2013-02-28 12:32:24 - New Energy market report from Business Monitor International: "Venezuela Oil & Gas Report Q2 2013"

BMI View: With a post-Hugo Chavez future seeming increasingly imminent, it is tempting for markets and industry players alike to imagine a brighter future for Venezuela's energy sector. Indeed, the country's unparalleled below-ground potential has disappointed in recent years due to economic mismanagement, underinvestment and the unsustainable social policies which have drained state-owned PdVSA of critical resources. As such, market optimism has prevailed in recent weeks, signalling that investors view a Venezuela without President Chavez positively. However, it would be wise to brace for a period of energy sector instability in the immediate aftermath of any transition in leadership.


Full Report Details at
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The key trends and developments in Venezuela's oil & gas sector are:

* We forecast that

Venezuelan oil production will surpass the 3mn barrels per day (b/d) mark in 2014, despite government claims that this goal would be achieved in 2012. Growth in production, which will average 5.4% year-on-year (y-o-y) between 2013 and 2018, will come primarily from the country's Orinoco heavy oil belt. That said, there remains a considerable downside risk to our short-term forecasts should there be political instability on the back of a leadership transition. Indeed, the outlook for 2013 and potentially even 2014 oil production remains vulnerable to the nature of the immediate post-Chavez future in Venezuela which, at the time of writing, is rather opaque.
* Despite Venezuela's unfavourable licensing terms and sour business environment, which have forced international oil majors including ConocoPhillips and ExxonMobil to exit the country, a significant amount of foreign interest remains and Asian players are still making large-scale investment as they seek access to the Orinoco belt. Of these, China remains the largest, and in May 2012 it increased its bilateral lending to Venezuela to US$36bn in exchange for an ever-increasing guaranteed annual oil shipment, which is supposed to be in the region of 700,000b/d by 2015.
* Venezuela's massive debt problem, fuelled by President Hugo Chavez's social agenda, has been systemically undermining the country's ability to invest in its own oil and gas sector. The July 2012 vote to raise the country's debt ceiling by 37% underscores the increasing difficulty in financing its current budget deficit. The government has also been dipping into Chinese loans in order to finance this agenda, rather than using the financing to boost the country's long-term growth and the much-needed investment into sustaining oil production. Indeed, this is one of the reasons why production had been falling in recent years. There are also long-term implications for these loan agreements, as Venezuela may end up sending around half of its total net exports to China by the middle of the decade in order to repay them.
* The large-scale smuggling of cheap Venezuelan gasoline has created a significant black market, where it is smuggled across the Colombian border and sold for profit. According to official figures, this practice is costing the government and PdVSA an additional US$8bn per year. The official response has been to implement an unpopular fuel rationing system in those states near the Colombian border.
* Due to underinvestment, Venezuela's domestic refining capacity has been insufficient to meet domestic demand in recent years, leaving the country increasingly dependent on imported refined products from the US at a higher price, and leaving the country increasingly vulnerable to swings in international oil prices while still maintaining hugely expensive fuel subsidies. The vulnerability of the country's downstream segment was also underscored by the Amuay refinery explosion in September 2012. Considered to be one of the worst industry accidents in years, Venezuelan officials have consistently denied a lack of maintenance to be the cause of the blast, despite evidence to the contrary. At the very least, the tragedy underscores the strain with which PdVSA operates. Indeed, in 2011 the entire CRP complex, of which Amuay is a part, produced 699,000b/d, while its nameplate capacity is 955,000b/d, indicating only a 73% operational efficiency.
* PdVSA has made plans to construct new refineries, as well as to expand and upgrade existing ones. The plan is known as PlanSiembra Petrolera, or 'Sowing the Oil'. Our forecasts currently suggest that refinery capacity will begin expanding in 2013 with the construction of the Batalla de Santa Ines refinery, and then again in 2018 when planned upgrades to the Puerto La Cruz/San Roque refinery complex and the El Palito complex are completed. There also remains substantial upside potential to the country's refinery capacity, with the Bicentenario project expected to have a capacity of 250,000b/d and the Cabruta refinery to have a capacity of 200,000b/d. Both projects are still in the planning phases.
* So long as Chavez and his Chavistas remain in power, the country will seek to keep social spending elevated in order to maintain political stability - and dominance over the country's institutions. This would occur largely on the back of a desire to maintain strong popular support, which Chavez has built throughout his 14 years in power, as well as to avoid political fragmentation. Consequently, both investors and industry players that are betting on reform in some of these aforementioned critical areas of the energy sector could be sorely disappointed.

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