If Chavez Dies, What Next for U.S. - Venezuelan Energy Relations?

Despite contradictory information from Caracas, one thing is clear - Venezuelan President Hugo Chavez, the country's chief executive since 1998, is a very sick man.

Having won reelection in October to a fourth term, many Venezuelans are now wondering if President Chavez will serve out his six years, or even if he will be well enough to attend his inauguration next month. The implications of President Chavez's illness are enormous, not only for Venezuela, but the world, and particularly the U.S., which despite chilly relations, nevertheless remains highly dependent on imports of Venezuelan crude.

According to the U.S. Energy Administration, of the United States total crude oil imports of 9.033 million barrels per day, despite all the friction with Caracas, Venezuela remains in fourth place at 930,000 bpd.

During last month's contested U.S. presidential election, Mitt Romney in particular made it a keynote of his policy to bolster U.S. energy independence by deepening relationships with Mexico and Canada along with opening up offshore and federal lands to drilling.

Both candidates overlooked however the importance of Venezuela in the global energy picture. Venezuela has the largest conventional oil reserves and the second-largest natural gas reserves in the Western Hemisphere. Two years ago OPEC stated that of the organization's 81.33 percent of the globe's known oil reserves Venezuela had 24.8 percent, exceeding Saudi Arabia with 22.2 percent.

Which means that everyone from Washington to Beijing is scrutinizing what is happening in Venezuela with the President's health, and whether one is an optimist or pessimist.

The facts are that President Chavez hasn't spoken publicly since his 11 December surgery in Havana for an undisclosed type of pelvic cancer, his fourth cancer-related operation since June 2011. Foreign oncologists are largely in agreement that President Chavez's disease seems to be a virulent and malignant illness, and on 18 December Venezuelan Information Minister Ernesto Villegas read a government statement on television acknowledging that President Chavez suffered a post-operative respiratory infection but, "It has been controlled. In the opinion of the doctors, this type of ailment is one of the consequences that appear with the greatest frequency in patients who have undergone complicated surgeries."

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Accordingly, all eyes are on the upcoming Venezuelan presidential inauguration scheduled for 10 January 2013.

But, in his 13 years as President, how deeply rooted are President Chavez's "Bolivarian Revolution" reforms? An indication occurred on 16 December, when in local elections allies of President Chavez won 20 of 23 states in gubernatorial elections.

Chavez himself seems to feel the winds of mortality swirling around him as on 8 December, before his departure for Havana he told his followers to support Vice President Nicolas Maduro as his successor, calling on Venezuelans to elect Maduro to take over his duties if illness incapacitated him.

So, if illness does sideline President Chavez, what might happen?

First, given the enormity of the nation's energy reserves, it is most unlikely that foreign countries, starting with the U.S. will sit on their hands, but instead begin to manoeuvre behind the scenes to find and promote a pliable candidate and administration willing to work with them. As Maduro is largely unknown, in the event of Chavez being incapacitated, it is likely that he will come under enormous foreign pressure, little of which is likely to be made public.

Washington's wish list would include two primary elements - an end to Venezuelan radical rhetoric and ties to such states as Cuba and Iran, and increased U.S. access to those oil reserves. In May 2011 the U.S. imposed sanctions on Venezuela's state oil company Petroleos de Venezuela, S.A. (PVDSA), and the country's fiscal crown jewel. President Chavez has used PVDSA as a cash cow for his social reform plans - between 2004 and 2010 PDVSA contributed $61.4 billion to social development funds. According to PDVSA figures, Venezuela currently has 77.5 billion barrels of oil reserves, the largest in the Western Hemisphere. PDVSA has a production capacity, including its strategic associations and operating agreements, of 4 million barrels per day, the highest production capacity in the Western Hemisphere.

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But it is President Chavez's nationalist approach to the country's energy assets that is likely to be the first target of foreign governments in a post-Chavez Venezuela. In February 2007 President Chavez announced a new decree to nationalize the last remaining oil production sites that were under foreign majority company control, to take effect on 1 May, allowing the foreign companies to negotiate the nationalization terms. Under the new regulations, the earlier joint ventures, involving ExxonMobil, ChevronTexaco, Statoil, ConocoPhillips and BP, were transformed to give PDVSA a minimum 60 percent stake. The process completed a government initiative begun in 2005, when the Chavez administration transformed earlier "operating agreements" in Venezuela's older oil fields into joint ventures with a wide variety of foreign companies. Thirty out of 32 such operating agreements were transformed, with only two being challenged in court. Most foreign companies accepted the new arrangements, including Chevron, Statoil, Total and BP, but America's ExxonMobil and ConocoPhillips refused. It therefore seems likely that a new Maduro administration would hear about compensation issues during any first meeting with the U.S. ambassador.

Given relative inefficiency and capital starved nature of PDVSA for major expansion projects, calls to loosen up the country's energy sector may be hard for Maduro to resist.

But Washington won't necessarily have any reshuffling of the Venezuelan energy sector to itself. Last year China agreed to provide more than $32 billion in assistance to Chavez's government, with the loans to be repaid in oil, in increasing amounts during the next decade. Venezuela is now exporting to China about 460,000 barrels a day, about 20 percent of its oil exports, according to official figures.

But whatever the future, President Chavez's place in Venezuelan and Latin American history is secure. After Fidel Castro, President Chavez led the Latin American charge to extricate itself from American hegemony, a process facilitated after 9-11 by Washington's obsession with global terrorism and its focus on the Middle East and Central Asia. And it is this accomplishment, perhaps more than any other, that may ultimately prove to be his greatest legacy.

But in Chavez's absence or death, will Maduro have the strength to carry on all of Chavez's policies without alteration? Only time will tell, but if President Chavez is unable to carry out his mandate, then one can expect to see outside forces frantically maneuvering behind the scenes to gain access to the Western hemisphere's largest energy assets.

By. John C.K. Daly of Oilprice.com