Political instability, debt handicap Venezuela oil, speakers say

Mounting political unrest under an increasingly oppressive government is only one reason Venezuela is having more trouble coping with depressed crude oil prices than other major producing countries, speakers said at a Columbia University Center on Global Energy Policy event in New York.

National oil company Petroleos de Venezuela SA’s wholly owned production has declined more quickly than production in joint ventures with outside partners, noted Francisco Monaldi, who spoke as CGEP released his paper, “The Impact of the Decline in Oil Prices on the Economics, Politics, and Oil Industry in Venezuela,” at a Sept. 10 event.

“It has less capital,” said Monaldi, who is Baker Institute Fellow in Latin American Energy Policy and Adjunct Professor of Energy Economics at Rice University in Houston. “Very recently, there’s been a slight increase in exports which has brought in some fresh cash. Nevertheless, almost half of the production doesn’t generate fresh revenue because it has to be applied to outstanding loan obligations with China and other countries.”

Depressed crude prices challenge any oil company, Monaldi said. “A lot of PDVSA’s production is not paid for because the domestic market is a cash drain,” he said. Programs that divert revenue to social reform projects effectively make it sell gasoline domestically at about 1¢/gal, which also has increased demand, he said. PDVSA has serious human resources problems ranging from massive firings of executives and engineers since 2003 to low wages now, he added.

Venezuela’s reputation of being the country with the highest perceived operating risks for outside companies, even when other countries are added, also harms its oil industry, Monaldi said. “The human resources and risk environment help create a macro-picture that is troubling,” he said. “All of this is leading to a strong dose of pragmatism—or what some people might call desperation.”

Two-way pressure

Other speakers, however, said PDVSA’s efforts are significantly less than what other countries are doing. “Its talk of adjusting contract terms lags behind what Mexico, Argentina, and Colombia are doing,” said Luisa Palacios, senior managing director for Latin America at Medley Global Advisors in New York. “Venezuela’s talk is much more timid.”

She said, “Because this country highly depends on oil, and is not adjusting significantly either in the oil sector or economic front, it’s feeling pressures. The significant devaluations we’ve seen on its currency have begun to affect its [capital expenditures]. Basically, the macro-sector affects the oil industry, and vice versa.”

Global oil markets are somewhat complacent about Venezuela’s situation because there is an impression that there are plenty of supplies elsewhere in the world, said a third speaker, Antoine Halff, who directs CGEP’s Global Oil Markets Research Program and is a former chief oil analyst at the International Energy Agency.

“Right now, Venezuelan supplies matter less to the world market than any time in history,” Halff said. “But they still matter, particularly because they’re still Gulf of Mexico refiners’ major source of heavy oil for blending with lighter crudes.”

Palacios said there are questions of whether national elections on Dec. 16 will unfold without interference from President Nicolas Maduro’s regime, particularly since polls show the opposition has about twice as much support among voters. “If the elections take place and the opposition is allowed to win, it will be significantly important for Venezuela because it will show there’s some kind of limit to what the people will take,” she said.

But the Columbia University event occurred the same day a Venezuelan court sentenced Leopoldo Lopez, a prominent opposition leader, to 13 years and 9 months in prison after finding him guilty of inciting violence during 2014 protests in which 43 people were killed. “The decision by the court raises great concern about the political nature of the judicial process and verdict, and the use of the Venezuelan judicial system to suppress and punish government critics,” US Sec. of State John F. Kerry said.

Contact Nick Snow at nicks@pennwell.com.

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