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Matthew Hulbert : Chavez's secret
Venezuela election weapon: oil


Calling elections is normally a mug's game, but the chances are Hugo Chavez will prevail in Venezuela when Presidential votes are cast on 7th October against Henrique Capriles. He'll do so for one very simple reason: high oil receipts. Chavez has just enough liquid gold left in the tank to buy another term, even if it means filling his boots from unexpected quarters. That's not necessarily going to be good news for Venezuela, or indeed anyone with a vested interest in oil market stability.

Twisted Logic

On the face of it, ‘oil as Chavez's salvation' is a bizarre statement to make. Systemic mismanagement of Venezuela's oil industry and flittered petrodollars is normally the starting point of any critique of El Presidente. Absolutely true. When Chavez first came to power in 1998, oil prices were trading at $10 a barrel, translating into initial budgets of little more than $10bn. Fast forward to 2012, oil prices have rocketed to $110/b with state budgets inching over $200bn, not to mention funds siphoned off into discretionary accounts for Chavez to use on a rainy day – figures that some economists think could be as high as three-fifths of all Venezuelan oil revenues. Chavista has become the quintessential petrocrat over the past 14 years. Venezuela relies on oil for 95% of its exports and half of public spending.

Unfortunately all the normal downside baggage applies; despite swimming in oil, Venezuela is drowning in debt, corruption is rife, inflation remains above 18%, poor decisions are increasingly centralised through the Chavez coterie; poverty remains at crippling levels. Go overseas, and Venezuela is a pointlessly irritating fly in international ointment. That's on anything ranging from Iranian nukes, Russian arms sales, to petty border disputes with Colombia. A raft of politically driven oil supply deals to Belarus, Syria and a dozen Central and South American countries can't be discounted either.

That points us directly to the oil sector itself. For all the Bolivarian bluster of holding the world's largest ‘296.5bn' barrels of oil (estimates have risen by at least 14% over the past five years) placing reserve to production ratios in excess of 100 years, actual production has slid for the past four years to a paltry 2.5mb/d. In fact Chavez has overseen a 22% fall in production since 1999, turning Venezuela into an OPEC bag carrier, certainly not a market maker.

The normal problems apply, despite significant finds in the Orinoco belt, PDVSA can't get the sticky stuff out of the ground by itself. That's always called for international investors, but Chavez always put short term political interests first. No sooner had ExxonMobil and ConocoPhillips pitched up, than El Presidente shifted the goal posts, converting pre-existing contracts into joint ventures, with PDVSA taking a 60% stake. Not even expropriation by stealth; just expropriation (full stop).

Smaller players such as Spain's Repsol, Italy's Eni, France's Total , Russia's Rosneft , Statoil 's Norway and even Chevron have been left picking up the pieces – albeit with a raft of emerging market national players entering the Orinoco fray. But production remains flat, either through a lack of infrastructure, expertise or late PDVSA payments. Little surprise that the bill to get things going has since gone up to $80bn – equating to $15bn per annum over the next five years on heavy oil plays. And you've guessed it, having been continually drained as a statist cash-cow, PDVSA has little choice but to take on enormous leverage to finance its 60% role – especially given Chavez has pulled Venezuela out of any World Bank international arbitration panels to provide investor protection and redress.

Black Gold

The Venezuelan electorate is by no means unaware of these facts. Opposition figures have long pointed out the hubristic nature of the Chavez regime; oil wealth has sowed the seeds of its own corruption and inefficient destruction. But the problem is that Chavez can still rely on sufficiently high oil receipts to buy his way through another election. For all its ills, Venezuela is recording 5.4% growth on the back of oil prices, hardly surprising when you consider Brent averaged historic peaks of $114/b in the first half of 2012. Venezuelan crude entails small discounts, but Chavez can still balance his budget in excess of $100/b and counting.

But that's only one side of the revenue coin. Chavez has also benefited from a torrent of hot Asian money flowing into his oil sector. Since 2007 the Chinese Development Bank has sunk over $40bn into Caracas in return for oil. According to industry numbers, at least $12bn of that has been promised in the past fifteen months. Unsurprisingly Mr. Capriles is asking serious questions whether such interests favour China far more than the Venezuelan street, but the figures (for now) remain in Chavez's favour.

The Chinese Development Bank has given the Venezuelan government close to $16bn in the past few years, not to mention a separate $20bn loan secured by Chavez in 2010, payable half in greenback, half redback (Rmb). That's all been very good news for the likes of China Petrochemical Corp and CNPC, with China receiving around 640,000b/d from Venezuela (200,000 barrels of which services the debt). Chavez can not only play the anti-US card on the back of it all (America sources less than 10% of its oil imports from Caracas these days), it also comes in remarkably handy for borrowing costs at politically tolerable 6% mates' rates between Chavez and China. Market prices would be at least double that. China is basically shielding PDVSA from brutal market realities, particularly when you consider PDVSA has only issued $3bn in dollar denominated debt so far this year.

Indian players are also in on the act. ONGC plans to invest $2.2bn into the Carabolo-1 heavy oil project, adding to the 14.5% Indian outfits already have in the play. Delhi is also going to increase its 40% stake in the San Cristobal field. Rumour has it that even Repsol is being paid for some of its offshore work with occasional oil tankers turning up in Spain. Not great corporate finances, but still one better than 40,000 Cuban workers currently labouring in Venezuela in direct exchange for oil supplies.

