Tuesday, August 10, 2004

Betting on Hugo
The long-anticipated Venezuelan referendum on the rule of Hugo Chavez will take place this Sunday. Despite Mr. Chavez's anti-US rhetoric, the energy industry appears to be betting on his winning a reprieve, as this article from the Financial Times notes. This puts them in the uncomfortable position of favoring someone who will most likely end up as a classic South American Generalissimo/President-for-Life, even if he got there democratically. It all comes down to risk management.

As the FT points out, the goal for companies with billions of dollars of past investments at risk, and billions in future opportunities at stake, is political stability, regardless of its flavor. In this case, I suggest that this attitude is not merely cynical, but ill-advised. Whatever positive remarks Mr. Chavez may have made concerning his commitment to continue supplying oil to the US, his current policies set him on a collision course with US diplomacy, and possibly even the War on Terrorism, in the future.

Venezuela needs the energy companies at least as much as they need its resources. In the wake of the massive oil industry strike in 2002 and the subsequent draconian restructuring of the state oil company, PDVSA, the country requires foreign technical expertise to keep its oil flowing. This is not the Middle East, where you drill a hole and watch the oil happily flow out for decades. The bulk of Venezuelan petroleum is heavy, and, as such, it takes much more ongoing maintenance and management to keep production going, as demonstrated by the unreported quantity of pre-strike output that is still offline.

The Chavistas also need capital investment from the international energy companies. With the lion's share of oil revenues committed to social programs--which coincidentally greatly bolster Mr. Chavez's support at the polls--rather than being reinvested, oil production will eventually grind to a halt without steady infusions of foreign money. I'm sure the companies are reassured by this dependency.

But I wouldn't bet that a confrontation won't originate on our side, particularly if the Bush administration is reelected. A Venezuela that supports the Colombian rebels and cozies up to Cuba is probably only a few steps away from an "Axis of Evil" designation. Instability comes in many varieties, and anyone considering new investments in Venezuela should bear that in mind.

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