Lower crude oil prices make it essential for Venezuela, Nigeria, and other producing countries to institute major reforms, two speakers agreed on June 2. But reduced revenue from plunging crude production also makes it harder to eliminate subsidies and to reduce social programs that citizens have come to expect, they said during a discussion at the Center for Strategic & International Studies.
“The first rule is to not do harm,” said Amos Hochstein, special envoy for international energy affairs at the US Department of State. “Nigeria’s previous petroleum minister was corrupt, and it’s good that he’s gone. We’ve had good discussions with his successor about making changes. But nobody would want the challenge he faces of Niger Delta terrorism that’s shutting down hundreds of thousands of barrels of daily production. He’s trying to do a good job.”
Ali Moshiri, president of Chevron Corp.’s Africa and Latin America exploration and production division, said, “He needs to address security issues, which have been problems for the last 20 years. The new petroleum minister needs to be willing to address this. If you look at what militants are doing, it’s actually more destructive to their own country’s government than to the multinational oil companies.”
Venezuela is in a class of its own, the speakers observed. “When Hugo Chavez came to power, [Venezuela] had 3 million b/d of production. Now, it’s below 2.5 million b/d. It did this on its own, even when prices were $100/bbl,” Hochstein said.
Moshiri said national oil company Petroleos de Venezuela SA (PDVSA) “has been abused with a limited budget, limited growth, and limited training.” He said, “The oil industry is capital-intensive. The government ordering increased production because of lower prices isn’t going to happen. It needs more foreign investment to get production where it was before.
Nigeria’s security challenge
“Nigeria is more complicated,” Moshiri said. “Security issues are driving investors out. The militants there have been quite busy in the last month or so. The government needs to show it can move in and protect investments. That’s not certain. In the last 8 years, not a single project has been developed there. If the government does not watch this and maintain security, production will decline more sharply than before.”
Hochstein said, “The government’s role, especially in the new structure that’s been put in place, is to increase confidence by oil companies and financial sources. I think the latest attacks in the Niger River Delta are a good wake-up call for the US and its allies to begin addressing problems there.”
Moshiri noted, “You need to look at it from two points of view. One is production, which I don’t think either country is going to turn around quickly. The other is how the government can sustain itself with lower revenue. I think Venezuela’s recovery could be fast. It could get back to 3.4 million b/d of production relatively easily. If changes happen and investments return, the resources are there and relatively easier to produce than Nigeria’s, which has swamps and offshore.”
Hochstein also said he considers it significant that global oil markets hardly reacted when the combination of terrorist attacks in Nigeria and fires in Canada’s heavy crude production effectively took more than 1 million b/d of production offline. “The idea that this is just another price swing isn’t necessarily so. The technological innovations happened faster than ever before,” he said.
“Tight oil is more flexible than conventional onshore and deep offshore production,” Hochstein said. “It’s faster to come off or come on. And it’s easier to manage as a private-led swing producer in the market than a cartel of producing nations. At some point, it will kick-start more US production.”
Risk of social strife
It’s also significant that the US has become the world’s swing producer driven by markets instead of Saudi Arabia and other members of the Organization of Petroleum Exporting Countries, Hochstein said. “It’s important to look at how government actions took potential resources off the table. A lot of this has to do with what countries did with their revenue when prices were high. The question now for many producing countries is how to manage this low-price period without social strife,” he said.
More countries will need to change their investment climates to attract more foreign capital, which has worked well in Argentina, the two speakers agreed. Chevron was one of the first companies to invest there following a recent change of government, “and it has worked out well,” Moshiri said. “We took our North American experience there and went through a learning curve there more quickly because we could avoid mistakes. At the same time, the government has provided incentives to produce more because it’s taking our production and using it domestically while giving us a higher price. It’s doing a great job in encouraging investments and technology.”
Hochstein said, “We need to consider consuming countries, too. I think that when prices are where they are today, it’s an opportunity for governments to diversify their energy mixes and suppliers. Some countries in Latin America like Jamaica are looking at their energy sources. Mexico is sticking with its reforms, and is continuing with bid rounds to attract investments in the deeper offshore.
“My main concern is that a producing country has stability and a plan in case prices don’t go back up,” he said. “What’s a problem for producers could be an opportunity for consumers. Lower prices not only provide a good opportunity to reduce subsidies, but also make it necessary. The problem is going to the people and saying subsidies are being cut but services aren’t being increased.”
More support for alternative and renewable energy also will be crucial, the DOS official said. “The reason the US is an energy superpower is not simply because of its oil and gas, but because we check all the boxes,” he said. “Washington is a city where we still talk about renewable energy as politics. It’s not. It’s an investment that’s cost-effective, creates jobs, and supports diversification. It’s a business issue…. If you want to support real energy diversification, the determinant will be how much renewable energy is in there.”
Contact Nick Snow at [email protected].
