Effect on oil prices
"In 2002, nearly half of PdVSA's employees walked off the job in protest against the rule of President Chavez, largely bringing the company's operations to a halt," said the US Department of Energy. "In the wake of the strike, PdVSA fired 18,000 workers and overhauled the internal organization in order to solidify government control. In 2006, Chavez implemented the nationalization of oil exploration and production in Venezuela, mandating a renegotiation of a 60% minimum PdVSA share in projects. Sixteen firms, including Chevron and Shell, complied with new agreements, while Total and Eni were forcibly taken over."The Financial Times recently wrote that Maduro should "hug" major oil operators as it needs their money to maintain mature oil fields.PdVSA needs USD 3 billion just to maintain its current production levels, but major oil operators will be quick to return to the country given Venezuela's natural riches.
The heir apparent
"While in the short term the political scenario will remain largely unchanged, with vice president Maduro widely expected to win the snap election, internal disputes within the ruling party could emerge in the medium to long term, increasing the long-term risk of political instability," notes risk consultants Maplecroft, adding that in the short term Venezuela's negative investor climate is likely to remain unchanged. "This will be the case regardless of the outcome of the elections, as Maduro will seek to show the electorate that he embodies continuity and the preservation of Chavez's legacy. Furthermore, a potential opposition winner would lack the political capital to unwind some of Chavez's most controversial policies in the short term."Maduro is unlikely to move away from resource nationalism and oil companies will continue to face a "markedly unfavorable regulatory regime"."Maplecroft's Expropriation Risk Index 2013 considers Venezuela an 'extreme-risk' economy, scoring 2.28/10 (where lower scores indicate higher risk). The country ranks 16th out of 197 nations (where first is worst), located between Iran (15th) and Angola (17th)."However, signs of warming relations with Washington may signal a rise in Venezuela crude to US refineries on the Gulf Coast, which were historically built for heavy Caracas blend, when the two countries enjoyed better relations."Oil is critical to the country's earnings (more than 95% of export earnings), so there could be the potential (longer-term on political change) for a change in approach to foreign investment in the sector," said Nathan Piper, an RBC analyst.Threatening Saudi's oil dominance
Saudi Arabia would be dismayed by the proceedings. It is already facing competition from a resurgent Iraq and the United States shale revolution, and more Venezuelan crude could displace its own rising exports to the Gulf Coast.Saudi Aramco is conscious of the moderation in demand and oversupply."Forecast growth has moderated, not only as a result of economic stagnation but also through welcome and increasing gains in energy efficiency," chairman Khalid Al Falih told energy executives at a conference in Houston on March 4. "Changing demographics and lifestyles, environmental pressures, and energy policies have played a role, too."So, while we believe long-term demand will be robust enough to provide us with the confidence to invest, it will not rise to the point where it creates market imbalances, and stretches the industry beyond its means."Abdalla S. El-Badri, OPEC Secretary General, puts the new wave of production in perspective: "At OPEC we do not envisage a price collapse, but it is important we understand some of the potential effects of falling prices," he told a Chatham House audience earlier in the year. "Of course, OPEC Member Countries will receive less revenue."While the new leader of Venezuela remains anti-American and it may take a while before the government's policy on crude oil production is revealed, economic reality may force its hand."Severe shortage of hard currency may force the new government to focus more resources on increasing oil revenues, which account for over 90% of foreign income," said Pugh. "The current high level of global oil prices has reduced the pressure for reform. But if oil prices fall below USD 100 per barrel for a sustained period over the coming years, as we think likely, then there is a high chance of a balance of payments crisis and even a possible debt default. At the very least, the Venezuelan government would have to try harder to maintain revenues by raising production."And that should make other major producers quack in their boots.
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