Scenarios For Venezuelan Oil Supply After Regime Change
A couple years ago, I asked a friend with ties to the Venezuelan émigré community if there was a betting pool on the date the Venezuelan regime would fall and he said most Venezuelans have shortened index fingers from tapping on the table going, “Today! This is the day the regime falls!” Which shows both that political predictions are unreliable and wishful thinking often dominates forecasting (as with oil prices).
That the Maduro regime has confounded expectations of regime change does not tell us too much about its political future. My favorite political risk anecdote concerns a group of foreign bankers visiting Teheran in late 1978 to arrange a multi-billion dollar loan to the Shah’s government. Asked about ongoing protests, they shrugged them off as something the Shah had always dealt with in the past. Which was true until it wasn’t. Similarly, the Maduro regime can survive—until it can’t. It increasingly looks like that point is nearing.
The Venezuelan production path over the next two years will depend on: a) when government change occurs; b) how government change occurs; and c) the post-change regime cohesiveness. These are all important: Forbes’ Chris Helman in 2006 wrote about me: “Don’t sell that SUV just yet. Oil, at a recent $66.50 a barrel, will fall to $45 by mid-2007 and could dip briefly into the 20s in 2008. Sometime next year you are going to see a $1.95 price on a gas pump.” Oopsie.
Aside from not anticipating events like the Arab Spring, my primary failing was thinking that, since Iraq had huge oil resources and huge financial needs, surely the politicians would quickly arrange investment that would ramp up production. In fact, they didn’t, and it was not until 2011 that production finally reached 2001 levels. Venezuela has huge resources and huge revenue needs, but that doesn’t guarantee they will do any better than the Iraqis.
Political stability after a regime change will be the most important factor in determining how quickly production recovers. The new government needs to attract former PDVSA personnel to return to work (and the country, in many cases), as well as get oil service companies to ramp up well rehabilitation, which requires both money and a degree of trust. The scenarios below are an attempt to estimate how different regime changes might affect Venezuela’s oil production through the end of next year.
Scenarios (with graph labels):
A coup would mean no major disruption in production. If power is turned over to National Assembly head Juan Guaido, restoration of production could begin quickly, as the (current) opposition’s control of the National Assembly should allow quick approval of fiscal terms and contracts and return of some PDVSA personnel who are now overseas. (Coup: Guaido) If instead the military establishes a transitional government to oversee new elections, new contracts might be delayed by political inertia or infighting. (Coup: military)
Removal of Maduro by his colleagues in the United Socialist Party of Venezuela (PSUV) would almost certainly see continued conflict with the opposition, so that perceived political risk would remain high discourage investors (outside of Russia and China) from undertaking major operations. Some improvement is likely, given the desperation of the government, but it would probably be slow. (This could also resemble the next scenario, where prolonged unrest could mean further reductions or a cessation in production.) In this case, production does not recover for months, possibly years.
Change in government through political protest would take an unpredictable amount of time, and could include a near-cessation of production. Afterwards, it would almost certainly result in a stable government, as it now appears that the opposition would unite behind Guaido, at least for a time. (Unrest) It is possible that post-change could see major squabbling amongst the various opposition parties, as occurred in Iraq, but more likely (I think) that they could at least get agreement on contracts to rehabilitate the existing fields.
The over 1 mb/d of production loss in the past few years will probably be restored gradually, as workers return and new contracts are signed with oil service countries. (The restart of the Petro San Felix upgrader could add about 150 tb/d in a single increment.) If the PSUV remains a major political force, it will be harder to entice émigré engineers to return or obtain large-scale investment in new production.
Longer term, if there is a relatively stable government, a new apertura or reform could see Venezuela return to much higher levels of production from marginal oil fields, new conventional production, and additional heavy oil projects. But if the new government splinters amongst the various opposition groups, or the PSUV proves capable of obstructing action, Venezuela could see the same kind of delays that plagued Iraq’s oil sector.
The oil market has received substantial assistance from the collapse of production in Venezuela and, like the QE stimulus, this is nearing an end. Its reversal is somewhere between likely and possible, and the addition of 500 tb/d in supply in a year’s time will make it that much harder for OPEC+ to balance the market. If WTI prices are near $60 over the next year, boosting investment in U.S. shale, and the global economy slows, this extra supply could mean a new price collapse next year.