It appears increasingly likely that Venezuelan President Hugo Chavez will not return to power following his latest cancer treatment in December and analysts are considering the implications of a post-Chavez regime for one of the largest crude oil producers in the world.
Venezuela holds some of the world’s largest oil reserves and is the second largest Opec oil exporter to the US. Oil revenue accounts for a bulk of the government’s income and has largely been used to fund Chavez’s wide-ranging social programs. But the country’s oil industry – which is essentially state-owned company PDVSA – has been struggling with declining production rates at mature fields, along with other problems.
In fact, on January 16, Moody’s Investor Service changed PDVSA’s rating outlook to negative. “Moody’s affirmed PDVSA’s B1 global local currency and B2 foreign currency ratings and changed the rating outlook to negative from stable,” the credit ratings agency said in a statement.
The rationale for the downgrade is due to the fact that “The government approves and controls PDVSA’s budget and has steeply increased transfer payments in the form of royalties, social payments and dividends to support government spending and social programs, particularly in the run-up to the presidential election in fall 2012. Under a scenario of fiscal and economic deterioration in a post-Chavez era, the government could become even more dependent on PDVSA, which would further constrain the state oil company’s capital investments and increase its debt burden” said Moody’s.
Venezuela’s Orinoco region is home to the largest oil sands deposits discovered outside of Canada, production of which was supposed to make up for conventional oil output declines, but production from those deposits has not ramped up as quickly as originally planned. These Orinoco projects are mostly run by joint ventures with majority control held by PDVSA.
Most of the original Orinoco JVs dating back to the 1990’s were formed with large international oil companies like ExxonMobil, Chevron, ConocoPhillips, BP, Total and Statoil. Following a nationalization move in 2007 that required PDVSA hold no less than 60% in these partnerships, ExxonMobil and Conoco opted for international arbitration rather than cede their ownership stakes. More recently, PDVSA selected Chinese, Russian and Vietnamese firms as Orinoco development partners.
As Chavez’s condition appears to deteriorate – he is currently being treated in Cuba – his hand-picked successor and Vice President, Nicolas Maduro, is effectively in charge, though he lacks much of the president’s executive decision making power.
What to Expect in the Energy Sector
The US imported roughly 860,000 barrels of crude per day from Venezuela in 2011, according to the Energy Information Administration, with much of that going to refineries owned or partially owned by PDVSA subsidiary Citgo.
There has been some speculation about how the US would deal with the loss of that supply if the situation in Venezuela deteriorated to a point where exports ceased.
Replacing the physical barrels does not appear to be a major issue Greg Haas, Manager of Research at Hart Energy, a publisher and consultancy told Breaking Energy. “Barrels from Cushing could make up for about half of a Venezuelan supply disruption and lowering product exports could also help,” he said.
The Seaway pipeline – a 50/50 JV between Enterprise Products Partners, the operator, and Enbridge – came online last Friday, with the capacity to transport 400,000 b/d of light and heavy grades from Cushing, OK to Freeport, TX.
“But there would be price implications for products and crude,” he said, referring to the price-related quality differential between light and heavy grades, and the fact that refiners would likely seek higher prices domestically for product volumes diverted from export markets.
However, the loss of Venezuelan crude imports is viewed as unlikely, Risa Grais-Targow, Venezuela Analyst at political risk consultant Eurasia Group told Breaking Energy. She does not believe there will be a complete political collapse though there will likely be new elections at some point, with Maduro as the Chavez supporters’ candidate and Henrique Capriles representing the opposition.
Capriles was defeated by Chavez in the presidential election last October, but was recently reelected Governor of Miranda, one of the country’s most populated states.
“We think Maduro will maintain the status quo in energy – policy continuity – and don’t see evidence of more pragmatic or modernist tendencies,” Grais-Targow said.
Foreign investors in Venezuela’s energy sector can expect the status quo with regard to political risk – which is relatively high to begin with – to continue.
Existing US-Venezuelan energy relations are not likely to be radically altered as part a leadership transition. Despite his bluster, “Chavez has been fairly pragmatic with the US on economics and trade – it appears unlikely this would change,” said Grais-Targow.