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Venezuela Oil: Who Will Fill The Void?

Latin America Advisor

Investors worry Venezuela’s future oil output may be on shaky ground following the transfer of control of four heavy oil projects to the government and the decision by the US’ Exxon Mobil and ConocoPhillips to pull out of the projects. What is the future of the projects and the outlook for Venezuelan oil output? Will PDVSA, the remaining foreign companies, and other companies, such as China’s Sinopec, be able to fill the void?

Patrick Esteruelas, Latin America Analyst at the Eurasia Group: Venezuela's oil production capacity will come under renewed strain after ConocoPhillips and Exxon Mobil walked out of contract negotiations and announced their departure from the heavy crude Orinoco Belt region on June 26. Both companies account for over 170,000 barrels per day, or just under a third of the Orinoco's maximum production capacity. Their walkout is unlikely to have a significant immediate impact on production, with all remaining private stakeholders picking up some of the slack and a likely relaxation of OPEC quotas that should allow for increases in production across the Orinoco. However, PDVSA's inefficient management and cash flow problems, coupled with a restrictive environment for international oil companies, will translate into an increasingly negative outlook for Orinoco production in the medium and long term. There are large questions over PDVSA's ability to assume control over the Orinoco at a time when the company is under pressure to bankroll the government's aggressive social spending platform. While Chevron, Total, Statoil, and BP appear to have agreed to relinquish control, they will be reluctant to make any sizable medium- and long-term investment commitments due to poor contractual guarantees. National oil companies willing to forsake economic return in favor of energy security could step in to fill the vacuum, but with little experience in heavy crude production and upgrading, they would likely struggle to meet the technical and commercial challenges of maximizing resources in the Orinoco.

Everett Santos, President of DALEC LLC: Venezuela has continued on a path consistent with its populist rhetoric that claims its recent measures enhance the nation's wealth and promote the poor's participation in the country's hydrocarbon cornucopia. The truth is much more complicated. There is no doubt that the national capacity of Venezuela to maintain and increase production today, without the input of foreign nationals and their corporations, is much greater than what it was when oil was first produced in Venezuela in the second quarter of the last century. So at least in the short and medium term, production should not dramatically decline (although it has been falling), at least not because of the exodus of Exxon Mobil and ConocoPhillips. But over the next decade, Venezuela will be diverting too much of its wealth from the type of research, development, and exploration which the oil industry relies upon for the continued increase in the industry's capacity to produce hydrocarbon products, not only fuel but all its derivative products. Venezuela will be denied that technology unless it is forthcoming from other sources. Unfortunately, Venezuela will ultimately recognize that there are no free rides onto the thoroughfare of technology. Whoever may be the provider, the cost may be not be to Venezuela's liking and may indeed be ultimately significantly higher than that competitively derived from Exxon Mobil and ConocoPhillips. The more we become familiar with the business practices of Chinese corporations, the more the idea that China's Sinopec will be less onerous seems temerarious and ludicrous.

Roger Stark, Partner at K&L Gates in Washington: Venezuela seems bent on re-enacting the Argentine 'fracaso'. Prior to 2000, Argentina had a burgeoning oil and gas industry with production confidently projected as sufficient to supply Argentina's domestic and export needs. However, with the advent of the peso meltdown and the ensuing mass exit of foreign capital, Argentine energy markets abruptly went from boom to bust. Natural gas is now being rationed on the grounds that economic growth has outstripped domestic supplies, but critics correctly point out that under-investment has significantly reduced production and slowed development of new fields. Unlike Argentina, Venezuela's recent actions lack even the fig leaf of a national emergency, but they have nevertheless triggered flight of financial and even human capital (key PDVSA employees are apparently being replaced by political cronies of President Chavez and his supporters). At a minimum, Venezuela's actions are increasing political risk perceptions and the cost of attracting foreign investment. Whether Venezuela and its remaining 'minority partners' can marshal necessary resources to avoid a full-blown energy crisis remains to be seen.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter. 

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