Francisco Monaldi, Ph.D. Fellow in Latin America Energy Policy, Baker Institute for Public Policy, Rice University

Belfer Center Associate in Geopolitics of Energy, Harvard Kennedy School Founding Director and Professor, Center on Energy, IESA, Venezuela

Columbia University, CGEP, September 2015

Wasted opportunity. Popularity tracked consumption How bad can it get? Will the opposition win?

2

Wasted opportunity: The largest windfall and the worst economic performance

4

-25-20-15-10-50510152025

25

35

45

55

65

75

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Chavez popularity (lhs)Maduro (lhs)Real consumption growth (rhs)

Source: BCV and Datanalisis

Chart1

76.84.62873574236571

55.91.552677601436661

60.62.096178423436753

60.610.260329004136845

62.76.259012293736937

62.79.678833273437026

55.85.124226857537118

55.83.316855847237210

34.4-0.484859128137302

44.7-7.305947416237391

32.7-4.464640676237483

32.6-15.136811109137575

35.1-12.384983438337667

36.8-6.875622574837756

30.8-4.175692236537848

41.56.590293502537940

41.415.745791448838032

43.314.553266670838122

50.815.37113030538214

65.416.063357015738306

64.213.633296993538398

71.215.971322469238487

70.114.120643548938579

67.618.709747560338671

73.614.000388146438763

75.414.642666755338852

72.800000013116.627357392138944

66.316.27274093639036

67.417.990170518739128

63.116.46142556939217

6019.624713820239309

5213.915472714239401

51.88.314660753139493

55.59.490182373139583

58.45.067946871839675

57.33.132940418339767

612.150574852339859

53.2-2.753161931839948

57.3-4.391479809740040

50.8-6.00158898440132

42.6-4.782648119240224

48-1.419024988840313

50.5-1.842062816740405

47.70.386228973540497

53.93.610370901240589

512.711995988740678

494.373033058840770

52.85.27469378940862

62.55.947390861740954

627.135988516741044

577.835326651157

687.085064890654

71.63.328984650248

414095.346898907846

415014.272087965845

415935.781316615550

4168541

37

35

Chavez popularity (lhs)

Real consumption growth (rhs)

Maduro (lhs)

Sheet1

Chavez popularity (lhs)Real consumption growth (rhs)Stack 6Stack 7Stack 8Totals (invisible)Stack 9Stack 10Stack 11Stack 12Stack 13Stack 14Stack 15Stack 16

36571.076.84.63

36661.055.91.55

36753.060.62.10

36845.060.610.26

36937.062.76.26

37026.062.79.68

37118.055.85.12

37210.055.83.32

37302.034.4-0.48

37391.044.7-7.31

37483.032.7-4.46

37575.032.6-15.14

37667.035.1-12.38

37756.036.8-6.88

37848.030.8-4.18

37940.041.56.59

38032.041.415.75

38122.043.314.55

38214.050.815.37

38306.065.416.06

38398.064.213.63

38487.071.215.97

38579.070.114.12

38671.067.618.71

38763.073.614.00

38852.075.414.64

38944.072.800000013116.63

39036.066.316.27

39128.067.417.99

39217.063.116.46

39309.06019.62

39401.05213.92

39493.051.88.31

39583.055.59.49

39675.058.45.07

39767.057.33.13

39859.0612.15

39948.053.2-2.75

40040.057.3-4.39

40132.050.8-6.00

40224.042.6-4.78

40313.048-1.42

40405.050.5-1.84

40497.047.70.39

40589.053.93.61

40678.0512.71

40770.0494.37

40862.052.85.27

40954.062.55.95

41044.0627.14

41136.0577.8457

41228.0687.0954

41320.071.63.3348

41409.05.3546

41501.04.2745

41593.05.7850

41685.041

41774.037

41866.035

6 Source: Datanalisis, July 2015

Public Opinion: How is the country doing?

7 Source: Datanalisis, July 2015

Public Opinion: Maduros Approval

8 Source: Datanalisis, July 2015

Voting Intention: Legislative elections Dec. 2015

Worrying tendencies Pragmatism or desperation?

9

10

11

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Venezuela will continue to produce oil until the world demands it Venezuelas official proved oil reserves are 298 billion barrels (using a 20% recovery rate on the Orinoco Belt, for 257 billion barrels). The USGS estimates that 510 billion barrels would be ultimately recoverable in the Orinoco Belt (using a 45% recovery rate). Even using a 10% recovery rate Venezuela would have the second largest reserves after Saudi Arabia, at around 190 billion barrels (close to Canadas).

0 50 100 150 200 250 300

US

Venezuela

Russian Federation

Iran

Kuwait

Saudi Arabia

United Arab Emirates

Nigeria

OPEC

Non.OPEC

Years of production

Reserves/production (years)

Source: BP Statistical Review of World Energy (2013)

Canada including oil sands 110 years

Venezuela low estimate 190 years

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Traditional areas and PDVSA decline. Orinoco and JVs partly compensate.

