ANALYSIS: Industry hopeful as referendum ends

Tuesday, February 17, 2009

Analysts and industry officials offered mixed opinions on the significance of Hugo Chávez's February 15 electoral victory to remove term limits. The reform will allow the president to run for reelection in 2012 when his current term ends but largely leaves the status quo unchanged for the oil industry.

What's clear, however, is that the country's state oil company PDVSA is facing tremendous problems including declining production, low oil prices and issues with labor unions and service companies. In the run up to the election, many industry analysts said PDVSA went into campaign mode and would wait for the results before addressing its ongoing problems.


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The reality that Chávez still maintains majority support in Venezuela and is likely to stay in power for a long time to come will certainly not be favored by international markets and a significant number of Venezuelans themselves. But with the referendum now over, even those in the industry who had been hoping for a Chávez loss seem hopeful PDVSA will at least be able to begin to carry out needed reforms.

"I don't think the continuing policies of the current administration bode well for the energy sector," Gianna Bern, an energy analyst and president of Chicago's Brookshire Advisory and Research, told BNamericas, adding Venezuelan bonds had lost virtually half their value since Chávez's victory was announced with credit default swap spreads in excess of 15%.

"There's no doubt the government will continue to rely on PDVSA's decreased cash flow as the lifeblood of the Venezuelan economy," Bern said. "A 75% plunge in crude oil prices means Venezuela will grapple with cash flow shortfalls, artificial currency levels and a staggering 30% inflation rate."

PDVSA also will continue to face difficulty in accessing capital markets without paying a hefty premium to investors, Bern said.

"At this point, investors and suppliers will be both wary and weary of an administration without end," she added.

"Recent payable issues with oilfield service suppliers are a case in point. There will be no end in sight to the massive social spending that strain financial resources, which might otherwise be utilized for ageing oil sector infrastructure," she continued.


One industry insider said talk among executives was now centering on how PDVSA would proceed, adding referendum results did not really change much.

"Let's hope PDVSA, [subsidiary] CVP and the oil ministry can get back to the oil and gas business," the insider said. "They need to catch up on outstanding payments to their JV partners and service providers as well as resuscitate the Carabobo bid process."

Industry executives are now waiting to see how Chávez and PDVSA executives decide to focus their efforts.

"Some say Chavez will focus on the national assembly elections in 2010. Others say he will try to call an immediate general election after the constitutional reform like he did in 2000 in order to guarantee himself another six years while his popularity is still high." the insider continued. "Some even say he will try to amend the six-year term to 10."

"The more optimistic say his team will finally focus on dealing with the global economic crisis and try to actually run a country rather than a campaign since they might be in power for a long time," the insider added.

Tom O'Donnell, a Fulbright scholar studying political economy and oil politics in Caracas, said Chávez and PDVSA now had the political freedom to begin tightening the belt if they decide to do so. The scholar, however, said that many of PDVSA's "problems" may actually be a part of its current strategy.

"Generally, PDVSA seems determined to push on and assume it can get foreign companies to finance new heavy crude projects in the Orinoco belt and that it will have the tech and managerial ability to operate these big projects in a way the IOCs can stomach without making undue concessions on financing or operations," O'Donnell said.


Many in the industry have speculated PDVSA would be forced to agree to more attractive terms with majors interested in participating in the Carabobo tender for seven new heavy crude blocks because of the current economic environment.

"PDVSA instead seems to be inclined simply to keep insisting on the same financing requirements and that taking the expertise they need from the Venezuelan service companies and suppliers by pushing a new spate of nationalization there," O'Donnell continued.

The referendum victory, meanwhile, could give Chávez more confidence to continue with heated and well-publicized spats with service companies operating in the country.

PDVSA owes service companies billions of dollars and the firm has taken over at least one rig operated by a US company that suspended operations because of late payments.

"I am extremely skeptical PDVSA needed to stop paying service companies last August, only one month after the price of oil peaked at an historic high. I suspect that, although they surely have economic difficulties, a certain significant percentage of this is a manufactured crisis, to put PDVSA in an optimal position as soon as possible to negotiate reductions in payments to the service companies and concessions from the four big PDVSA trade unions," O'Donnell said.

"Also, practically bankrupting the domestic service companies and suppliers greatly facilitates their nationalization if that is indeed what Chávez aims to do," O'Donnell added.

RoseAnne Franco, PFC Energy's lead Latin America analyst, said problems with service providers should not be exaggerated.

"It's important to place these talks in context," she said in an interview. "A number of oil companies are also engaged in discussions with their respective service companies about cost cutting moving forward. It's more a sign of the times."

The referendum does, however, give Chávez more negotiating room, Franco agreed.

"For the oil sector, there was little expectation of a major policy change, but the shift away from campaign mode will be welcomed. No doubt the referendum leaves Chávez emboldened and this may be more of an issue for oil service providers given present negotiations," she added.

"For the oil companies, the attention will be on the Carabobo tender because Venezuela continues to house significant acreage and that cannot be easily ignored," she continued.


The result of the referendum then came as no surprise to Venezuela's oil industry. Executives and analysts long ago came to the conclusion companies wishing to operate in the country will have to play by Chávez's rules and the possibility of another Chávez decade now seems the most likely outcome.

The sheer extent of the country's reserves is enough to keep oil majors interested in the country regardless of the country's political system or any specific leader. What remains to be seen now, however, is if PDVSA will get serious about returning to the oil business.

The latest vote is now over but will surely be followed by other referendums and elections in the future as Chávez has made it clear his project is not yet complete.