Publish in Perspectives - Monday, April 8, 2013
Acting President Nicolas Maduro with PDVSA workers, with PDVSA CEO and Oil Minister Rafael Ramirez in the background. (Photo: VTV)
Venezuelan state oil giant PDVSA will likely have to focus on boosting production through more partnerships with foreign firms, experts say.
BY LATIN AMERICA ADVISOR
Venezuelan Oil and Mines Minister Rafael Ramirez, who is also president of state oil company PDVSA, said last month that the company would continue to follow the energy policy set by late President Hugo Chávez. How entrenched are Chavez's energy policies in PDVSA today? What are the company's biggest challenges and opportunities in the post-Chavez period? What changes in PDVSA might both improve the company's performance yet remain true to Chavez's vision for the use of Venezuela's abundant natural resources?
Carlos Bellorin, senior petroleum analyst with Petroleum Economics and Policy Solutions at IHS in London: If interim President Nicolas Maduro is elected on April 14 (which is likely) I don't expect significant changes to the fundamental provisions of the 2006 hydrocarbons law and the mixed companies contract and business model. Maduro's government and PDVSA's top priority will remain directing funds to social programs rather than enhancing the oil industry's capabilities. The government's biggest challenge will be maintaining its massive social expending and trying to increase PDVSA's production while relying on high oil prices. However, during the 14 years of President Chavez's government, oil production declined rapidly, and this won't change dramatically during the next presidential term. However, it cannot be ruled out that some production may be added mainly from new projects in the Orinoco Belt if the government follows up the recent windfall profits tax amendment with other incentives. Under this scenario, international oil companies operating in Venezuela as minority partners may play a more important role in the short term. The inability to build the operational, managerial and financial capabilities of Venezuela's oil industry during Chávez's administration almost completely eroded PDVSA's bargaining power in negotiations with its international partners. As a consequence, PDVSA may be forced to ease some terms in negotiations to obtain capital from its partners to start seven new projects in the Orinoco Belt and increase production. PDVSA's top management is likely to be reappointed, and this could be seen as a continuity of the previous oil policy based on tight control over operations and a high take by the government. In the less likely scenario that Capriles wins the election, gradualism will be the rule. Although no major changes are expected due to their high political cost, key 'enhancements' are likely to take place such as reconfiguring the functions and adding efficiency of the petroleum ministry and PDVSA, respectively. Also, a Capriles government may make oil sector laws and contracts with oil companies more flexible.
Asdrúbal Oliveros, director of Ecoanalítica in Caracas: Although Minister Rafael Ramirez declared that there will be no changes in oil policy, we believe that changes will come. An eventual Maduro government will not have the fiscal and financial ability that President Chavez enjoyed. Oil production has stagnated for almost three years, which has affected the country's foreign currency supply. The new government needs production to grow, so we do not discard the possibility of more flexible operating conditions of member companies in the Orinoco Belt. We also expect a gradual revision of the Petrocaribe agreement and even a review of the gasoline subsidy. In case of more flexible conditions, Venezuelan oil production could increase to 100,000 barrels per day in an average year. If Maduro is elected president, he can convince the most radical wing of Chavez supporters to achieve the changes without generating a strain on the government. Finally, there is the role of China. Venezuela's debt with the Asian giant is still increasing. But during this new stage, the resources granted by China could be used for oil investment and thus ensure a reliable oil supply from Caracas.
Maria Velez de Berliner, president of Latin Intelligence Corporation: If Ramirez continues the policies that turned PDVSA into Chavez's social development bank, PDVSA's challenges, from exploration to refining, will compound. Only so much can be squeezed out of a company whose primary purpose has been subverted for over a decade. Chavismo is institutionalized throughout today's PDVSA, resulting in the physical deterioration of the Paraguana Oil Refining Complex, less Venezuelan crude refined in the Gulf of Mexico, Venezuela's diminished influence within OPEC and fewer internal resources available for PDVSA's capital reinvestment. Chavez's vision for Venezuela's petroleum resources is incompatible with PDVSA's role as the influential global oil company it again deserves to be. Chavez was not the first Venezuelan president who misallocated an oil bonanza; at least four did before him, but none harmed the country's oil industry as effectively as he did. Ironically, the rebuilding of PDVSA's oil production and export capacity are what Chavez's successors need to create an effective and equitable redistribution of national income allocated to infrastructure, food production, public health, education and economic fairness (which Chavez mostly botched up). And they need PDVSA's resources to remedy the economic, social, cultural, and political polarization Chavez created, which they must now overcome. If scarcities of essential goods and services continue, and if Chavistas and non-Chavistas are pitted against one another, Chavez's successors will be hard pressed to retain power. And only through the rebuilding of PDVSA can the opposition, if and when successful, begin to reverse the damage done to the Venezuelan economy and culture by Chavez's misuse of PDVSA. Rebuilding PDVSA, by either side, will be neither easy nor cheap, but it must be done to stem the economic and political deterioration of Venezuela.
Roger Tissot, independent energy economist: Energy Minister and PDVSA President Rafael Ramirez may want to keep Chavez's oil policies. But the reality is that with Chavez gone, the likelihood of this is very low. The administration of interim President Nicolas Maduro is likely to continue to rely on PDVSA's revenues to finance the upcoming campaign. Since it is a given Maduro will be elected president, one can assume that PDVSA will start focusing once again on the important issue of oil production. The change will likely be gradual, but inevitable. With declining revenues and increasing debt, PDVSA will not be able to continue to finance massive government spending. The administration faces very difficult choices. Minister Ramirez is expected to focus on increasing short-term oil production to boost badly needed revenues. The government is also seeking additional revenues from PDVSA partners through the oil windfall reforms. However, the company may seek to capture additional revenues by, for example, opening more areas for exploration and production to foreign oil companies. Bidding rounds and new joint ventures are likely. In fact, the unfortunate truth for Chavistas is that the only way out of their current economic woes (and their best chance to remain in power after Maduro's first term) is to implement some of the most disliked policies of the pre-Chávez era: opening more opportunities for foreign oil companies to invest in exploration and production.