Venezuela: Progressively Worse, But Hanging On

The economic situation in Venezuela has been deteriorating for over three years now, and Venezuela appears to be in a worse situation than ever before, as President Nicolas Maduro seems unable to avert social collapse, while battling to keep Petróleos de Venezuela, S.A. (PDVSA) and its oil exports afloat. It is reported that inflation hit 800 percent at the end of 2016 and that the economy contracted by a staggering 19 percent on average in 2016. Shortages in food and basic medicine are now facts of life for most Venezuelans. Despite the severity of the crisis and economic hardship, Maduro’s socialist government has maintained its grip on power. Maduro has successfully thwarted several political attempts to remove him from power, and as the military has assumed a greater role in his cabinet and in the economy, his position appears to be protected from efforts to forcibly depose him. In fact, several recent moves by the Maduro government appear to have solidified his grasp of power.

One such move came at the end of March when Venezuela’s Supreme Court ruled to assume the constitutionally assigned powers of the opposition-dominated National Assembly. Following the outbreak of protests, widespread condemnation from abroad, and calls for the decision to be revised, the Supreme Court retracted several provisions of its decision. This served to reverse the ruling to completely nullify the National Assembly; however, one of the provisions that remains intact has neutralized the constitutional power of the assembly to approve PDVSA contracts of “national public interest” with foreign companies. This move coincided with PDVSA’s maturing debt obligations, which the cash strapped national oil company (NOC) was struggling to meet. While PDVSA successfully made $2.6 billion of bond repayments on April 12, a further $3.5 billion is due in October and November. The market appears to doubt that these payments will be met, with the probability of default continuing to rise; however, Venezuela has avoided default in precarious situations before.

The government is now looking to tap new sources of capital from abroad to meet PDVSA’s maturing debt obligations. The Supreme Court’s recent move against Congress appears to have come in response to the National Assembly’s objection to a deal brokered with Rosneft, which increased Rosneft’s stake in the Petromonagas crude-processing joint venture to 40 percent. Two other deals with the Russian oil major are rumored to be on the books in 2017, including a relinquishment of 10 percent of PDVSA’s Petropiar project in the Orinoco Belt to Rosneft. The government’s move to partially denationalize several of PDVSA’s assets to save the NOC and the country from default appears to go against the prevailing government ideology; however, having used up all its lines of credit, there are few options left.

The National Assembly, which was overhauled by several opposing parties in December 2015, contends that any deals brokered without assembly approval will not be recognized. This may mark a turning point for Congress, which until now has remained fractured with over 12 different parties accounting for the seats in the House. The unified response by the National Assembly suggests that Congress might prove to be more of a headache for the president than last year, when it failed to stop Maduro from thwarting a referendum to remove him from power. The net effect of these events has negatively affected investor sentiment, one of two crucial elements that will determine if PDVSA can avoid default (the other being the sustained recovery in global oil prices). Venezuela’s benchmark sovereign bond hit a 10-month low in April and PDVSA’s debt notes have mirrored this movement.

Maduro’s government also recently barred Miranda state governor Henrique Capriles, one of the most popular politicians in the state, from running for office for 15 years. The combination of the move against Capriles and the National Assembly spurred some of the largest public protests ever seen in Venezuela. The protests have carried on for over three weeks and have turned extremely violent at times. However, they have been contained by pro-Maduro forces, and it is difficult to see the protests being sustained for much longer given the high personal costs. Although it is estimated that only 20 percent of the population support Maduro, his government maintains a high level of control over the army, armed civilian collectives, and many of the institutions of the government.

Another point to consider is that several sources claim that corruption is so deeply embedded in the government, and touches so many actors within the ruling system, including ranking members of the military, that there is too much at stake for these individuals to let the current system be upended. Finally, despite showing some signs of unification, Congress will likely remain fractured, and so there will continue to be no coherent platform behind the opposition. As such, it appears unlikely that we will see any substantive change of government in the short term, and even if Maduro steps aside, a change in leadership will not necessarily equate to a change in government, in which case the same story is likely to prevail.

The overall outlook for Venezuelan oil production is not positive. The combination of mismanagement and a low oil price environment has meant that PDVSA is struggling to meet debt obligations and to pay employees and suppliers, let alone spend on upstream investment. A cash crunch at PDVSA has led to operational difficulties at fields and facilities and has seen Venezuelan oil production fall by over 200 thousand barrels per day (kb/d) in 2016 and significantly fall again in the first three months of 2017 to stand at its lowest yearly average in over two decades. Production of heavy crude from the Orinoco belt is now making up an increasing share of overall production, as light crude from the Lake Maracaibo region has been hard hit due to deteriorating infrastructure and lack of basic equipment. Due to this change in its production profile, PDVSA has had to increase its imports of light crude, largely from the United States, to blend with its heavy crude.

A dramatic fall in production like the one seen in 2002, when PDVSA protests occurred, seems unlikely, given that PDVSA is now fully under the control of the government. Furthermore, an upheaval of the government itself seems unlikely in the short term. Consequently, the current level of declining rates look set to continue. In view of the U.S. Energy Information Administration forecast that West Texas Intermediate will average $54 in 2017 and $56 in 2018, it will take a much higher price level to support any form of growth in production in Venezuela given the high production costs of its heavy crude and overall levels of mismanagement. Finally, investor sentiment is not positive, with costs of capital remaining high and further investment from international oil companies looking unlikely given the comments made by the National Assembly surrounding deals made without legislative approval. Venezuela still accounts for approximately 2 percent of global output of crude oil, and this trend of falling output and exports could add marginal upward pressure on global prices.

Adam Sieminski holds the James R. Schlesinger Chair for Energy and Geopolitics at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Andrew Stanley is a research associate with the CSIS Energy and National Security Program.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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