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PW: Chavez' Damocles

Editorial

Below is a Stratfor analysis of the present Venezuela's electricity crises, however, it does not make clear the most important issue, Venezuela is an hydroelectric generating country.

The model of energy generation chosen by Venezuela is through hydroelectric
generating energy due to the vast hydraulic resources in the country.
However, due to the type of energy depending on mother nature,
Venezuela decided to develop an alternate way of generating electricity
with the construction of a vast chain of electrical generating plants, first
fueled by venezuelan fuel oil and in recent year adding a combine cycle fueled by gas & fuel oil, to be a back up when nature fails and not enough water are in the dams to turn the water driven electric generating turbines to produce the necessary electricity.

It is obvious that this energy generating solutions for the country needs to develop the necessary hydroelectric generating capacity to meet the country's increase energy demand and to maintain a total readiness in the non hydroelectricity plants in the dry season in event of need if venezuela wants to depend on it.

In the last 10 years, little has been done to meet the demand, big delays
plague the hydroelectric new developments and a total lack of maintenance of the existing back up source of electricity generation has occur.

Bottom line: Venezuela will not have enough electricity generation to meet demand, aggravated by a severe drought. Solutions will not come in the short run, it will take time to repair and to organize a capable group of human resources to maintain the existing plant and to finish construction of new generating capacity.

The future: for at least 2-3 years years Venezuela will continue suffer regular electricity cuts due to lack of generating capacity to meet the demand and lack of an organization to maintain all the electricity generating plants.

Elio Ohep

Stratfor

Venezuela: The electric crisis

Venezuela's electricity sector, already suffering from years of
underdevelopment and overuse, has been impaired by a drought that has
seriously impacted the country's hydroelectric power generation. The crisis
has dire implications for the country's economic situation, and the
government does not appear to have a comprehensive plan to address the
challenge.

Analysis

Venezuela is mired in an electricity crisis of skyrocketing demand and
declining production capacity. The cause is a combination of factors that
have conspired to bring the country to the brink of darkness. There has been
no lack of creative ideas to stem demand and raise production, but true
solutions to the crisis seem far off (or at least out of the hands of the
government), raising serious questions about how Venezuelan President Hugo
Chavez's government will handle the situation.

This is not the first time Venezuela has faced electricity shortages. In
fact, the electricity system has been deteriorating for more than a decade.
Things came to a head in 2008 and 2009 with several major electricity
failures -- including unplanned blackouts lasting several hours, and rolling
blackouts that have lasted as long as 17 hours in some parts of the country.

Problems with Supply and Demand

Part of Venezuela's problem lies in a deteriorating production capacity. The
drought conditions caused by the El Nino weather pattern have contributed to
the problem. With about 73 percent of Venezuelan electricity coming from the
Guri Dam, the reduction of water levels to historic lows as a result of the
drought has caused the dam to shut down some of its operations, and has
caused a great deal of concern. Government officials have stated that unless
drought conditions improve, the dam could reach critically low levels in
January, and be forced to make significant cuts in electricity production.

Colombia's decision to cut natural gas exports to Venezuela from 7 million
cubic meters per day to 2.3 million cubic meters per day has further
exacerbated Venezuela's woes. The decision was prompted by Colombia's own
drought-related concerns, but certainly carries political implications at a
time when relations between the two countries are at a serious low point.
This reduction has forced some natural gas-powered electrical plants to run
at reduced capacity, shift to using diesel fuel, or shut down completely.

Problems also exist on the demand side of the equation. Due to price
subsidies and outright theft, Venezuela claims some of the highest per
capita usage of electricity in all of Latin America -- and usage continues
to increase. National demand has skyrocketed, reaching record highs in 2009
of around 17 gigawatts, a 25 percent increase from five years earlier.

The rapid increase in demand has been coupled with -- and in part driven
by -- a pervasive lack of maintenance and investment in infrastructure, has
placed Venezuela's aging and increasingly inefficient electric grid under
considerable stress. With little funding for maintenance and upgrades,
Venezuela's electricity system is particularly vulnerable to inefficient
transmission -- where electricity simply gets lost -- and electricity theft.
Many users do not pay for the service at all, opting instead to tap
electricity lines with improvised wiring systems. This practice is made
easier by the fact that electricity producers do not have the resources to
police the lines. For those who do pay for electricity, low fixed prices
incentivize high usage levels.

