Market Report, "Venezuela Oil & Gas Report Q2 2014", published

From: Fast Market Research, Inc.
Published: Wed Feb 05 2014

We retain a cautious stance on the Venezuelan oil and gas sector. While a flurry of new loans and deals may improve the financial position of PdVSA over the short term, the threat that badly needed funds will diverted from investment into the oil and gas sector to fund social programmes remains as real as ever. Moreover, although our long-term forecasts call for growth as projects in the Orinoco belt ramp up, we expect Venezuela to continue its underperformance given the scale of challenges - which range from political interference to chronic underinvestment. Similarly, despite abundant gas reserves, we expect Venezuela to remain a net importer of gas over the course of our forecast period.

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The key trends and developments in Venezuela's oil and gas sector are:

* We continue to hold a conservative outlook for Venezuelan oil production, seeing more downside risk than upside in the near term in the absence of a wider overhaul of the sector. We acknowledge that there is some scope for improvement, with PdVSA having reported a flurry of recent loans and credit deals, which will see substantial funds pumped into the troubled firm to support upstream development. This could allow for some long-stalled projects in the Orinoco Belt to advance. However, the risk remains strong that, as in the past, funds intended to support the chronically underfunded oil and gas sector could be diverted to support additional social expenditure.
* In the medium term, production growth will remain sluggish until near the end of the decade, when we expect a modest acceleration, as planned and proposed developments in the Orinoco belt come online. Our conservative forecast assumes continued delays and problems that have been a hallmark of the country's oil sector.
* Despite Venezuela's unfavourable licensing terms and difficult business environment, which have forced international oil companies including ConocoPhillips, ExxonMobil, and more recently Petronas and Lukoil, to exit the country, a significant amount of foreign interest remains. In particular, players from India, China and Russia are continuing to make investments as they seek access to the Orinoco belt.
* Of these, China remains the largest, although there are reports Beijing is growing concerned with Venezuela's ability to repay the loans. This reflects a growing debt of oil-for-loans. While some of the recent agreements remain opaque, we approximate that total lending from China is approaching US $43bn, with a large chunk agreed under an oil-for-loans scheme. While this may help to ease Venezuela's poor cash flow position though, there are potentially damaging long-term implications from these loan agreements. Should production continue to stagnate, and the oil-for-loans burden rise, Venezuela may end up sending around half of its total net exports to China by the middle of the decade in order to repay them, and receive no revenue in return.

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