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Venezuela running short of options

19 Aug 2016 17:47 (+01:00 GMT)
Venezuela running short of options

Long-standing plans to expand production capacity are unlikely to progress without action to boost oil prices

Caracas, 19 August (Argus) — Cracks among Venezuela's ruling elite are widening as the country grows more isolated and oil revenue shrinks.

Former long-time oil minister Rafael Ramirez resurfaced in Caracas on 14 August, giving a television interview in which he suggested Venezuela should rethink its campaign to boost production capacity so long as oil prices remain weak. "We can continue spending millions of dollars to raise production capacity, but if there is no short-term price recovery then it truly makes no sense," said Ramirez, who is Venezuela's ambassador to the UN. The remarks fly in the face of the production-growth strategy of Ramirez's successor, Eulogio Del Pino, who left Venezuela on a tour of oil producing countries at around the same time that Ramirez appeared in Caracas.

State-owned oil company PdV issued a revised $260bn investment plan in June reiterating a target of increasing production capacity to 6mn b/d in 2019, from its current officially reported level of 2.36mn b/d. Argus estimates that production is around 2.1mn b/d. Del Pino has pressed hard to develop the technically challenging Orinoco extra-heavy oil belt, but progress has been limited. He sparked a backlash among regime hardliners with a proposal to return nationalised oil service companies to their previous owners, an idea Del Pino later retracted.

Ramirez had been an influential regime figure who served as energy minister and PdV chief executive from 2003-14, before being removed amid allegations of corruption. In the interview, he reiterated his denial of any wrongdoing.

Ramirez blames fractures at Opec for the 2014 oil price collapse. "It is very important that Venezuela continues insisting to other Opec and non-Opec producers on actions to recover the oil price," he says. Del Pino and foreign minister Delcy Rodriguez visited Iran on 15 August to lobby for action on prices, followed by visits to Qatar and Saudi Arabia, but their trip appears to have done little to enhance the prospect of concerted action among Opec members to support oil prices. Venezuela's crude export basket price is averaging around $35/bl, half of its $70/bl target for Opec.

Cold shoulders

Closer to home, the government's isolation is deepening. Brazil, Argentina and Paraguay have refused to recognise Venezuela's rotating six-month presidency of customs union Mercosur because of alleged human rights abuses and democracy violations. Even in steadfast ally Ecuador, PdV's upstream joint venture with local counterpart PetroAmazonas has been disbanded because of a lack of investment.

Caracas tried to mend fences with Colombia by reopening the border on 13 August. But the huge number of Venezuelans crossing over to buy basic goods has turned into a political embarrassment for Venezuelan president Nicolas Maduro, who routinely denies that the country is suffering a humanitarian crisis.

Venezuela's political opposition is fractured and demoralised, having failed to leverage its legislative majority to challenge Maduro's policies. With the government so far successfully preventing a referendum on a presidential recall, a number of opponents want to invoke a constitutional provision that allows civil disobedience when all other democratic recourses are exhausted.

The IMF and World Bank forecast that Venezuela's GDP will contract by up to 10pc in 2016, with annual inflation of more than 700pc. A 50pc general wage increase that Maduro decreed on 12 August could cause annual inflation to spike to more than 1,000pc by early next year, a Venezuelan central bank economist says. Venezuela has around $12bn in international hard currency reserves, but only around $200mn of this is in cash.