2013-12-06 12:34:23 - Recently published research from Business Monitor International, "Venezuela Oil & Gas Report Q1 2014", is now available at Fast Market Research
In the wake of the political transition following the death of long-time leader Hugo Chavez, a weaker than expected current President Nicolas Maduro is confronting a worsening economy and growing unpopularity. While a flurry of new loans and deals may improve the financial position of PdVSA over the short term, the threat that badly needed funds will diverted from investment into the oil and gas sector to fund social programmes remains as real as ever. Although our long-term forecasts call for growth as projects in the Orinoco belt ramp up, we expect Venezuela to continue its underperformance given the scale of challenges - which range from political interference to chronic underinvestment. Similarly, despite abundant gas reserves, we expect Venezuela to
remain a net importer of gas over the course of our forecast period.
The key trends and developments in Venezuela's oil & gas sector are:
Full Report Details at
* We continue to hold a conservative outlook for Venezuelan oil production, seeing more downside risk than upside in the near term in the absence of a wider overhaul of the sector. With production flat in 2012 at around 2.5mn barrels per day (b/d), we expect output to rise slightly to 2.6mn b/d by 2014, driven mostly by new output from the Orinoco belt.
* However, in the medium term, we expect production to remain below the stated goal of 3.0mn b/d until near the end of the decade, when we expect gains in production to accelerate as planned and proposed developments in the Orinoco belt come online. Our conservative forecast assumes delays and problems that have been a hallmark of the country's oil sector.
* There is some scope for improvement over the near-to-medium term. PdVSA has reported a flurry of recent loans and credit deals, which will see substantial funds pumped into the troubled firm to support upstream development. This could allow for some long-stalled projects in the Orinoco Belt to advance.
* However, the risk remains strong that, as in the past, funds intended to support the chronically underfunded oil and gas sector could be diverted to support additional social expenditure as part of an effort to offer support for a government whose popularity is waning. While our core view is for no major liberalisation in the oil sector, we could see pressure for reform growth should the economic and social situation in Venezuela deteriorate further.
* Despite Venezuela's unfavourable licensing terms and difficult business environment, which have forced international oil companies including ConocoPhillips and ExxonMobil, and more recently Petronas and Lukoil, to exit the country, a significant amount of foreign interest remains. In particular, Asian players from India and China are continuing to make large-scale investment as they seek access to the Orinoco belt. Of these, China remains the largest, although there are reports Beijing is growing concerned with Venezuela's ability to repay further loans. Shipments of Venezuelan crude to China have risen from 79,000b/d in 2009 to above 300,000b/d in 2012, and we anticipate substantial further growth.
* This reflects a growing debt of oil-for-loans. While some of the recent agreements remain opaque, we note that total lending from China is approaching US$43bn, with a large chunk agreed under an oil-for-loans scheme. While this may help to ease Venezuela's poor cash flow position though, there are long-term implications from 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.
* We see similar challenges in Venezuela's effort to boost natural gas output. PdVSA lacks the capacity to develop offshore gas on its own, and has made some progress in getting foreign investors, with a recent announcement that Chevron would join YPF and PdVSA in developing the offshore Deltana Platform. However despite holding substantial gas reserves, underinvestment and flaring, as well as considerable subsidies which have bolstered domestic consumption, have left Caracas dependent upon imports of gas to meet demand.
* We see limited scope for this trend to change, with our forecast calling for a net import requirement to endure even as domestic supplies grow. Indeed, even with the government reporting that it expects the flow of the major pipeline linking Venezuela to Colombia to be reversed in 2014 as the Mariscal Sucre project comes online, we believe this will be insufficient. Indeed, not only is there downside risk to production should PdVSA fail to meet its investment commitment or should a challenging business environment slow project momentum; we see risks that a greater share of gas output could be directed towards enhanced oil recovery operations as Orinoco projects ramp up.
* Due to years of underinvestment and mismanagement, Venezuela's refining capacity growth has struggled with significant impairments. While the September 2012 Amuay refinery explosion was the most overt example, a year on, a leaked document from PdVSA reports that total capacity utilisation stands at only 74%. This has left the country increasingly dependent on imported refined products from the US at a higher price, and vulnerable to swings in international oil prices while still maintaining hugely expensive fuel subsidies.
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