2012-02-13 17:13:22 - New Energy research report from Business Monitor International is now available from Fast Market Research

BMI View: Venezuela's oil sector operates at the extremes. Few, if any, countries can match it in terms of untapped growth potential. The Orinoco heavy oil belt, which covers a vast swath of the country's heartland, holds tens of billions of barrels of reserves that are only now starting to be developed. At the same time, President Hugo Chavez has implemented some of the most demanding fiscal and operating terms in the world for foreign companies, has repeatedly nationalised assets, severely damaged state-run PdVSA's ability to manage the oil industry and generally sown a highly volatile and unpredictable operating environment. Indeed, those policies have plagued Venezuela's oil sector and threaten to derail development of the Orinoco heavy oil belt, which

is likely to be the last hope for the country to turn around its flagging oil sector. With that said, our view is that sustained oil prices above US$90/bbl will provide a sufficient financial incentive to sustain much-needed foreign investment in the Orinoco belt. As a result, we are fundamentally bullish about the future oil production, with forecasted growth of 67% over the coming decade pushing production over 4mn b/d, although we note the significant downside risks to this forecast.


Full Report Details at
- www.fastmr.com/prod/329592_venezuela_oil_gas_report_q1_2012.aspx


Main trends and developments we highlight for Venezuela's Oil and Gas sector are:

* Venezuela's oil production is a long way from its peak of around 3.5mn b/d in the late 1990's. Output in the OPEC member country has fallen steadily from the time Hugo Chavez took power in 1999, as a series of reforms to the sector have proven nothing short of disastrous for the country's oil sector. State-run PdVSA has lost much of its senior management over the period, and seen much-needed funds diverted to popular social programmes and other Chavez initiatives. Moreover, repeated nationalisations and harsh fiscal terms have chased many foreign investors out of the country.
* Nevertheless, with a number of the country's Orinoco Belt heavy oil projects taking shape, particularly in the Junin and Carabobo regions, we see a turnaround in production on the horizon. We forecast oil production ticking up from 2.44mn b/d in 2011 to 2.52mn b/d in 2012 and 2.81mn b/d in 2013. From that point, production is forecast to accelerate, with the country potentially breaking 4mn b/d in 2019. * Key projects to watch over the short-term, as a barometer for project execution success, include the PdVSA/Chevron Carabobo 3 project, the PdVSA/Russia consortium Junin 6 project, the PdVSA/China National Petroleum Corporation (CNPC) Junin 4 project and the PdVSA/PetroVietnam Junin 2 project, all of which are scheduled to start production in 2012.
* Although we are broadly optimistic on oil production growth, the risks to this outlook are myriad and welldocumented. PdVSA, which by regulatory mandate holds a 60% in all Orinoco Belt projects, remains underfunded and understaffed and will rely increasingly on its foreign partners to fund its share of development costs. At the same time, PdVSA is turning to its partners for more funding, the government is imposing more stringent fiscal terms, as evidenced by a 95% windfall tax imposed on all crude sales over US$100/bbl imposed in April 2011. Our primary assumption is that long-term oil prices above US$90/bbl will provide sufficient economic incentive for foreign investors to remain in the country and continue with their projects in spite of the difficult operating environment. Moreover, Chinese companies, which will play a crucial role in developing the Orinoco heavy oil belt, will see much of their production increases shipped to China.
* Indeed, one need not look much further that Venezuela's gas sector to see the perils of doing business in Venezuela. After years of touting the countries liquefied natural gas (LNG) export potential, the government was forced to radically scale back plans for the gas sector in September 2011. This has led to one of the most significant revisions from last quarter's report. Whereas we had forecast some small-scale LNG exports starting in 2015, we now see no scope for LNG exports. In fact, without the financial incentive of LNG exports, we see relatively limited investment in gas projects, and as a result we forecast production growth lagging consumption, ensuring that the country continues to rely on its neighbour Colombia for small-scale imports.
* On the corporate side, the industry will continue to be dominated by state-run PdVSA. However, PdVSA will rely on its foreign partners for funding and technical expertise, and those foreign partners will increasingly come from nations ideologically aligned with Chavez's government. China's state-run companies CNPC, Sinopec and China National Offshore Oil Corporation (CNOOC) will play a vital role in developing and funding the oil industry after signing a series of deals in late-2010 that sets out plans for as much as US$40bn of investment through 2016. From Russia, state-run Rosneft, as well as privatelyheld TNK-BP and Lukoil will be major players in the Orinoco heavy oil belt. Of the industry majors, Chevron and Eni have the most exposure to Venezuela. Their risk tolerance has given them stakes in largescale projects, but they will be exposed to serious risks to disruption in output and financial returns.

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