Outlook uncertain following Chavez’s death in Venezuela

The outlook remained uncertain both inside and outside Venezuela following President Hugo Chavez’s death from cancer on Mar. 5. Venezuelan government offices worldwide closed Mar. 6-8 as the South American oil-producing country began a national mourning period. Current and former US leaders expressed hope that elections for a permanent successor to Chavez would be held soon.

“At this challenging time of President Hugo Chavez’s passing, the United States reaffirms its support for the Venezuelan people and its interest in developing a constructive relationship with the Venezuelan government,” US President Barack Obama said on Mar. 5.

“As Venezuela begins a new chapter in its history, the United States remains committed to policies that promote democratic principles, the rule of law, and respect for human rights,” Obama continued in an official statement.

Policy prospects

Some observers said that Vice-President Nicolas Maduro, who officially announced Chavez’s death on Mar. 5 and became acting president until elections are held, will likely continue Chavez’s policies, including selling some of the country’s crude oil to some neighboring countries at below-market prices.

“Toward Latin America, Chavez embarked on a generous ‘oil diplomacy’ strategy, selling millions of heavily subsidized barrels to energy-poor Cuba, an important ally; and to Argentina and Bolivia,” said Daniel Greenberg, a history professor at Pace University in New York and founder of its Institute of Latin American Service and Studies.

In 2002, Chavez also installed new leaders at state oil firm Petroleos de Venezuela SA after firing 18,000 employees who walked off the job to protest his program of using oil revenue to finance social reforms. Venezuela remains the fourth-largest foreign supplier of crude oil and products to the US, but has been losing its market share ever since, the US Energy Information Administration said.

“As a strong nationalist, Chavez had attacked ‘US Imperialism’ and nationalized the holdings of US-based oil giants like Exxon,” said Greenberg. “But he was smart enough never to cut trade with Washington, Venezuela's most important trading partner. And with the rich profits from the oil trade, Chavez carried out ambitious projects to build what he called ‘20th-Century Socialism’.”

Alex Choinski, a project finance and energy lawyer specializing in Latin America in McDermott Will & Emery LLP’s Washington office, said it will take time to determine whether the Chauvismo party will splinter or become pragmatic and soften its nationalistic approach on the economy, foreign investment, oil, and infrastructure.

PDVSA’s deterioration

PDVSA’s internal and managerial capabilities have deteriorated since 2002, according to Sarah A. Ladislaw, co-director of the Center for Strategic and International Studies’ Energy and National Security Program, and CSIS Senior Vice-Pres. Frank A. Verrastro, who holds the James R. Schlesinger Chair for Energy and Geopolitics there.

“Increasingly, PDVSA relies on contractors, as well as other private company partners, to keep the fields in production but reports state that contractors have not been paid in months and that the political uncertainty in the country has even driven routine decision making to a halt,” they said in a Mar. 6 commentary.

Sustained political uncertainty also has stifled outside investment in Venezuela’s oil sector, Ladislaw and Verrastro noted. Russian and Indian companies planning to invest in the country’s oil fields have withheld incremental new money, and China has not announced a new line of credit or extensions on its development-linked financing since last April, they said.

In Venezuela, Oil and Mining Minister and PDVSA Pres. Rafael Ramirez said on Mar. 1 that PDVSA plans to increase its expenditures to $25 billion in 2013. Cooperation between PDVSA and Russia’s Rosneft consortium also has been growing, Ramirez said on Jan. 31.

“Even under the best of circumstances, reform in the energy sector will take a long time to emerge,” Ladislaw and Verrastro said. “The damage that has been done to not only PDVSA but to the institutions of the state and civil society could take years to rehabilitate.”

Contact Nick Snow at nicks@pennwell.com.

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