Bottom Line: Amid two major oil deals, Venezuela is lurching towards political chaos with the state oil company’s debts rivaling those of the federal government and socio-economic and political unrest threatening to spiral out of control.
Analysis: Within the last two weeks, two major foreign investors signed multi-billion dollar deals with Venezuela. On 27 May, Chevron agreed to pony up $2 billion to increase production under joint management in the Boscan field off the coast of Zulia state. China National Petroleum Corp. (CNPC) is finalizing an agreement to loan Venezuela $4 billion to purchase the necessary equipment to sustain and expand oil production under the flag of bi-national Sinovensa in the Orinoco Belt. Yet political unrest and economic pressures are mounting. State oil company Pdvsa’s debt rivals that of Venezuela’s federal government.
Shortages of many staples are causing the government to clamp down even harder; on 5 June they announced a pilot program to prevent shoppers from buying more than a fixed number of certain key goods using microchips, even if they go to more than one store. Meanwhile, annual inflation is now over 25%, and most economic forecasters think Caracas is headed for a recession. As people become more desperate, newly elected President Nicolas Maduro’s position becomes more precarious.
Cracks have started appearing among the chavistas; a recent audio recording detailed alleged machinations by President of the National Congress Diosdado Cabello to manipulate the military against Maduro, and possibly even orchestrate a coup d’etat. Whether the money, the military or the masses in the street are his undoing, it seems likely that Maduro will face challenges to his power beyond opposition rival Henrique Capriles. That political chaos is likely to be accompanied by massive insecurity, including looting, road blocks and violence.
Recommendation: Though their historic relationships with the Venezuelan bureaucracy and years of experience working in a high-risk environment may partially insulate Chevron and CNPC’s off-shore operations, any investor who is not already deeply entrenched in Venezuela should avoid starting new projects there.