Chavez's death opens door to Venezuela's oil riches

The Globe and Mail

Venezuela’s President Hugo Chavez has died at 58 after a nearly two-year bout with cancer. (Dmitry Astakhov/AP)

For years, the torrents of oil flowing from Venezuela’s giant energy reserves have dwindled. From a peak of 3.5 million barrels per day, the country’s output has fallen to less than 2.5 million.

Now, the death of Hugo Chavez offers the promise of domestic oil market changes that could roil the energy world and place substantial opportunities at the feet of Canadian oil companies whose expertise in heavy crude is directly applicable to Venezuela’s Orinoco oil fields. Venezuela, after all, boasts the world’s largest crude reserves. The country’s ability to exploit them has been constrained by a lack of investment in dwindling older fields and the regime’s hostile treatment of foreign capital.

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Observers caution that in the short term, the likelihood of substantial change is low, and even if policy shifts do come, they are unlikely to result in an energy transformation for many years.

For now, the most likely outcome is that “everything will remain the same in terms of policies,” said Jorge Neher, Venezuelan-born partner with law firm Norton Rose who specializes in South American natural resource extraction.

Yet the death of Mr. Chavez, the populist leader who tossed out international oil companies and proved a frequent irritant to the United States, may set in motion a series of long-term reforms that could slowly redraw the world’s energy map.

“There is going to be a point in time that, without the charismatic figure of Chavez in power, the Chavista movement is going to degrade – and at some point it’s going to lose,” Mr. Neher said.

That could portend important shifts for Canada, given the sheer size of Venezuela’s reserves and their similarity to the Alberta oil sands.

“The question for Canada, especially, is – is this the beginning of the end of Venezuela as an inefficient producer? And it probably is,” said Robert Johnston, the director of energy and natural resources at the Eurasia Group political risk firm.

“I don’t think we’ll see a big change in the next four or five years. If you look at the four or five years beyond that, things could get very interesting.”

A revival in Venezuela’s oil industry could draw investment dollars away from Canada, given the relatively low cost of producing heavy crude in the South American nation. A revival in production there could also pose new competitive threats to Canada as it seeks markets for its oil sands product.

“Longer-term, the risks are adding to the heavy oil glut in the Gulf Coast, or potentially in China,” Mr. Johnston said.

Many observers, however, believe Chavez’s ruling United Socialist Party of Venezuela will hold on to power in coming elections, and “political status quo means status quo for the oil industry,” Katherine Spector, commodity strategist at the Canadian Imperial Bank of Commerce in New York, wrote in a January research note.

The greater uncertainty lies in the impact of a political transition – either to opposition rule or to fractured governance among Chavistas. In that case, “implications for oil price would be short-term bullish, and possibly long-term bearish if the outcome is a more liberal government,” she wrote.

Observers caution, however, that profound change is needed for Venezuela to attract the billions in outside investment it needs to revitalize energy output. That includes abiding by international dispute resolution systems, offering competitive terms and respecting contract law. Even then, those who have been burned in the past may face obstacles in returning to a country that has under-invested in numerous areas.

“We have some clients who have a factory that was nationalized,” Mr. Neher said. “They weren’t ever paid, and they want compensation for the factory. But they don’t want the factory back because the factory has been run down.”

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