Perfect Storm Brewing in Venezuela: Oil industry needs long-term solutions, incentives to increase production; Automotive market may be in for a further drop in 2014


LONDON--March 5, 2014: One year on from Hugo Chávez’s death, a “perfect storm is brewing in Venezuela,” according to Diego Moya-Ocampos, senior Latin America analyst at IHS Inc. , a leading global source of critical information and insight.

“Due to new measures enacted by the Executive branch to control vehicle prices and with the absence of US Dollars to purchase foreign parts to assemble vehicles, the automotive market in Venezuela may be in for a further drop in 2014”

“What we are seeing in Venezuela is a political vacuum left unfilled since Chávez’s death, escalating pro and anti-government protests and a further contraction of the economy in 2014 and 2015, with record high inflation levels and shortages of food and basic goods, including medicines. It’s a perfect storm that could lead to big changes in the country,” Moya-Ocampos said.

“What began as peaceful demonstrations against the government’s economic policies and rising levels of insecurity has evolved into widespread civil unrest. Protestors are calling for the release of those arrested, including opposition leader Leopoldo López, an end to human rights violations, and increasingly for the resignation of incumbent president Nicolas Máduro,” he continued.

“The left-leaning government's mismanagement of macroeconomic policies has deepened the country's economic dependence on government spending as its main driver of growth. Moreover, Máduro has attempted to intensify the socialist model. The administration is likely to continue using short-term populist measures to try to regain popularity in the next few quarters, though these are unlikely to be sustainable in time. Expect announcements shortly on minimum wage raises throughout 2014 and more funding for cash transfer projects such as ‘Misiones’,” he said.

Increasing divisions between PSUV and armed forces

“There is no sign of protests abating in Venezuela and there is a very real and increasing risk of political instability if the death tally continues to climb and if civil unrest extends from urban and residential areas to shanty towns. The weaker the government becomes, the stronger the influence of the armed forces behind the scenes. The ongoing political and economic difficulties are likely to continue increasing the potential for divisions between the ruling PSUV party and the armed forces; something that could eventually lead to a direct or indirect military intervention to guarantee political stability,” Moya-Ocampos said.

Oil industry needs long-term solutions, incentives to increase production

IHS senior petroleum analyst Carlos Bellorin said, “After the death of President Chávez, things changed completely for the oil and gas industry in Venezuela. While Chávez entailed some sort of a political stability but tough fiscal terms for oil industry participants, Nicolas Máduro’s government might mean the opposite, less political and economic stability might force him to relax the fiscal terms for oil industry participants. Máduro’s government faces very tough challenges in order to fulfil the late President Chávez’s promises of finally increasing oil and non-associated gas production. Máduro needs massive investments from international oil companies. But, many international investors for such major capital projects are not willing to bring in the much needed investment due to several factors, including tough fiscal conditions, a very unattractive exchange regime framework and galloping inflation. Máduro’s government recently approved a new Exchange Regime Law that might help to ease things with foreign investors, but that certainly will not solve the problem.”

“It is very interesting to point out that not only have tough fiscal terms and exchange regime issues been blocking the proper development of new oil and gas projects in Venezuela but also the implementation and governance of current contracts have as well. In this sense, the government has been very active in entering into several financing agreements with several international players in order to increase production in some mature fields and Orinoco Belt extra-heavy oil projects. These deals give more operational and financial control to the international players in these projects.” Bellorin continued.

“However, long-term solutions, honouring current contracts and more incentives are needed in order to really meet the country’s plan to increase production. This is even more important and urgent now when other oil producing countries in the region are either opening their doors to foreign investors, such as Mexico, or offering very attractive fields with very competitive terms, such as Brazil. Many international players in Venezuela apparently have understood this situation and have been strengthening their stance in negotiations with the government. How to use this new gained leverage will very much depend on their success in negotiating better conditions for their projects. Nevertheless, the pace of these inevitable changes will depend on the oil prices level in the short to medium run,” Bellorin concluded.

Automotive market may be in for a further drop in 2014

In regards to the economic impact on Venezuela’s automotive sector, IHS principle automotive analyst Guido Vildozo said, “Venezuela has had a particularly complicated year, between the passing of President Chávez and his successor’s inability to control the exchange rate and inflation. As a result, in 2013, vehicle demand was down 18% to 95,000 units. This is but a small fraction of the nearly half a million units that were sold just a few years ago.”

“Due to new measures enacted by the Executive branch to control vehicle prices and with the absence of US Dollars to purchase foreign parts to assemble vehicles, the automotive market in Venezuela may be in for a further drop in 2014,” Vildozo continued. “Venezuela is the only market in Latin America where new cars have an average waitlist that is more than 12 months long. In Venezuela, used cars are worth more than new ones,” he concluded.

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