Analysis: Chavez win keeps Venezuela oil policy intact

CARACAS Mon Oct 8, 2012 2:23pm EDT

Venezuelan President Hugo Chavez holds the sword used by former Venezuelan military leader Simon Bolivar while celebrating from a balcony at Miraflores Palace in Caracas October 7, 2012. REUTERS/Tomas Bravo

Venezuelan President Hugo Chavez holds the sword used by former Venezuelan military leader Simon Bolivar while celebrating from a balcony at Miraflores Palace in Caracas October 7, 2012.

Credit: Reuters/Tomas Bravo

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CARACAS (Reuters) - President Hugo Chavez's re-election on Sunday means Venezuela's state oil company PDVSA will remain highly politicized and will continue its discount supply deals with his socialist allies.

Chavez, 58, won a new six-year term with more then 54 percent of the vote against opposition rival Henrique Capriles, a young state governor who sought to end his 14-year, self-styled revolution.

Critics say Chavez has hobbled PDVSA with the weight of his government's financial demands - it helps pay for everything from sports teams to health clinics and home building - meaning it has neglected to invest enough in the oil business.

The industry brings in more than 95 percent of the OPEC nation's hard currency revenue. PDVSA produces almost 3 million barrels per day (bpd) and boasts the biggest crude reserves in the world.

But the company, which has more than 100,000 employees, has repeatedly failed to hit its own production targets and has suffered a string of sometimes deadly accidents in recent years.

In a note on Monday, J.P. Morgan analysts predicted that Chavez's victory would likely further stifle foreign investment in Venezuela's oil industry and cause production to fall in coming years.

The investment bank said it expects Venezuelan oil supply to fall to 2.58 million barrels per day (bpd) next year, down from the a J.P. Morgan estimate of 2.62 million bpd for 2012. By 2014, production is likely to fall to 2.52 million bpd, the bank said.

"The most important impact is on the mid-term outlook, as a Capriles victory might have brought much-needed investment to the industry," wrote J.P. Morgan's commodities analysts, led by Colin Fenton.

Wall Street's forecasts contrast with much higher production estimates from PDVSA, which has said it may add 100,000 bpd in output this year, and pump as much as 4 million bpd in 2014.

PDVSA's outlook hinges on what it hopes will be much larger foreign investments. Following Chavez's comfortable victory, his government will seek to push forward a raft of ambitious joint ventures with foreign partners in the huge Orinoco extra-heavy crude belt - one of the planet's biggest, mostly untouched oil reserves.

Venezuela's crude production fell in 2010 to its lowest level since a months-long strike at PDVSA a decade ago, and more Orinoco crude is central to the government's hopes of increasing output.

In total, the Chavez administration - which has repeatedly raised taxes on the oil industry while requiring that PDVSA have a majority stake in all projects - expects investment of more than $80 billion in the Orinoco belt over the next several years.

It has signed deals for projects there with foreign companies including Chevron of the United States, Spain's Repsol, Italy's Eni and a consortium of Russian companies, including Rosneft.

Executives from foreign companies in some of those joint ventures say they have suffered delays because of late payments by PDVSA, lack of infrastructure and uncertainty over tax rules.

Those delays are likely to continue, but the Russian joint venture began pumping its first oil last month, and others are due to come onstream soon.


Under Chavez, China has become a key source of funding, providing his administration with loans totaling $32 billion over the last few years. PDVSA is sending 430,000 bpd of crude and products to China in repayment.

The importance of Beijing to Caracas's finances is expected to increase under Chavez's next government. His administration often says it wants to boost exports to China to 1 million bpd.

The new Chavez government is also expected to prioritize efforts to tap its offshore natural gas. Venezuela is among the world's top 10 nations in gas reserves but has yet to begin any commercial gas production. Instead it imports supplies from neighboring Colombia.

Electricity shortages are a pressing domestic issue, and the development of Venezuela's natural gas reserves would help the government produce more power.

All eyes are on the Perla gas field and its reserves of more than 15 trillion cubic feet. Production is due to begin there early next year at a partnership between PDVSA, ENI and Repsol.

Chavez is also expected to continue and possibly widen the politically driven oil-supply deals with ideological allies such as Cuba, Belarus, Iran, Syria and more than a dozen Central and South American countries.

Under these agreements, Venezuela is often paid for its oil in goods or services - sometimes with food or livestock - which puts even more pressure on PDVSA's cash flow. The company was not paid directly for almost half the crude it pumped last year.

Ramirez is expected to remain in his post following Chavez's victory, at least in the short-term. He once described PDVSA as "red from top to bottom" in its support for the president.

While there is discontent within the company's ranks - some workers resented being bused to rallies during the election campaign, for instance - the creation of a single workers' union has limited criticism of PDVSA's management.

"It is an honor for us to take part in Chavez's government," Wills Rangel, president of the oil workers' federation, told Reuters last month. (Joshua Schneyer in New York contributed additional reporting. Editing by Kieran Murray, Philip Barbara and Bob Burgdorfer)

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Comments (1)
Venerability wrote:
Reuters really needed to include some contrary opinions in this story, as the JPM analyst is simply talking his (Short seller’s) book, IMO.

Would Capriles have opened up the Energy sector to foreign investment and inflence faster? Possibly.

But the Chavez regime has been doing a fairly good job of it already this past year or more, reversing the lack of progress in the prior decade.

Within a few days before the election, major deals were reached with India’s Reliance and Russia’s Rosneft.

That’s after a number of major deals and pending deals with the likes of Chevron, Pemex, and Pertamina.

Venezuela’s energy bloc auctions have been open, fair and well-attended in recent months by every Oil major on the planet, including all of the Seven Sisters.

China, of course, considers Venezuela its personal protectorate and has been making deals there practically week by week.

Although the Trapped Short position has been finagling the stock via options so far today, one immediate beneficiary of the Chavez election should be Harvest (HNR), whose pending deal with Pertamina, which was dearly hoping for a Chavez victory, should now reach the approval stage quickly.

A Capriles victory would have upped the value of HNR’s Petrodelta share to other countries’ standards and almost certainly have brought in a counterbid which Pertamina would have had to meet, delaying the process by many months.

Now, Pertamina will ask for Indonesia’s approval of the deal immediately, IMO, and the re-elected Chavez government will give in to Pertamina’s demand to take its dividends from the project in Oil, not cash. The Chavez-istas have made similar deals with other companies very recently, so there is no reason not to respond positively to Pertamina’s preferences.

From HNR’s perspective, Quick is better than Higher, in the case of the deal’s consummation. They don’t want to stay in Venezuela and have very promising projects elsewhere.

What is coming in from the Pertamina deal, including international tax benefits, equal about twice HNR’s current market cap! valuing the entire rest of the company at zero, which even the Trapped Shorts know is silly.

One valuable asset given NO value at all yet is HNR’s potentially very productive bloc in the South China Sea, which overlaps Talisman’s claims. HNR is pretty much the only Western company on China’s side in the South China Sea brouhaha – not a bad place to be.

Oct 08, 2012 2:41pm EDT  --  Report as abuse
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