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Chavez Cancer Freezes Venezuela’s Overseas Oil Funding

Photographer: Nathan Crooks

Sechin, who sported a Chavez-emblazoned T-shirt during a trip to Anzoategui state in September, said Jan. 15 that Venezuela is “our number one overseas priority.” Close

Sechin, who sported a Chavez-emblazoned T-shirt during a trip to Anzoategui state in... Read More

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Photographer: Nathan Crooks

Sechin, who sported a Chavez-emblazoned T-shirt during a trip to Anzoategui state in September, said Jan. 15 that Venezuela is “our number one overseas priority.”

Venezuela’s $100 billion oil industry is seeing the first drop in funding in five years from some of its closest partners, as concern mounts President Hugo Chavez’s battle with cancer is creating a political vacuum, people familiar with the matter said.

The government, which for a decade has disclosed credit lines from China when they’re signed, has announced none since April, according to a report released Jan. 13 by the National Autonomous University of Mexico, known as UNAM. Russian and Indian companies are withholding planned investments in Venezuelan oilfields, according to eight oil company executives and consultants who declined to be identified because they weren’t authorized to talk about the matter publicly.

The cooling by governments allied to Chavez in his 14th year in office contrasts with growing interest among private investors. They’ve driven up bonds of Petroleos de Venezuela SA, the state oil producer known as PDVSA, to a record this month on bets Chavez’s successor will reduce state control of the economy. Delays in funding threaten the ability of South America’s largest oil producer to reverse declining output.

“Given the precarious political situation in Venezuela, these countries are not increasing their lending,” Margaret Myers, director of the China and Latin America program at the Inter-American Dialogue think tank, said by phone from Washington. “It’s a wait-and-see mentality.”

‘Their Man’

Chavez, 58, hasn’t appeared or spoken publicly since his fourth cancer-related surgery in Havana on Dec. 11. In his absence, Vice President Nicolas Maduro is running affairs. The opposition is calling for the former paratrooper to cede power temporarily while he recovers.

The state-run China Development Bank agreed to lend Venezuela $46.5 billion since 2008, 95 percent of which is backed by crude sales, representing half of the lending received in the period, according to the UNAM report.

“There is simply nowhere in the world, outside of China, where the CDB has built up such a huge financial presence,” said Matt Ferchen, resident scholar at the Carnegie-Tsinghua Center for Global Policy. “Even if Chavez wasn’t the easiest partner for China, he was their man, and now they don’t know who is in charge.”

Output Slide

Oil output in the country declined 13 percent to 2.7 million barrels per day in 2011 from 1999 when Chavez came to power, according to the BP Statistical Review of World Energy. PDVSA, which oversees the world’s largest oil reserves, hasn’t published any operational data beyond 2011. Spokesmen for Venezuela’s oil and information ministries and PDVSA didn’t return e-mails and phone calls seeking comment.

Venezuela became the Americas’ largest recipient of Chinese credit under Chavez, as private lenders were driven away by the nationalization of more than 1,000 companies as well as currency and price controls.

While Venezuela’s borrowing costs have fallen since Chavez’s health deteriorated, they remain the highest among major emerging markets tracked by JPMorgan Chase & Co. after Argentina and Pakistan. The yield on PDVSA’s notes due in 2017 plunged to a record 8.17 percent on Jan. 3 from 18.52 percent on Sept. 26, 2011, according to data compiled by Bloomberg. The yield was 8.68 percent at 1:30 p.m. New York time today.

‘21st Century Socialism’

The China Development Bank money has gone toward joint projects with state-owned China National Petroleum Corp., or CNPC, in the Orinoco heavy oil belt, as well as housing, infrastructure and agriculture ventures entrusted to PDVSA under Chavez’s “21st century socialism.”

A CNPC spokesman didn’t return e-mails or phone calls seeking comment. CDB didn’t reply to faxed questions about Venezuelan loans and the country’s political risk.

“China is now our main oil partner,” Rafael Ramirez, who as oil minister heads PDVSA, told reporters in November. CNPC’s gross production in Venezuela tripled to 140,000 barrels per day between 2006 and 2012, he said.

In September, Chavez said he asked Chinese President Hu Jintao for a new credit line, as he boosted public spending ahead of the presidential elections on Oct. 7 that helped push last year’s budget deficit to 7.8 percent of GDP, according to Bank of America Corp.

‘Grown Frustrated’

China and Venezuela signed an average of 29 commercial agreements at each annual ministerial meeting held since 2001, a survey of Venezuelan government statements shows. Ramirez returned from Beijing in early December without announcing any new funding deals for the first time since 2008.