OOB Heavy and extra-heavy

Conventional

Venezuela Oil Production IPD Latin America

0

0.5

1

1.5

2

2.5

3

3.5M

BD

Oil Production by Ownership, Venezuela 1990-2013

61%

Orinoco JVs

Conventional JVs

PDVSA

Source: Oil Ministry (PODE 2007-2008); PDVSA Annual Reports, 2009, 2010, 2011 & 2013. Note 1: Since 2006 the conventional crude operative agreements transformed into Joint Ventures Note 2: Since 2007, the heavy oil strategic agreements transformed into Joint Ventures. Note 3: Production data does not include Natural Gas Liquids

23%

16%

PDVSAs share decreases. JVs increase.

15

Heavy and extra-heavy Orinoco Projects IPD estimates

CNPC

Total/Statoil

Rosneft

Chevron

Repsol/ONGC

Chevron/Inpex

CNPC

ENI

Gazprom/Rosneft

16

Not paid in cash (kbd) Cuba 80 (from 100) Others 40 (from 80) Domestic market 700-750 (Smuggling 100, Imports 150) China loans 350-400 Total ~ 1.2 mbd Cash flow production ~ 1.4 mbd of ~2.7 mbd

Source: PDVSA

EIA reports 802 kbd Ven exports to US in 2015 vs. 790 kbd in 2014, up 1.5% According to Petrologistics in the last 12 months total exports are up 4% and net exports up 1% Total imports 300 kbd, import of diluents up 40% to 140 kbd (future swaps?)

0 200 400 600 800 1000 1200 1400 1600 1800

Others

Africa

South America

Europe

Asia

Central America & The Caribbean

North America (St. Croix included)

2012 2011 2010 2009 2008 2007 2006

Significant contributions to FONDEN & social programs, compared to investment.

Financial Debt has increased to more than US$ 45 bn. Debt with suppliers and partners above $15 bn. Debt with Central Bank above Bs. 800 bn. Arbitrations $7-8 bn. (estimate)

Cash Flow availability PDVSA

VENEZUELA

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Texas 5 Qatar 33 United Arab Emirates 39 Colombia 48 Alberta 51 Trinidad and Tobago 58 Brazil 66 Alaska 83 Angola 118 Nigeria 124 Algeria 126 Russia 127 Libya 128 Iraq 129 Kazakhstan 131 Iran 132 Bolivia 133 Ecuador 134 Venezuela 135

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The Reputational Legacy

Ranking sobre barreras a la inversin Fraser Institute 2009 2010 2011 2012 2013 2014

Ranking Venezuela 141 132 135 146 157 156Jurisdicciones Consideradas 141 133 135 147 157 156

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26.14

0.00

20.00

40.00

60.00

80.00

100.00

120.00

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

b/d per employee

Daily production per employee

Source: PDVSA financial statements

Productivity down, costs up

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Gasoline price: $0.07 per gallon or $0.002 at black market exchange rate. 1 cent per barrel versus $21 in Saudi Arabia Domestic subsidies: $24 billion in 2013. $13-14 bn. in 2015

Worrisome trends in the oil industry: production and net exports down, limited exports cash-flow, heavier production basket, most productive fields declining, PDVSAs own-operated production collapsing.

PDVSAs malaise: debt rising, investment stagnant, costs rising, and productivity collapsing.

Pragmatism prevailing: Chevron contract, windfall tax exemption, exchange rate, operational control, strategic focus on extra-heavy blending, reduction in Petrocaribe and increase in US exports, etc.

However, unlikely to have significant impact in the short term due to: low oil prices, cash-flow and human resources problems, and risk environment (macro-imbalances, credibility, instability, and security issues).

However, if investor-friendly policies continue and the price environment / political stability help (particularly under a new government) production should reverse the negative trend. There is significant upside potential.

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Thanks for your attention

francisco.monaldi@rice.edu

Twitter: @fmonaldi

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mailto:francisco.monaldi@rice.edumailto:francisco.monaldi@rice.edu

After the Party, the Hangover:Venezuela in the midst of the oil price collapse Politics and EconomicsSlide Number 3Unsustainable path even before the oil price collapsePopularity tracked consumption Slide Number 6Slide Number 7Slide Number 8The Oil IndustryHigher oil dependence, with declining net oil exportsThe Rise and Fall and Rise again and Fall again of the Venezuelan Oil IndustrySlide Number 12Slide Number 13Slide Number 14Slide Number 15Declining production, declining exports, and more than a third of total production is not paid forSlide Number 17Slide Number 18Fraser Institute Global Petroleum Survey 2011: Jurisdictional rankings according to the extent of investment barriers(based on All-Inclusive Composite Index values) 135 jurisdictions rankedSlide Number 20Venezuela Domestic Oil ConsumptionConclusionsSlide Number 23