Boston, MA -- (SBWIRE) -- 03/19/2013 -- BMI View: With a post-Hugo Chavez future seeming increasingly imminent, it is tempting for markets and industry players alike to imagine a brighter future for Venezuela's energy sector. Indeed, the country's unparalleled below-ground potential has disappointed in recent years due to economic mismanagement, underinvestment and the unsustainable social policies which have drained state-owned PdVSA of critical resources. As such, market optimism has prevailed in recent weeks, signalling that investors view a Venezuela without President Chavez positively. However, it would be wise to brace for a period of energy sector instability in the immediate aftermath of any transition in leadership.

The key trends and developments in Venezuela's oil & gas sector are:

- We forecast that Venezuelan oil production will surpass the 3mn barrels per day (b/d) mark in 2014, despite government claims that this goal would be achieved in 2012. Growth in production, which will average 5.4% year-on-year (y-o-y) between 2013 and 2018, will come primarily from the country's Orinoco heavy oil belt. That said, there remains a considerable downside risk to our short-term forecasts should there be political instability on the back of a leadership transition. Indeed, the outlook for 2013 and potentially even 2014 oil production remains vulnerable to the nature of the immediate post-Chavez future in Venezuela which, at the time of writing, is rather opaque.
- Despite Venezuela's unfavourable licensing terms and sour business environment, which have forced international oil majors including ConocoPhillips and ExxonMobil to exit the country, a significant amount of foreign interest remains and Asian players are still making large-scale investment as they seek access to the Orinoco belt. Of these, China remains the largest, and in May 2012 it increased its bilateral lending to Venezuela to US$36bn in exchange for an ever-increasing guaranteed annual oil shipment, which is supposed to be in the region of 700,000b/d by 2015.
- Venezuela's massive debt problem, fuelled by President Hugo Chavez's social agenda, has been systemically undermining the country's ability to invest in its own oil and gas sector. The July 2012 vote to raise the country's debt ceiling by 37% underscores the increasing difficulty in financing its current budget deficit. The government has also been dipping into Chinese loans in order to finance this agenda, rather than using the financing to boost the country's long-term growth and the much-needed investment into sustaining oil production. Indeed, this is one of the reasons why production had been falling in recent years. There are also long-term implications for these loan agreements, as Venezuela may end up sending around half of its total net exports to China by the middle of the decade in order to repay them.

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