What Next for Repsol and Venezuela?

Bottom Line: After Petroleum Minister Rafael Ramírez announced on 4 December 2013 that Spanish oil and gas company Repsol and the Venezuelan government would be signing an agreement to invest US$1.2 billion in Venezuelan petroleum company Petroquiriquire S.A., on 6 December it was reported that the signing would be delayed until the following week. A source from state-owned oil and gas company Petróleos de Venezuela (PDVSA), majority shareholder of Petroquiriquire, referred to the current electoral situation, with municipal elections taking place on 8 December. He indicated that the agreement could be completed shortly afterward, without specifying a date. If the agreement is signed, Venezuela will have contracted almost US$10 billion in oil financing in 2013.

Analysis: Repsol has had contracts in Venezuela since 2000, and in 2009 discovered one of the world's largest natural gas fields, La Perla. They also hold an 11 percent stake in the Carabobo-1 project, located in Venezuela's Orinoco belt, which contains a large amount of extra heavy crude. In October 2013, Repsol CEO Antonio Brufau affirmed the company's commitment to long-term investment in Venezuela. In early November technical manager for crude oil assets Cosme Vargas announced that Repsol would be investing US$4 billion between 2013 and 2022, which will help increase oil output from the 40,000 barrels per day (bpd) presently to almost 100,000 bpd in 2022.

As economic and political conditions worsen in Venezuela, the administration is pushing for further financing from foreign partners to boost oil output, which it depends on for approximately 45 percent of federal budget revenue. President Nicolás Maduro was sworn in to the presidency on 19 April 2013, narrowly beating opposition leader Henrique Capriles. Since then, the opposition has claimed a rigged election and refuses to recognize Maduro. On top of deep political divisions, over the last seven months Venezuelans have faced basic food shortages, water shortages, blackouts, incredibly high inflation (54 percent annually as of October 2013) and increased violence as citizens become desperate. Additionally, there is a booming black market for dollars that is said to be almost ten times the official exchange rate and Transparency International has rated Venezuela as the second most corrupt country in Latin America. Critics complain of Venezuela's economic distortion and increased censorship under Maduro, who has pledged to follow the policy of the late President Hugo Chávez.

Though Venezuela has some of the largest oil reserves in the world, they do not have the means to fully exploit them. Oil production declined under Chávez, when he nationalized companies in various sectors. Currently some of the major problems facing the oil sector are maturing fields and the lack of maintenance and investment. With more foreign investment, Venezuela would be able to better tap its energy potential, and Maduro would be able to use oil revenues to further social programs to placate a discontented public and pay for continued campaigning as support for his administration declines.

On 19 November 2013 Maduro was given the power to enact laws by decree, which he declared he will use to solve economic problems such as inflation and shortages, which he claims to be caused by greedy businessmen and supported by the U.S. Government. As Maduro struggles to maintain his power, his tactics have become more extreme, with increased censorship and the detention of an aide of Capriles, both of which have generated criticism. One measure that won some of the public back over was when Maduro boldly sent troops to take over an electronics store chain in early November and forced them to reduce their prices. However, one such act is not enough to fix his weakening image, though it seems to have carried him through municipal elections on 8 December 2013 unscathed.

Recommendation: The elections are significant for Maduro and the opposition coalition Democratic Unity (MUD), but also telling for Repsol. With the deepening political insecurity and discord, it would appear beneficial for Repsol to garner an agreement now, rather than later. Currently Maduro needs income and is prioritizing foreign investment and increased oil production, making it a timely moment for Repsol to sign further contracts and increase its presence in Venezuela. However long Maduro hangs on, current trends indicate the situation in Venezuela is likely to get worse, eventually reaching crisis levels. When Venezuela comes out the other side, no matter who is governing Venezuela, Repsol will have contracts on the books and contacts on the ground.

This week's Intel Notes are provided by Latin America experts at Southern Pulse (http://www.southernpulse.com).