Market Report, "Venezuela Oil & Gas Report Q2 2016", published

We maintain our cautious outlook for Venezuela's oil and gas sector d espite vast below- ground potential and ambitious production plans by state-owned PD VSA . We expect Venezuela to continue to underperform given the large scope of above-ground challenges, including excessive political interference, chronic underinvestment, an unattractive operating environment and the precarious financial situation of P D VSA . Moreover, the sustained fall in global oil prices will deteriorate produc tion growth prospects as both PD VSA and international investors face declining revenues and a reduction in available capex funds.

Latest Updates And Key Forecasts

Our crude production forecast for 2016 predicts a 3.0% y-o-y decline amid sustained weakness in crude oil markets. This will negatively impact available investment in Venezuela's upstream sector as the government contends with its significant public sector spending plans.

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The landmark victory of the opposition party in Venezuela's legislative elections held on December 6 marks a clear break from the country's recent past, and will serve as a strong mandate for reform. While this marks the first power shift away from the ruling party in nearly 17 years, the United Socialist Party of Venezuela (PSUV)'s dominance in other branches of government and divisions within the opposing coalition will preclude a swift change in policy direction.

Venezuela's downstream sector continues to suffer from a lack of maintenance and underinvestment. This was illustrated by the blackout at the country's two largest refineries in October 2015, informing our modest capacity growth forecast through 2024.

Exports of both crude and refined products will decline as upstream activity wanes. Low fuel prices will prop up domestic demand and weigh on available export quantities through the remainder of our 10-year forecast period. Natural gas imports will also increase as domestic demand rises following the opening of the Juan Manuel Valdez gas-fired power plant in 2016.

On January 4, Venezuelan national oil company (NOC) Petroleos de Venezuela (PDVSA) indefinitely postponed its plans to export natural gas to Colombia amid stronger domestic demand, supporting our previously-held view. As recently as November 2015, PDVSA reiterated its commitment to complete the long-awaited reversal of the Antonio Ricaurte pipeline and begin sending 1.1mn cu m per day of supplies by January 1. However, the NOC now claims they are unable to uphold this agreement given adverse weather conditions from El Nino and continued demand from their industrial sector - factors we previously claimed would threaten future exports.

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