A year from now, will oil markets be buzzing about investment prospects brightening in Venezuela but worsening in Russia?
And will that turnabout in popular perception represent another contribution to the tightening global oil supply-demand balance?
Venezuela: improving oil investment?
The situation in Venezuela remains fluid in the run-up to the Aug. 15 referendum on the recall of President Hugo Chávez. Polls in Venezuela show, alternatively, depending on the poll, victory or narrow defeat for the anti-Chavistas. But, as New York-based Merrill Lynch analyst Pablo Goldberg noted in a recent research note, the trend of late has been definitely in Chávez's favor. And the opposition has not closed ranks around a leader who could be a serious challenge to the Venezuelan firebrand. But even while there is a strong chance Chávez could be recalled, there also is reason to believe he ultimately would prevail. The former coup leader probably would win a general election, notes Goldberg, as polls show him defeating any prospective opposition candidate. And there is every reason to expect a recalled Chávez to run again, while a surrogate consolidates his grip on the armed forces and Supreme Court and deepens his prestige with the poor by spreading around more Petroleos de Venezuela SA cash on local programs and projects.
But with more PDVSA petrodollars funneled into such people-pleasing efforts, less of the state oil company's capital expenditure is available for reinvestment in exploration and production projects. Merrill Lynch estimated that PDVSA will produce this year 400,000 b/d of oil less than in 2002. The state firm needs to invest $2.5-3 billion just to maintain production capacity this year, up from $2 billion spent in 2003. Its plans to hike production capacity to 5 million b/d by 2007 calls for $37 billion in capex, $10 billion of that from the private sector.
"As a result, the participation of the private sector in the oil industry is likely to grow significantly in the years to come," Goldberg said. However, he notes that the government might boost royalties for new Orinoco integrated heavy oil projects.
Given the long lead times for the Orinoco megaprojects and the need to jump output soon, that points to support for more foreign oil and gas companies participating in Venezuela's conventional E&P sector once Chávez has firmly reentrenched himself. With PDVSA brought to heel and his grip on domestic politics reaffirmed, Chávez might mellow enough to encourage another surge in foreign investment in Venezuelan E&P the next 2 years. But how bearish is this news for oil markets in the end? Not very. There are suggestions that Venezuela will be assigned a lower quota at the September meeting of the Organization of Petroleum Exporting Countries, reflecting its poststrike struggles to achieve its quota. The likelihood is that Venezuelan E&P foreign investment prospects will improve in order just to maintain capacity as a reelected Chávez uses PDVSA for his political cash cow.
Russia's fall from grace
In less than a year, Russia has fallen from grace in its much-touted role as the ideal alternative to Middle East oil or OPEC, with its oil sector prospects the victim of heavy-handed presidential politics.
After 5 years of an impressive turnaround in Russian oil production, with its surging output helping to keep oil prices from soaring even higher, "recent Russian moves are now at risk of stoking the fire of higher oil prices," warns J. Marshall Adkins, analyst with St. Petersburg, Fla.-based Raymond James & Associates Inc., in an Aug. 2 research note. In predicting earlier this year a slowdown in Russian production growth during the next 3-5 years, the analyst cited a lack of investment targeting reserve growth, pipeline bottlenecks, and political fears and higher taxes.
"All three of these factors are as valid as before, but in the past month, we have seen most dramatically whyURussia's worsening political and legal climateUmay now be the single biggest drag on the country's oil sector," Adkins said. "The [OAO] Yukos crisis suggests that as the rule of law and property rights in Russia are weakened, foreign investment—and, consequently, oil output—are likely to suffer."
Adkins cites new export duties kicking in this month, an increase in the resource extraction tax taking effort in January, and new legislation being drafted to limit foreign firms' access to oil and gas resources. Russia has been the biggest threat to OPEC market dominance in recent years. With that threat fading, OPEC's ability to pursue higher oil prices later—after the current round of crises subsides—is strengthened. What a difference a year will make.
(Online Aug. 2, 2004; author's e-mail: [email protected])