“The meeting did not go well for the Venezuelans,” Thomas O’Donnell, a petroleum analyst affiliated with U.S.’ New School University, said by telephone from Berlin Jan. 12. “The Chinese have grown frustrated with the chaos surrounding Chavez.”

While current political uncertainties in Venezuela are a concern for China, cooperation between the two countries makes economic sense, is protected by law and will continue, said Sun Hongbo, a Latin American studies associate professor at the Chinese Academy of Social Sciences in Beijing.

China’s growing demand for oil will push the country to restart lending to PDVSA and then expand it as soon as Venezuela lays out a clear transition plan in case of Chavez’s death, said Evan Ellis, associate professor at the Center for Hemispheric Defense Studies in Washington.

Protecting Legacy

That may not be necessary. Bolivian President Evo Morales said Jan. 22 that Chavez is preparing to return home, a day after Venezuela’s foreign minister said the self-declared socialist joked and laughed during a meeting at his hospital bedside in Havana.

Chavez missed his Jan. 10 inauguration after beating Henrique Capriles in October’s presidential election by more than 10 percentage points. He said Dec. 8 that voters should elect Maduro to protect his legacy if his illness prevents him from remaining in office.

“Any government, whether led by Maduro, Capriles or anyone else, is going to continue looking East,” David Voght, managing director of IPD Latin America consultancy, said by telephone from Miami. “An opposition government may review the lending contracts, but with slowing U.S. oil market, it makes sense to pursue continuity with China.”

Investment Delays

Chavez’s protracted health battle is slowing investment and lending from other major emerging markets, executives said.

India’s Reliance Industries Ltd. has postponed by a few months an estimated $2 billion investment decision for four Venezuelan oilfields beyond the Jan. 31 deadline because it has not received geological data from PDVSA, a person directly involved in the deal said from New Delhi, asking not to be identified citing confidentiality terms.

“The new projects are suffering delays because there’s no-one in PDVSA who can make a decision,” Antero Alvarado, Venezuela country manager for consultancy Gas Energy, said by telephone on Jan. 11.

Russian President Vladimir Putin, who like Chavez has governed since 1999, wished the South American strength to “take the helm again,” in a Dec. 31 statement.

OAO Rosneft Chief Executive Officer Igor Sechin, who sported a Chavez-emblazoned T-shirt during a trip to Anzoategui state in September, said Jan. 15 that Venezuela is “our number one overseas priority.” Rosneft agreed to spend $36 billion with PDVSA and fellow Russian partners on the Orinoco projects it entered in the last three years and lend Venezuela $6 billion together with state-run OAO Gazprom in 2011.

New Elections

While Russian energy projects will advance as long as Chavez’s party remains in charge, they won’t be supported by the opposition, a Gazprom Latin American manager, who asked not to be named citing company policy, said Jan. 12. Gazprom spokesman Vladimir Voevoda and Reliance spokesman Tushar Pania didn’t immediately reply to e-mail and telephone requests for comments.

OAO Surgutneftegas (SGGD), Russia’s fourth-largest producer, decided to leave the Russian group developing the Junin-6 block in Orinoco, according to a Nov. 7 filing. TNK-BP also sought to sell last year, according to two people familiar with the matter, until Rosneft’s agreement to buy Russia’s third-largest producer made the issue redundant.

That $55 billion deal probably will restrict Rosneft’s ability to make investments needed to boost Venezuelan projects, said an official close to PetroMiranda, as the Russian group at Junin-6 is called. The TNK-BP deal won’t affect the Venezuelan work schedule, said a Rosneft spokeswoman, who asked not to be named citing company policy. A press department official at Russia’s Energy Ministry, who can’t be named due to policy, said she wasn’t aware of suspension of oil investments in Venezuela.

While any government will need oil, preservation of the current political system offers the best way for OAO Lukoil to carry out its contracts in Venezuela, Andrei Kuzyaev, head of the Russian company’s overseas arm, said in Davos Jan. 23.

‘Everybody Concerned’

The constitution requires new elections to be held within 30 days if Chavez is declared permanently absent. Although Chavez’s chosen successor is favored to win, the opposition’s chances will grow as the economy slows, Bank of America economist Francisco Rodriguez said by phone Jan. 3.

Beijing will be among the keenest observers.

“Everybody is concerned about the situation in Venezuela, including China,” Wang Peng, a Latin American scholar at Beijing’s CASS, said by e-mail. “China has very large commercial interests there and wants to protect them from potential political risks from power transition or party rotation.”

To contact the reporters on this story: Anatoly Kurmanaev in Bogota at akurmanaev1@bloomberg.net; Stephen Bierman in Moscow at sbierman1@bloomberg.net

To contact the editor responsible for this story: James Attwood at jattwood3@bloomberg.net

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