Spending vs. Shooting: Whichever You'd Prefer

Politically, it's not just that Chavez is using these ‘gains' to shore up his balance sheets, but the fact he's more than willing to spend it on the electorate. Plan A for Chavez is very clear; spend whatever you have from oil, wherever you can to win votes. Oil prices trading consistently above $100/b makes life infinitely easier for him than trying to appease the Venezuelan street in a $60-70/b price environment. The gaps would have been too great for Chavez to cover up. The Bolivarian revolution would have been shown for what it was: the ultimate basket case of Latin America.

As it is, public spending has increased by around 30% this year, some of which has gone on high-profile set piece spectaculars such as cross-country railroads, but mostly on social programmes. Subsidized food, spot cash payments, fuel price manipulation all remain in place, while new projects such as 350,000 new homes by the end of 2012 are urgently being rolled out. Over 3 million Venezuelan's are registered on the housing scheme, all with the promise of new homes after the election. It hardly comes as shock news that Chinese companies have been building many of the homes, or indeed providing knock down prices on household appliances, televisions and even cars to get around growing currency restrictions.

But there is of course a rather more sinister plan B to oil money that most petrocrats are happy to use to maintain power if all else fails; direct coercion. Chavez obviously retains a tight grip on the media, continues to carry the support of the Supreme Court, Congress, PDVSA (where a single union has been installed), alongside core elements of the military. Threats and violence have already marred the campaign. Three activists supporting Mr. Capriles were killed in a rally on 29th September under dubious circumstances – sending the clear message that if things don't go Chavez's way – expect events to turn very ugly. The election itself is likely to be neither free nor fair. Chavez has already had 2 million public workers filling out forms to say where they'll be voting, replete with signatures and thumbprints. State surveillance is a given, the real question is what opposition votes could entail for future repercussions? It was only in 2004 when Chavez published the names of 2.4 million people who had called for his ousting through referendum. Having survived that, military coups in 2002, and a general strike in the same year, Chavez has no problems playing rough to retain office – or indeed rattling international sabres to enhance his ‘petrocratic' reputation.

Hard Times Ahead: Short And Long

So by hook or by crook, oil should get Chavez through the election, but truth be told, it's unlikely to make his life any easier into his new tenure. Assuming prices see downside corrections into 2013, the Venezuelan economy will not only suffer, but the oil loans they've dished out will all remain in place. The real costs of servicing the loans will jump, which means three things will happen in the short term; either Chavez brings his latest spending spree to a very abrupt end, Venezuela decides to default on its debts, or goes cap in hand to China to arrange (or re-arrange) favourable deals to keep Caracas in the black.

Ironically that could create significant opportunities for international players, and especially China. If they get Orinoco right, production could inch towards 2mb/d, much of which would go to Beijing. Chavez will also have to pay far more attention to developing offshore gas plays sat deep in the Pacific Ocean rather than monetised into state coffers. As yet, Venezuela has no commercial gas production. That's an incredible thought when you consider ongoing energy shortages in the country. All hopes are pinned on the Perla field (holding 15 trillion cubic feet of gas) to come online next year via PDVSA, Eni and Repsol.

But none of this fixes Chavez's longer term problem that his political fortunes remain fundamentally tied to oil, or that he's becoming increasingly dependent on China to keep things ticking over. Like it or not, PDVSA will have to keep financing the Bolivarian revolution, not just its own oil operations that will continue to fall behind schedule. When you consider that PDVSA wasn't paid with cash for almost half the crude it pumped last year, you see just how chronic the problem is. Slowly winding down some of his more ridiculous supply deals would be a smart move for Chavez to make. He could also open up more international acreage and deliberately eschew Chinese interest to rebalance the international books. But he'd have to offer extremely favourable terms to do so – particularly with unconventional gains providing rich pickings for international players able to choose jurisdictions at will.

His highest risk option is to rip up some of the more dubious Chinese contracts (a move that Capriles is threatening to make) and start afresh. Given the position he's in, that's an unlikely ploy for Chavez to adopt, not unless he wants to feel the full wrath of market based pricing. But what he categorically can't do – not under any circumstance – is go back to his old days of ramping up royalties and handing majority stakes over to PDVSA whenever it suits. Not unless he wants to finally push Venezuela's oil sector off the edge of an international cliff.

The upshot is that whatever direction Chavez goes, he's in trouble. His ‘hydrocarbon victory' on 7th October will inexorably be followed by slow burn defeat for Venezuela. Unlike most half decent petrocrats, Chavez can't even claim to be good for stability, or good for long term oil production, especially when you consider that Venezula had clear plans under the ‘Apertura Petrolera' programme to push towards 6mb/d production in the early 1990s. Far from achieving that, Chavez will  take Venezuela down with him; subjecting his nation to six more years of Bolivarian bluster. That said, with his health (cancer) problems well advanced, there is the strong possibility that Chavez might leave office in a coffin well before 2018. If that happens, the autocratic glue holding Caracas together, and associated Chavista paraphernalia would all go with him -  a development that might plunge Venezuela into total chaos – but one that will give them chance to see how much damage he's done, and how they can begin to start to fix it.


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Matthew Hulbert
specialises in energy security and political risk and is lead Analyst at European Energy Review and consultant to a number of governments, most recently as Senior Research Fellow, Netherlands Institute for International Relations (Clingendael). He can be contacted at . Petroleumworld does not necessarily share these views. 

Editor's Note: This commentary was originally published by Forbes, on Oct. 02, 2012 . Petroleumworld reprint this article in the interest of our readers.

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Petroleumworld News 10/03/2012


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