Oil Deals Savings Would Come At Financial And Diplomatic Cost

BMI View: During a campaign stop, opposition candidate Henrique Capriles pledged to scrap preferential oil deals signed by President Hugo Chávez if he prevails in the October 7 2012 presidential election. Although reneging on international agreements would help Caracas make substantial savings, the move would likely alienate Latin American and Asian allies (particularly China), thus having a negative impact on the country's diplomatic pull and halting foreign direct investment from traditional partners. Western companies would likely welcome this decision as it would offer them the opportunity to grow their influence and presence in Venezuela.

Opposition candidate Henrique Capriles has pledged to effectively scrap preferential oil deals signed by President Hugo Chávez if he prevails in the October 7 2012 Venezuelan presidential election. Since winning the February 2012 primaries to become the candidate for the Democratic Unity Roundtable (MUD), a coalition of parties formed in January 2008 to unify the Venezuelan opposition, Capriles has become Chávez's main electoral rival. During a campaign stop only a few kilometres away from the Puerto de la Cruz Refinery on August 1 2012, Capriles said: 'To have a friend, you don't need to buy him', before adding 'From 2013, not a single free barrel of oil will leave to other countries'.

Partners To Lose Out As Savings Are Made

Notwithstanding health issues that could stand in the way of Chávez's candidacy, BMI expects the incumbent to win the presidential election. However, if Capriles were to win, scrapping preferential oil deals would affect not only Venezuela's oil industry but also the industries in many other countries. In Latin America, the move would have a significant impact on countries such as Argentina, Uruguay and the 17 members of the Petrocaribe alliance. Under the alliance, launched in 2005, members can purchase oil from Venezuela on condition of preferential payment. Buyers only need to pay for a limited amount of the market value of their purchase up front, with the remainder financed via a 25-year loan with a 1% interest rate. Up to 185,000 barrels a day (b/d) can be purchased under these terms. The alliance also allows member nations to pay Venezuela with other products such as bananas, rice and sugar.

Beyond Latin America, scrapping these deals would also have a significant impact on Venezuela's main international allies, such as Belarus and China. Through a series of bilateral deals, Beijing has agreed to lend a total of US$36bn to Venezuela, the bulk of which is to be paid through an oil-for-loans scheme. Thus, under the terms of a US$20bn credit facility, agreed with the China Development Bank (CDC) in April 2010, Caracas has already agreed to hike exports to China to 700,000b/d by 2015. This would already be a considerable increase on current trade levels which, according to state-owned PdVSA, stand at 430,000b/d (although Chinese customs data show an average of just 322,000b/d of crude and fuel oil was imported from Venezuela during 2011), although the government has even more ambitious targets, aiming to export 1mn b/d to China by the mid-2010s. With BMI forecasting exports of 1.86mn b/d in 2015, this would imply that Beijing would account for 40%-54% of all Venezuelan exports.

Rapid Growth Expected
Venezuelan Oil Production, Consumption And Exports

In spite of frustrating the nation's international partners, such a move would generate much-needed savings for the country. In 2011, 43% of PdVSA's crude and oil products were not paid for directly, up from 36.5% and 32% respectively in 2009. According to Capriles, scrapping these deals would save the country US$6.7bn annually, although these numbers are likely to have been inflated substantially for electoral purposes.

This article is tagged to:
Sector: Oil & Gas
Geography: Venezuela

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