Now that Nicolas Maduro—the late Hugo Chavez’s choice for successor—has narrowly won Sunday’s presidential elections in Venezuela, oil and gas investors can expect a perpetuation of the status quo.
In Sunday’s vote, Maduro won with a very narrow 50.7% and a vow to continue with Chavez’s “revolution,” which has seen the oil industry nationalized and the state-run PDVSA oil company funding social programs and voraciously courting China and Russia.
The narrow vote will not be without its challenges. Opposition rival candidate Henrique Capriles has refused to recognize the results and is demanding a recount, though the electoral commission is standing firm on Maduro’s victory.
For foreign oil and gas companies, we can expect more of the same. There are no regulatory changes in the works, and an unattractive windfall tax system announced in January will likely be pushed forward under Maduro.
What Maduro is inheriting, though, is a nightmare situation that will see him stuck between using PDVSA to fund expensive social programs that cost it $44 billion last year alone diverted from oil revenues, and cutting social spending or allowing a rise in the price of fuel that could spark regime-threatening unrest.
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If Maduro feels compelled to reduce fuel subsidies, it could lead to riots as cheap fuel—which cannot be sustained—is one of the most crucial social benefits for Venezuelans, who pay around 6 cents per gallon.
Maduro has inherited a “sinking ship” and does not appear to have the political capital to make any short-term changes in Venezuela’s energy policy, experts at Southern Pulse told Oilprice.com.
“The main energy issue for Venezuela is that oil production is struggling, down from a peak of about 3.2 million barrels per day in 1998 to less than 2.8 million bpd now. One would hope that fixing infrastructure, completing refinery repairs and construction, and investing in exploration and new technology would be priorities but Maduro will not have funds to invest unless he makes controversial cuts to social programs,” according to Southern Pulse, which does not believe that Maduro will attempt to cut fuel subsidies any time soon.
A top priority for Maduro will be boosting refining capacity, says Southern Pulse. Towards this end, Maduro may be willing to negotiate if a partner steps forward to build a new refinery, which is a goal Chavez failed to realize.
“If PDVSA fails to increase production, PDVSA President Rafael Ramirez may be replaced this year. One way for Maduro to keep his presidency afloat is to bring new proven wells online in the Orinoco Belt; but that will require major investment. PDVSA may need more than a minority-partner-with-a-service-contract at those fields if they want to start pumping soon.”
In the meantime, China’s foothold in Venezuela remains on solid ground. China is already privy to 600,000 bpd from Venezuela in return for $42 billion in loans. Maduro is not likely to rock this boat with Beijing, and according to the terms already in place, Venezuelan exports are set to increase to one million bpd by 2015, though most of the loan money has already been spent. According to Southern Pulse, Maduro will likely seek new loans from China, but this will depend on the terms and stability in Venezuela.
If this doesn’t work, Maduro will have to look elsewhere—first to Russia and then perhaps to US Chevron or Spanish Repsol, the latter two having only limited operations in the country.
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Overall, we should consider that Maduro will pursue all-out chavismo. “As president, Maduro will govern as he thinks Chavez himself would have ruled. However, Maduro probably will not begin pandering to the most radical elements of his party, PSUV, because he has little to gain from that. Maduro is not blind to the myriad problems facing the next president such as blackouts, food shortages and rampant criminal violence,” according to Southern Pulse.
While it’s status quo for now for the oil and gas industry, it’s clearly bad news for Maduro.
“Despite Chavez’s immense popularity, his memory will fade. And with time citizens who loved Chavez will blame Maduro for their struggles,” experts at Southern Pulse say. “If Maduro survives that long, the next election in 2018 will involve a much deeper conversation about the direction of the country.”
“In fact, some think that one reason former military leader and current National Assembly Diosdado Cabello—a Chavez loyalist--did not dispute Maduro’s succession is precisely because of the precarious financial and political situation he would have inherited.”