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Venezuela's PDVSA to keep funding socialist programs under Maduro

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(Globalpost/GlobalPost)

By Daniel Wallis

CARACAS (Reuters) - Nicolas Maduro's win in Venezuela's presidential election means state oil company PDVSA will continue funding the government's socialist policies while increasingly relying on deals with China and Russia.

The late Hugo Chavez picked Maduro, a 50-year-old former bus driver, to continue his self-declared revolution in the OPEC country where he nationalized most of the oil industry during his polarizing 14-year rule.

That put Venezuela's crude reserves, the world's biggest, at the service of Chavez's power base among the poor majority. Maduro, who narrowly won the presidential election on Sunday with 50.7 percent of votes, now takes office on a pledge to push forward his late boss's plan.

His opposition rival, Henrique Capriles, refused to recognize the result and demanded a recount, although the National Electoral Council said Maduro's victory was "irreversible".

Maduro can be expected to increase oil sales to political allies, especially China, at the expense of the United States, the traditional top buyer of Venezuelan crude, while taking on more debt from those partners.

Chavez turned PDVSA into the financial motor of his self-styled revolution, funding everything from sports and cultural events to free health clinics and home-building programs.

Critics say that stopped the company from focusing on its main priorities, leading to the neglect of older oil fields and new projects alike, and fomenting a culture in which technocrats were replaced by political appointees.

Chavez sharply increased fuel sales to China amid years of ideological tensions with the United States, turning Beijing into his government's biggest single source of foreign funding.

Venezuela now sends China about 430,000 barrels per day (bpd) of crude and products, up from just a few thousand bpd in 2005, in repayment for loans totalling $36 billion (23 billion pounds).

And the biggest Chinese energy company, China National Petroleum Corp (CNPC), is a key part of Venezuela's ambitious efforts to tap its vast Orinoco extra heavy crude belt, one of the planet's largest mostly-untapped hydrocarbon reserves.

Maduro's victory ensures the continuity of a string of projects in the Orinoco region with foreign partners that include U.S. major Chevron and Spain's Repsol - all drawn to the South American country in spite of Chavez's record of nationalizing oilfield operations in the past.

Early production began last month at one joint venture in the Orinoco between PDVSA and Italy's ENI, and the Venezuelan government expects output to begin within weeks at other projects with Chevron and CNPC.

Another key Orinoco project began pumping last September, Petromiranda, where PDVSA is partnered with a consortium of Russian companies led by state energy giant Rosneft.

FOCUS ON ORINOCO PROJECTS

Russia has given high-level support to its energy companies' efforts in Venezuela. During a visit in 2010, then-Prime Minister Vladimir Putin handed Chavez a $600 million check as part of a signing fee for their participation in the Orinoco.

And Igor Sechin, powerful deputy prime minister and chief executive at Rosneft, Russia's top crude producer, has been a regular visitor to discuss oil deals and arms sales.

Just weeks before the late Venezuelan president won re-election last October, Sechin donned a Chavez T-shirt to pose with workers as Petromiranda produced its first barrels.

Venezuelan officials hope the Orinoco projects will eventually add 2 million bpd of new output via investments of more than $80 billion. But that will take years, with executives at some joint ventures saying work has often been delayed by lack of infrastructure and delays in payments from PDVSA.

Venezuela has consistently taken a "hawkish" stance on global oil prices and Energy Minister Rafael Ramirez, who is also the president of PDVSA, says the government will continue to push for a minimum $100 per barrel at the next OPEC meeting, which is due to be held on May 31 in Vienna.

Venezuela is likely to import more processed fuels because of recurrent problems in its refinery network. They were starkly illustrated by an explosion that killed more than 40 people at the Amuay refinery last August. It was one of the global industry's most deadly accidents in decades.

As he faces a raft of economic challenges from day one, Maduro could be tempted to look at cutting local fuel subsidies that have made Venezuela's gasoline the cheapest in the world.

Venezuelans who see cheap petrol as a birth-right enjoy gasoline prices of around $0.06 per gallon - meaning it costs less than $2 to fill up an average SUV. Chavez was loathe to increase it since it could have revived memories of deadly riots in 1989 that were partly triggered by a fuel price hike.

The International Energy Agency (IEA) forecast last month that whoever won the election would face a "Catch 22" situation.

Current policies of diverting oil revenue to costly social programs could not continue, it warned, without putting the industry and the whole economy at considerable risk.

"But neither can they be reversed without the risk of social unrest and political chaos," it said in a report.

PDVSA contributed almost $44 billion to social welfare programs last year. But despite high global oil prices, its profits slipped 6.1 percent to $4.2 billion - in part because it sold more fuel on the heavily subsidized domestic market.

Ramirez has told Reuters that Venezuela will maintain its oil industry tax and legal framework under Maduro, including an easing of the windfall tax system that was unveiled in January. That alone is unlikely to attract much new funding.

"More far-reaching changes will be needed to increase Venezuela's attractiveness as an investment destination," the IHS Energy consultancy said in a research note.

(Additional reporting by Marianna Parraga; Editing by Kieran Murray and Andrew Heavens)

http://www.globalpost.com/dispatch/news/thomson-reuters/130415/venezuelas-pdvsa-keep-funding-socialist-programs-under-maduro