Venezuela: Chavez's Policies Endanger State Oil Firm
4 February 2002
Summary
The government of Venezuela says the United States can always count on it to be a secure and reliable energy ally. However, deep investment cutbacks and Caracas's voracious fiscal demands to sustain public spending have crippled Venezuela's oil industry financially and operationally.
Analysis
Venezuela long has claimed that the United States will always be able to count on it as an energy supplier. This claim has been reasserted in an Energy Ministry paper distributed extensively to U.S. government officials and investors in recent months.
The reasons to doubt the country's claims are multiplying, however. Before President Hugo Chavez was elected in 1998, state-owned oil company Petroleos de Venezuela (PDVSA) was well embarked on an ambitious capacity-expansion plan. Since 1999, however, the government has repeatedly mandated deep cutbacks in PDVSA's investment budget, and the company's production capacity has declined dramatically as a result. In short, Venezuela now needs foreign investment in its oil industry more than ever -- but will find it much harder to come by so long as the government pursues its current policies.
Should a price war break out between OPEC and non-OPEC producers, Caracas will find that those policies have weakened not only PDVSA but also the government itself. Now pumping at nearly full capacity, PDVSA -- and Venezuela by extension -- is not in a position to grab market share and offset collapsing oil prices, as other producers might. Given that PDVSA accounts for 80 percent of Venezuela's export earnings, falling oil prices would cut into social spending and fuel the nation's political instability.
Without the means to increase PDVSA's capacity, Chavez is bound even more tightly to an OPEC-centered production control strategy in efforts to drive oil prices up. Yet, as plunging prices have shown over the past year, OPEC's strategy is failing. High-cost producers that do not belong to the cartel have taken advantage of higher oil prices since 1999 to sharply ramp up production. Volumes taken out of the market by OPEC production cuts have been more than offset by increased supplies from non-OPEC producers.
Although collapsing oil prices are an important factor in PDVSA's current situation, mandatory investment cutbacks and the government's heavy fiscal demands have severely weakened the company. Caracas-based energy analysts say they believe that PDVSA has lost nearly 1 million barrels per day (bpd) of production capacity since 1999 due to government-mandated investment cutbacks. Recovering that capacity would take three to four years and more than $4 billion, they say. However, PDVSA recently slashed more than $1.5 billion from its investment budget for 2002, and the company likely will report a financial loss this year for the first time in its history.
Public spending has increased as oil prices have dropped, and the Chavez government is taking more money out of PDVSA than is coming in from exports. As a result, PDVSA likely will end 2002 with a cash flow deficit of nearly $6 billion and debt of about $8 billion.
Complicating the company's outlook even more, a hydrocarbons law that took effect Jan. 1 imposes equity restrictions and sharply higher royalties that will discourage foreign investors. Instead of attracting more foreign investment, the new law will persuade potential investors to take their money elsewhere while raising the cost of all future PDVSA projects by hundreds of millions of dollars. Because the law requires PDVSA to own at least 51 percent of any joint venture with foreign investors, lenders will automatically add a higher country-risk premium to oil projects in Venezuela.
Most of the damage PDVSA has suffered can be repaired, but former company executives say the process would take at least five years. It also would require constitutional and legal reforms, a management reorganization to bring skilled oil executives back into the industry, billions of dollars in fresh investment to recover PDVSA's lost output capacity and launch new capacity expansions, plus a substantial foreign presence in upstream and downstream operations.
An organizational and financial turnaround at PDVSA probably would not begin until after a change of regimes in Venezuela, which likely will happen this year.
On the upside, the company's vast assets constitute a solid foundation for a rapid recovery. Venezuela is the world's fourth-largest oil producer and has the largest oil reserves outside the Middle East. PDVSA controls nearly 77 billion barrels of proven oil and condensate reserves, about 147 trillion cubic feet of natural gas and an estimated 1.6 trillion barrels of super-heavy oil in the Orinoco Tar Belt. It also has one of the biggest oil refining systems in the world, including an overseas refining capacity of nearly 3 million bpd.
The crown jewel of PDVSA's international assets is Citgo, the third-largest gasoline retailer in the United States. Citgo has fully owned refining capacity of 752,000 bpd, more than 13,500 retail outlets and stakes in another 518,000 bpd of refining ventures.
Venezuela's oil and gas reserves are of vital strategic importance to the United States. Before Chavez became president, major U.S. companies invested billions of dollars in "strategic associations" and joint ventures to develop its super-heavy oil reserves.
For example, Conoco is a 51 percent partner with PDVSA in a $3 billion venture to produce 103,000 bpd of extra-heavy crude from the Orinoco Tar Belt and process it into lighter synthetic oil. ExxonMobil is a 50 percent operator of the 100,000 bpd Cerro Negro project, which also upgrades extra-heavy crude into lighter synthetic oil. Phillips and ChevronTexaco own a combined 70 percent of the $3.9 billion Hamaca project, which is currently producing more than 30,000 bpd.
U.S. oil companies in Venezuela have kept a very low profile as Chavez's popularity has collapsed and the country has become more politically unstable. However, lobbying sources in Washington tell STRATFOR that these oil companies -- several of which are based in Texas -- are lobbying the Bush administration to help persuade the Chavez regime to amend Venezuela's new investor-unfriendly oil legislation.
A change of direction in the Chavez government's oil policies and legislation could spark a fast reversal of PDVSA's growing financial problems. However, Chavez is unlikely to reverse course: It is not in his nature to make concessions to those who criticize his initiatives.
|