Amidst one of the world’s great oil booms, Hugo Chavez caused the Venezuelan oil industry to decline, chasing out talent and investment, leading to a collapse in production.
In a new note, Morgan Stanley worries that this chart — the long-term decline in Venezuelan oil production — will take a long time to reverse.
Photo: Morgan Stanley
Venezuelan oil prospects still dim in a post-Chavez era. We caution against expectations of a phase shift in Venezuelan oil production, despite some bullishness in the market. Oil supply growth requires material investment, technology, and long lead times. The brain drain of Venezuelan oil engineers over the past decade and reports that only 6 kb/d of new Orinoco crude production started last year (of 195 kb/d expected) confirm our suspicions. IOC investment vital, but hard to justify without time-consuming reform. PDVSA is already saddled with debt and 43% of its 2011 production was not paid in cash, making foreign investment crucial. Granted, a post-Chavez Venezuela is likely more conducive to foreign investment. However, we doubt IOCs will invest without material, time-consuming economic and structural reforms, especially given Chavez’s entrenched bureaucracy. We have heard anecdotal evidence of languishing pipeline approvals, which has capped production growth. But even with every reform in place, production will still lag investment by years.
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