A 1999 report by Venezuelan electrical industry experts anticipated these
problems to an extent, and recommended adding an additional 1,000 megawatts
per year to the electricity system. Some of this was achieved through the
acquisition of 300 Cuban-manufactured electrical generation units. However,
the cost of purchasing and operating the single-megawatt units was almost
four times as expensive per kilowatt-hour as operating a major electrical
plant. Even so, the government has only managed to achieve about 10 percent
of the recommended additions, which leaves a very narrow margin between
production and consumption. STRATFOR sources estimate that consumption is
just 18 percent below production on a per capita basis, leaving a minimal
ability to handle spikes in usage or dips in production. Reports estimate
that nearly 9,000 megawatts would have to be added to the system to achieve
the 1991 reliability levels.

Government Responses

The most forceful government response thus far has been to address the
demand side of the problem with water and electricity rationing measures,
which were announced in December 2009. The measures required 20 percent cuts from certain consumers, such as malls and casinos, and stated that consumers that failed to comply with the cuts would face fines or electricity
shutoffs. The government has attempted to mitigate personal consumption
levels by distributing energy-efficient light bulbs and prohibiting the
importation of electrical devices. It has even considered changing the
country's time zone to gain additional workday hours -- a measure that would
reverse the country's 2007 decision to align itself with the -4:30 GMT time
zone.

Power cuts have led to dramatic production complications in the country's
industrial sector. The metals industry has been particularly impacted, with
Venezuelan aluminum producers Venalum and Alcasa cutting production by as
much as 40 percent. Venezuelan steel maker Sidor has also shut down some of
its operations. Government officials have openly speculated about the
possibility of shutting down both industries entirely to save on
electricity, something that could have grave consequences for the country's
overall growth prospects. Despite these measures to force cuts in
electricity usage, achieving a significant system-wide reduction will prove
to be extremely difficult, as electricity providers lack the ability to
enforce usage cuts or even payments on a wide variety of other consumers.

There is not much hope on the supply side, either. Though the government has
promised to increase electricity production, it has failed to meet
previously stated goals due to a lack of resources and organization. In
2008, for instance, the government set a goal of raising national generating
capacity by 1,000 megawatts. However, only 700 megawatts of capacity was
installed, over half of which was subsequently deemed unavailable due to
maintenance issues and poor construction.

The government has gone so far as to promise to build a canal from the
Amazon River to the Guri Reservoir. Even if the project were feasible --
which it is not since the Amazon rain forest and Venezuela's own mountains
are in the way -- it would take years to complete. By that point, the
effects of this year's El Nino would be long passed.

In the meantime, Caracas appears to be counting on an end to the drought as
a solution to the crisis, but this is clearly only the most immediate cause.
Systematic underinvestment in the energy sector, coupled with poor
maintenance and high usage rates have pushed Venezuela's electricity grid to
the point of breaking.

Political Consequences?

An improvement in the weather, a change in the time zone, electricity quotas
and thousands of energy efficient light bulbs may effectively stabilize the
situation in the medium term. However, the long-term prospects of the
sector's survival are dim without a massive influx of rejuvenating capital.
But Venezuela has enough money woes even in light of high oil prices, and a
steady source of reliably managed cash may not be available.

With no comprehensive solution in sight, energy scarcity may be something
Venezuela will have to get used to. A political response opposing the
government is possible, but the opposition remains disunited and hamstrung,
so its ability to use the electricity crisis as a platform to challenge
Chavez is likely limited. In the long term, however, the electricity
situation will contribute to the decline in the Venezuelan economy that
started in 2009 and shows no signs of slowing. As the economy declines, so
does the Chavez government's ability to meet its populist spending promises,
which is a very serious long term threat to the regime.

STARTFOR/ January 5, 2010

Elio Ohep is the editor and publisher of Petroleumworld. Stratfor is a publication of strategic intelligence on global business, economic, security and geopolitical affairs.

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Petroleumworld News 01/06/2010

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