Venezuela not quite as shaky

Venezuela not quite as shaky as Argentina. The Opposition in Caracas demonstrates in "mourning black' while those supporting President Hugo Chavez celebrate in flaming red berets. People are now very clear about which side of the fence they stand on, and both sides express their positions with fervor. Banging pans, in contrast to behavior in Argentina, is an action that is both pro- and anti-government. Feelings can run high, but the lack of generalized, violent clashes says much for the now-recognized good citizenship of the Venezuelan population. This maturity and responsibility also extends into the less rarefied air of the economy, in general, and into the oil sector, in particular.

For example, Domingo Maza Zavala, a director of the Venezuelan Central Bank (BCV), estimates that there will be an improvement in oil's share of gross domestic product this year, if no further production cuts are made. Oil GDP fell 0.9% last year, when there was a reduction in upstream activity as a result of the cuts. He does see, however, the OPEC-mandated cuts of Jan. 1 as positive for the market. Venezuelan Oil Minister Alvaro Silva Calderon expects the oil price to be within OPEC'S price band in March. There is a period of austerity, nevertheless, coming for state firm Petroleos de Venezuela (PDVSA). The corporation has to reduce personnel costs and other spending by 20% this year. After all, an average price of $15.82/bbl in 2001 for the Venezuelan crude basket does take its toll.

The country's budget for this year is based on an average oil price of $1 8.50/bbl. complemented by production of approximately 2.88 million bopd, yielding a total income of approximately $19.5 billion. According to official estimates, this would guarantee the government an income of 7.5 billion Bolivars. A shortfall here, however, in addition to negatively affecting the fiscal deficit (budgeted to be 4.3%), would put more of a strain on governmental spending, in general, as well as on the very needed social services spending. The government's internal debt is, by the way, at an all-time high.

Indirect taxes have already been increased to help cover the widening fiscal gap. Unfortunately, hard currency reserves have suffered not only from the effects of lower oil income but also from currency defense, falling by over $1 billion in January of this year. Reserves fell by 23.7% in 2001, second only on the continent to Argentina's miserable performance, where reserves fell 37.6%. At least Venezuela can count on the macroeconomic stabilization fund (FIEM) that contains $6 billion and can aid in squaring of the budget. The harsh reality, however, is that Venezuela needs oil prices to be higher than they are at present.

The crisis in Argentina has also had some effect here. Argentina has $3 billion invested in Venezuela-in the steel industry, telecommunications, agriculture, and, of course, in oil, where Perez Companc and Texpetrol are present. Perez Companc took provisions for the crisis last year, reducing its growth estimates, both for Argentina and for other countries. With regard to Venezuela, the company's investment plans for the Oritupano-Leona, La Concepcion, La Mata and Acema fields have been reduced for 2002--the crisis and the OPEC cuts have reduced the firm's goals.

Late in January, the company also had some payments outstanding with its contractors in Venezuela, due to a restricted money movement policy in Argentina. Trade between the two countries is not very significant, and analysts say that the crisis should not have negative consequences for Venezuela.

All is not black, however. A recent report from Morgan Stanley Dean Witter said that when one looks at the macroeconomic numbers, rather than at the political situation, Venezuela is in an outstanding position within the region. Nevertheless, the real problem is that confrontation between government officials and the Opposition keeps Venezuela listed second behind Argentina as the country with most risk. The international perception about Venezuela could improve, if volatile political scenarios within the country would dissipate. According to the investment bank, Venezuela has a series of advantages. For example, these include government's promise to guarantee payment of the foreign debt; the increase in the value of Venezuelan bonds if the oil price were to increase; and the fact that the Venezuelan foreign debt represents 26.4% of GDP. The latter is one of the best averages in the world's emerging markets.

Within this positive vision, the new Hydrocarbons Law is experiencing some mixed reactions. Just before the law came into effect, PetroChina signed a deal (under the old regulations) for the third Orimulsion production module with PDVSA's Bitor subsidiary. Now, with the new law in place, Italian businessmen interested in electricity generation are asking the Venezuelan government to give them the same contractual conditions that the Chinese received. It seems that they feel that the old regulations suited them better than the new law.

Also, Shell Venezuela has presented a series of observations to the commission that is studying the regulations approved in the presidential Enabling Law, of which the Hydrocarbons Law is one. Shell's points include the clearer definition of the legal status of the mixed companies; clearer definition of mature wells for the purposes of royalties; and clarification of how the Hydrocarbons Law and the Gas Law interrelate on certain specific points, to determine the viability of gas exploitation projects.

As can be seen, all is not quiet on the Venezuelan front. But rational, workable solutions to the problems that the country is experiencing will certainly come sooner rather than later.

Stuart Wilkinson is a Caracas-based journalist with extensive experience covering Venezuela's petroleum industry. He currently is editor of the English section of the magazine, Enfoque Petrolero. He is a regular contributor to this column.