Reform Efforts Likely Too Little, Too Late

BMI View: While the government has recently announced a number of reforms in the wake of Venezuela's December 8 municipal elections, we continue to maintain a cautious view on the outlook for the Latin American country's hydrocarbon sector. Indeed, while these measures may have some benefit, without more substantial, structural changes the country will continue to produce well below its potential.

We have long held a cautious stance on both the Venezuelan oil and gas sector as well as the financial position of state-owned firm Petróleos de Venezuela (PdVSA), noting that chronic underinvestment and misappropriation of funds have weighed heavily on the company's upstream and downstream segments. While the government has recently announced a number of reforms, following the strong showing by the ruling Partido Socialista Unido de Venezuela (PSUV) in the December 8th municipal elections, for now we remain unconvinced these will be sufficient to put the sector on the right track.

Sicad No Long-Term Solution

Ruling Party Rules Elections
Venezuela - Preliminary Election Results, Popular Vote, %

BMI View: While the government has recently announced a number of reforms in the wake of Venezuela's December 8 municipal elections, we continue to maintain a cautious view on the outlook for the Latin American country's hydrocarbon sector. Indeed, while these measures may have some benefit, without more substantial, structural changes the country will continue to produce well below its potential.

We have long held a cautious stance on both the Venezuelan oil and gas sector as well as the financial position of state-owned firm Petróleos de Venezuela (PdVSA), noting that chronic underinvestment and misappropriation of funds have weighed heavily on the company's upstream and downstream segments. While the government has recently announced a number of reforms, following the strong showing by the ruling Partido Socialista Unido de Venezuela (PSUV) in the December 8th municipal elections, for now we remain unconvinced these will be sufficient to put the sector on the right track.

Ruling Party Rules Elections
Venezuela - Preliminary Election Results, Popular Vote, %

Sicad No Long-Term Solution

First, the Venezuelan government has recently announced plans to revamp its currency controls, allowing the oil and gas sector to use the Sicad system - the secondary foreign exchange - for future investments into the country. While not officially disclosed, private sector reports suggest that the Sicad rate is currently around 12 bolivars to the dollar - nearly half the current official rate of VEF6.3/US$.

Oil Minister Rafael Ramirez has billed the move, in part, as an attempt to incentivise investment into the oil and gas sector, noting that it will make it easier for those "sectors that want to bring dollars into the country to increase production." We see this broadly positive for the sector, noting that it will, in effect, act to double oil firms investment in the economy and help to reduce the impact of the highly overvalued exchange rate.

However we remain uncertain of the extent to which this will act to drive a substantial increase in investment given an uncertain policymaking environment. Indeed, while the country has the largest level of unproven oil reserves in the world, moves such as a June announcement that any foreign company that misses it production targets will not be able to repatriate dividend payments as well as the seizure of Superior Energy Services rigs, are likely to keep foreign firms cautious.

Low Priced Gas To Keep Costing PdVSA?

Second, although hints of an impending gasoline price hike could have a significant positive impact on state-owned PdVSA's finances, at this stage we are sceptical that a truly significant price rise is on the cards.

Low Prices, High Demand
Venezuela - Gasoline Prices & Consumption, January 2013

PdVSA, has long faced a massive fuel subsidy burden, with Venezuelan gasoline prices at just US$0.06/gallon at the time of writing. According to the last available data for the EIA, this roughly equates to a subsidation rate of over 80% - the highest in the world. Moreover, we note that the substantial fuel subsidies have not only acted as a heavy financial burden in and of itself, costing the government nearly US$30bn in 2011, but have led to a ramping up of domestic demand and encouraged rampant theft from across the border. Indeed, combined with chronic underinvestment in the downstream segment ( see 'Downbeat Outlook On the Downstream Segment', October 10) this has not only contributed to a sharp decline in total refined product exports, but may have seen the country flip from net exporter to net importer of gasoline in 2012 according to Reuters (something the government denies).

While the PSUV's victory in the recent local elections may have given President Nicolás Maduro the political cover to enact some reforms, we note that any truly substantial fuel prices hikes will still face considerable local opposition( see 'Elections Not Likely To Alter Long-Term Decline', December 9). Indeed, the subsidies in place have remained untouched for more than two decades since prices increases in 1989 prompted massive, violent demonstrations. Given the enormous differential between international and domestic gas prices, and our expectations for considerable domestic opposition to price hikes, we believe that while it is an overall positive sign that the government has begun a discussion on the fuel subsidies, the actual positive impact on PdVSA's finances is likely to be somewhat limited.

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Sector: Oil & Gas
Geography: Venezuela
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