Francisco Monaldi: The energy repercussions
of the Venezuelan presidential elections
The controversial re-election of President Nicolas Maduro places the Latin American country at a crossroads, as it suffers the worst economic and social crisis in its history. On one hand, the macroeconomic stabilization and debt restructuring programme with international support, on the other, the on-going reduction in oil production, the international credit squeeze and the perspective of US sanctions
On Sunday, May 20 th , 2018, Venezuela's president Nicolas Maduro was “reelected” by a landslide in an electoral process with the highest abstention rate in the country's history. The result was a forgone conclusion. The opposition candidates with the largest support were banned from running or imprisoned. The coalition of the main opposition parties, the Democratic Unity Roundtable, boycotted the election after failed negotiations, in which the government was unwilling to provide even the minimal guarantees for free and fair elections. As a result, most countries in the Western Hemisphere and Europe declared the elections illegitimate, even before they occurred. Still, Henri Falcon, a former governor, dissident from the government, decided to run and was supported by a few opposition leaders and a couple of small parties. In the end, opposition voters massively abstained. The official results were: Maduro 68%, Falcon 21%. The official abstention rate was 52%, up from an average of 21% in the last three presidential elections. Still, according to Reuters and other news outlets, both exit poll estimates and internal sources from the electoral council reported higher abstention rates, ranging from 58% to 68%. Falcon did not recognize the results and reported massive irregularities. Before the election, polls showed Maduro with an approval rating of around 20% and losing by double digit margins to Falcon, although among those “sure to vote” the margins were slim. The official results defy credibility. The electoral route, towards a peaceful transition to democracy, seems to have been closed for now.
An early move that played into Maduro's hands
The presidential elections, generally held in December, were rushed in an attempt to “re-legitimize” Maduro before the economic and political instability got even worse. Venezuela is in hyperinflation, reaching 80% per-month according to the National Assembly, the highest inflation in the world. The IMF estimates that per-capita GDP would fall by almost half in 2014-2018, the worst economic depression in the recorded history of Latin America. The economic collapse has resulted in a humanitarian crisis and massive emigration to neighboring countries, which threatens to destabilize the region.
After the elections, the U.S. government announced a tightening of the financial sanctions it had implemented last year and said that further sanctions, including targeted at the oil industry, are on the table. Other Western democracies in Europe and the Americas have also announced they are considering imposing sanctions. Despite the widespread condemnation of the electoral process, key authoritarian allies of the Venezuelan regime, including, Cuba, China, and Russia, recognized Maduro as reelected president for the next six years.
The collapse of the Venezuelan oil industry
The Venezuelan oil industry has been in free fall for the last few years. When president Maduro was first elected in 2013, oil production was at 2.7 million barrels per day (mbd), current production is close to half that level, at 1.4 mbd. Most of that decline has occurred in the last two years. Production operated by PDVSA, the national oil company, has been falling rapidly and it is currently estimated at 650 thousand barrels per day (tbd). Production operated by the joint-ventures with foreign partners, has been also falling, but less sharply, to about 750 tbd. About 800 tbd of total production is of extra-heavy oil and the country is importing close to 125 tbd of diluents to blend and re-export the diluted extra-heavy oil. Because of the production collapse, Venezuela is over-complying with the OPEC cuts, by over 600%. In addition, less than half of PDVSA's total production (about 650 tbd) generates cash flow. Around 350-400 tbd are consumed in the subsidized domestic market at a massive loss; more than 350 tbd are committed to repay debts with Russia, China, and other creditors; and around 50 tbd are sold subsidized to Cuba. The cash flow collapse has resulted in an investment collapse, generating a death spiral. Oil rigs in operation have collapsed to 35, less than half the level on 2014-2016, and rig productivity is about a third of what it used to be.
PDVSA pays a high price for the international controversies
The bad news does not end there. Venezuela and PDVSA entered selective default in some bonds in late 2017. Full blown default is likely in 2018. Recently, ConocoPhillips was awarded a $2 billion compensation from PDVSA, for the 2007 expropriation of their assets in Venezuela, by an arbitration tribunal of the International Chamber of Commerce. They quickly moved to get injunctions to seize PDVSA's assets and cargoes in the Dutch Caribbean islands. As a result, about 20% of Venezuelan exports have been hindered. In addition, the U.S. financial sanctions have been increasingly undermining PDVSA's operations and financing, severely limiting the company's capacity to restructure or refinance its debt.
Two divergent paths
The regime and the Venezuelan oil industry face two dramatically divergent paths. The first one requires a macroeconomic stabilization program with debt restructuring and the support of the IMF and the international community. It also requires massive foreign investment in the oil industry. That path would be unthinkable without cooperation with the U.S. and other Western countries, lifting the sanctions in exchange for some significant steps towards reestablishing constitutional democracy. Without such a plan it appears close to impossible to stop hyperinflation, restart growth, and recover oil production. Of course, there are no signs that the regime will be willing to negotiate such a deal, which would weaken their grip on power. The alternative path is one in which oil production continues to decline; Venezuelan creditors corner the country, trying to seize assets, cargoes and revenue flows; Western companies have a declining role in the oil sector; Russia and China increasingly manage Venezuela's oil exports and reluctantly become the largest operators in the declining oil industry; the country becomes highly politically isolated; and the massive exodus of emigrants to the region continues.
A dark future looms
There does not seem to be too much space for a middle ground. Perhaps a large increase in the price of oil could make the second scenario less dramatic. Even a transition within the regime, which could be seen favorably by some of its key allies, would require moving towards the first path, if it does not want to end up back in the second. The question then is: could the second path be politically sustainable? It seems implausible, but it cannot be discarded. The electoral route was closed, military conspiracies against the regime have been forcefully squashed during the last few months, and international pressures seem to have had limited effect on the regime. Thus, the future of Venezuela and its oil industry look grim, for now.
Francisco J. Monaldi is Fellow in Latin America Energy Policy at Rice University's Baker Institute for Public Policy in Houston, Nonresident Fellow at Columbia University's Center on Global Energy Policy in New York, and the Founding Director of the Center on Energy and the Environment at IESA in Caracas. Petroleumworld does not necessarily share these views.
Editor's Note: This commentary was originally published by About Energy 05/21/2018. Petroleumworld reprint this article in the interest of our readers and does not necessarily reflect the opinion of Petroleumworld and its owners.
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