised the question: Will he be able to run for reelection next year? However, after undergoing surgery to remove a baseball-sized tumor from his pelvic area and two rounds of chemotherapy in Cuba, Chavez was as busy as ever in late August—crediting Jesus and Castro for his recovery, nationalizing Venezuela’s gold industry, and vowing to continue supporting Libya’s Muammar al-Qaddafi even as rebels stormed the gates of Qaddafi’s compound in Tripoli.

Nevertheless, political uncertainty remains, threatening to undermine investor confidence while simultaneously raising hopes that a new leader might reform the state-dominated economy and generate investment opportunities. After more than 12 years in power, Chavez’s illness certainly weakens his position as a strong counter-influence to the US in Latin America. On July 27, Venezuelan daily El Universal reports, PDVSA President and Energy and Petroleum Minister Rafael Ramirez expressed the government’s willingness to reach an accord with ExxonMobil and ConocoPhillips over confiscated assets. Wall Street rejoiced!

Beyond the implications of all these uncertainties, the country is facing serious problems in the oil and gas sectors, along with constant electricity blackouts. According to the Ministry of Energy and Petroleum, crude oil production dropped last year to 2.78 million bpd, the lowest level since a strike at PDVSA reduced production between 2002 and 2003.

Venezuelan oil in high demand. Oil accounts for more than one-third of Venezuela’s gross domestic product, more than 50% of government revenue and about 90% of the country’s exports. In 2010, over 40% of those oil exports went to the US, making Venezuela that country’s fifth-largest supplier of crude oil.

However, according to data from state oil firm PDVSA, oil exports in 2010 were down nearly 700,000 bpd from 3.1 million bpd in 1998. And the pressure on Venezuela’s oil sector will only increase in the years ahead, fueled by growing internal demand and agreements with various countries aimed at reducing dependence on the US.

Venezuela is sending an average of 125,900 bpd of crude oil to China, and in September 2010 it agreed to increase that amount to 300,000 bpd by 2012 to repay a $20 billion loan for development projects. Venezuela also ships about 115,000 bpd at reduced prices to Cuba, meeting about 60% of the island’s oil needs, according to a recent Brookings Institution paper. In exchange, Cuba has sent about 30,000 Cuban doctors to tend to poor Venezuelans who don’t have access to medical services.

Other destinations for Venezuelan oil include select countries in Central America and the Caribbean, where PDVSA is financing 50% of the value of the exports under preferential conditions.
These favorable loans are for 17–25 years at 1% interest with a one- to two-year grace period. The Dominican Republic and Nicaragua, the principal beneficiaries of this pact, each receive 30,000 bpd. For Venezuela, this will amount to cash losses of $6.2 billion in 2011 and $6.6 billion in 2012, but it also puts the Chavez government in the position of being the principal donor and/or financier of the region.

Expensive expropriations. The fact is that Venezuela has put more money into paying for expropriations and nationalizations than into oil production. According to a recent report by Spain’s El País newspaper,  from 2007 through 2009 PDVSA invested $21.931 billion in E&P, while $23.377 billion was allocated to buy huge companies such as the steel company Siderúrgica del Orinoco (Sidor) and the telecom firm CANTV. The report highlights companies that have become a “great ghost industrial complex” after being taken over by the Chavez government, and argues that most of the nationalized companies do not generate enough income to cover their operating costs.

Despite the incorporation of about 600,000 bpd from projects in the Orinoco heavy oil belt in recent years, Venezuela has seen an erosion in total oil production due to lack of investment, which could keep the country from reaching its 2015 production target of 5 million bpd.

Under Chavez, PDVSA became the financial motor for social projects, says El Universal. This led the company to owe a record $10.9 billion to suppliers and service companies in 2010. Thus, some companies are reluctant to work with the state-owned firm or require difficult payment conditions.

“There have been efforts to organize tenders, but the profit margins are regulated and there is the fear of expropriations,” Reneiro Contreras, the president of the Venezuelan Association of Contractors, told El Universal.

In July, PDVSA declared an operational emergency in the Orinoco belt effective through September, cutting red tape for tenders and to sign contracts. The target is to increase production by 140,000 bpd by the end of 2011.

Frequent blackouts. Analysts find it difficult to understand how a country so rich in oil and gas, endowed with huge rivers that power hydroelectric plants, faces so many outages. Chavez has gone as far as accusing the opposition of sabotage.

Critics say the government invests too little in new electricity projects while demand is expanding. Blackouts and power rationing in 21 of Venezuela’s 24 states are seriously affecting businesses, hospitals, schools and residences and create widespread irritation against the government.In response to another energy crisis, in June Venezuela launched new rationing measures that impose steep fines on customers that do not conserve.

All of these problems create serious obstacles for Chavez’s plans to run for reelection next year.  WO