(EnergyAsia, March 11 2013, Monday) — The following is an edited version of a comment by Boston, US-based consultant Energy Security Analysis Inc (ESAI).
“Although there were rumours that Venezuelan President Hugo Chavez died on December 30, his death was officially announced on March 5, triggering a 30-day countdown to the election of a new President. Before his death, Chavez anointed Vice President Nicolas Maduro as his preferred successor, and many Venezuela watchers believe he will be elected purely on the strength of the Chavez endorsement. Opposition candidate Henrique Capriles is likely to make the election more of a race between candidates than an administered succession, but we have no reason to believe Maduro will lose.
For the oil sector, this transition to a post-Chavez Venezuela is an important inflection point.
Since his crushing of the end-2002 oil workers’ strike and the subsequent dismantling of the old PdVSA, the oil sector has struggled with inexperienced replacement workers and the burden of funding Chavez’ wide ranging populist initiatives. Stories of crumbling facilities and underused refining capacity were highlighted again following the recent explosion at the giant Amuay refinery.
Meanwhile, Chavez’s changes to the Venezuelan constitution secured his tenure in office and implied legal cover to unilaterally change the fiscal terms governing the association agreements that brought foreign investment and expertise to the Orinoco under the previous administration’s “oil opening.”
It is striking, but perhaps not surprising, that despite historically high oil prices, Venezuela’s crude oil production has never returned to pre-strike levels.
After years of speculating about a post-Chavez Venezuela, the day has finally come and with it countless questions regarding likely oil policy under an expected Maduro Administration. In thinking about the future, the path of least resistance is the continuation of oil sector mismanagement and the attendant hazards for the Venezuelan economy.
President Chavez, however, was an unusual leader whose charisma and confidence stirred millions of impoverished Venezuelans, keeping political opposition at bay despite a crumbling economy. It’s not clear a President Maduro has the personality or political savvy to do the same.
As a result, with greater risk of political or social instability, Mr Maduro may have to chart a more pragmatic course for the economy, which may, by necessity, include the rehabilitation of the oil sector. But, that will take capital.
Venezuela’s Chinese, Russian and Iranian patrons may not have the appetite to lend more. The Obama Administration has opened the door to normalised relations by asking for a “more constructive relationship.”
Mr Maduro however, was a vocal critic of the US while foreign minister, so reconciliation with Washington DC is unlikely in the short term.
For now, it looks as if a President Maduro will likely play the Chavez trump card as long as he can. This approach may eventually fail and strengthen the hand of the opposition, especially if the economy continues to deteriorate.
As a result, Maduro may take more deliberate steps to mend the economy, including changes in the oil sector. Steps by Rafael Ramirez, the President of PdVSA, to improve terms with foreign oil companies, such as Chevron, may be indicative of small steps that can be taken to stem production decline. Alternatively, a period of political instability might result in further damage to the oil sector and the economy.
In the long run, however, the death of Hugo Chavez represents a change in the status quo that has set Venezuela on an admittedly long path to a new oil policy and, perhaps one day, higher oil production.
Founded in 1984, Energy Security Analysis, Inc (ESAI), is a global energy consulting company that provides market research and strategic advisory services.