Venezuela: Profligacy puts Chávez’s dream at risk

| Wednesday, September 12th, 2012 | No Comments »

Financial TimesBY BENEDICT MANDER & JOHN PAUL RATHBONE

Whether or not President Hugo Chávez triumphs in Venezuela’s presidential elections on October 7, the country will still have the world’s largest proven oil reserves – more even than Saudi Arabia.

Such potentially vast rewards are why so many oil men – be they Asian, Russian or from such as the US’s Chevron, Italy’s Eni and Spain’s Repsol – put up with the mean streets of Caracas and swallow their words when Mr Chávez launches one of his characteristic anti-capitalist tirades.

“You need patience and stamina here,” says one senior foreign oil executive. “Those who see Venezuela as a short-term game make a big mistake.”

Venezuela has some 296.5bn barrels of reserves, according to Opec, compared with Saudi Arabia’s 264.5bn. Most of it is “extra-heavy” oil that lies just a few hundred metres underground in the Orinoco Belt and, although costly and complex to refine, is reckoned to be profitable when oil rises above about $20 a barrel.

“Venezuela is an El Dorado of oil,” adds the executive.

Yet the biggest obstacle to these riches – worth some $34tn at current prices – is state-owned oil company PDVSA itself. Critics say the world’s fourth-largest oil company, according to a ranking by Petroleum Intelligence Weekly, is being ransacked to sustain the spiralling costs of Mr Chávez’s socialist revolution.

“This government has been intensely, incredibly short-termist. They are killing the goose that lays the golden eggs,” says Ricardo Villasmil, senior adviser to opposition leader Henrique Capriles Radonski, challenger to Mr Chávez in the elections.

Venezuela’s oil production has at best stagnated over the past decade, producing almost 3m b/d in 2011, according to PDVSA. The US Energy Information Administration estimates production of about 600,000 barrels per day (b/d) less, a drop of some 17 per cent since Mr Chávez was elected in 1998. Given that oil accounts for more than 90 per cent of Venezuelan exports, the country is the US’s fourth-biggest foreign supplier, this puts the Mr Chávez’s socialist dream at risk.

Critics say PDVSA has been scrimping on investing in its core business, instead pouring money into “social contributions” to government, which last year topped $27bn, almost a fifth of the company’s $128bn in revenues and almost six times net profits of $4.95bn. Meanwhile it has been issuing ever more debt, which has risen to $34bn from $2.5bn since 1998.

Mr Villasmil says: “There’s nothing wrong with having big debts – it’s natural for a country with reserves this size. The problem is that the money hasn’t been invested in increasing our future production capacity.”

In Lake Maracaibo, Venezuela’s mature western oil basin where the first gushers were found at the start of the 20th century, $3bn a year is required to maintain current production of 830,000 b/d. Instead, PDVSA has racked up $10bn of unpaid bills with private sector service providers.

Another private sector oil executive says: “If PDVSA doesn’t resolve these issues, it’s going to be very hard to bring new capital into those projects, not to mention new ones.”

The oilfields of the Orinoco produce 1.1m b/d, but the government says six new projects, with partners including China’s CNPC and Russia’s Gazprom, will add 2bn b/d by 2020.

The snag is these fields require estimated total investment of at least $80bn, with PDVSA, the majority partner, required to stump up 60 per cent.

Its need to raise funds explains reports PDVSA is considering a very capitalist solution: the partial listing on the Hong Kong stock exchange of one of its Chinese joint ventures.

“It’s not possible to produce anything there yet. Bureaucracy, delays, PDVSA’s debt – a lot of things affect PDVSA, and that affects us,” says an executive at one of the companies involved in the new projects.

Finally, there has been an exodus of management talent. Asian companies, such as PetroVietnam and India’s ONGC, have arrived as companies such as ExxonMobilBP and Petrobras have wound down operations. In the public sector, confrontations earlier in Mr Chávez’s presidency with senior PDVSA staff have led to a management exodus – much of it to neighbouring Colombia.

There, Pacific Rubiales, a Canadian-listed junior led by former PDVSA managers, has almost doubled production every year since 2007 to 86,000 b/d. Meanwhile, in Venezuela oil executives say accidents are rising. “The company doesn’t have the personnel it currently needs, let alone to expand into the Orinoco,” says a diplomat.

So far, Mr Chávez’s profligacy has been met by rising oil prices. Econalitica, a local consultancy, says the government balances it books with oil at $83 a barrel.

Given Venezuela’s oil basket is trading at just over $100 a barrel, Mr Chávez has breathing space. But oil men say whoever is in power next year will have to divert resources into the sector if production is to be maintained and bills paid.

“This year the economy is booming thanks to Chávez’s huge spending. Next year will be crunch time,” says Jorge Botti, president of business chamber Fedecamaras.

Foreign oil executives bide their time – including one who, for fear of being kidnapped, locks himself in his hotel room every day at 7pm. “Still, there’s oil here, and a future. You think Iraq is any better?” he says.

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