Venezuela Part Two

Jim Brown
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Venezuela signed a deal with Eni (E) to invest more than $18 billion in developing the country's Orinoco region. Because the Orinoco oil is similar to Canadian oil sands Eni will build a refinery in the region to upgrade the oil and export it as refined products. Is Eni management living under a rock and not aware of the dozens of suits for confiscation of property currently pending against Venezuela? Could be they are planning head.

Hugo Chavez has never met a business he did not want to nationalize. It makes you wonder what Eni was thinking when they signed this deal to invest $18 billion in Venezuela. It is just possible Eni sees the coming demise of Chavez and is trying to gain a favorable position for the period after Chavez. After all the country is spiraling down so quickly now that protests against Chavez are no longer broken up by police. It is becoming the national pastime. When the electricity is out go to the town square and protest. Since electricity is out about nine hours a day that gives workers plenty of time to vent their hostility.

Venezuela is already exporting less refined products because the usage inside the country for fuel oil and diesel is skyrocketing. Generators are being imported by the shipload to combat the daily blackouts. Shopping centers have banks of diesel generators to provide power to the shops. Restaurants have generators to provide electricity to keep freezers and refrigerators running to prevent food from spoiling. About the only way you are going to have electricity is if you provide it yourself.

In 2009 the use of fuel oil by the electricity sector in Venezuela rose by +62% and the amount of fuel oil exported has fallen by -17%. The use of diesel has increased +15% to nearly 55,000 barrels per day over the last year.

The main cause of the electricity shortage is caused by a drought. The Guri Lake hydro dam, which supplies three-fourths of the nations electricity, has been operating at only 50% of capacity due to low water levels. The largest fossil fueled plant, Planto Centro, is rated at 2,000 megawats but is only producing around 267 megawatts for lack of fuel and maintenance. Officials claim it has not hit 500 MW in the last three months. Insiders claim it has not been maintained properly for years because Chavez takes the money from the company to pay for welfare programs to keep him in power.

Here is where the situation gets critical. If electrical generation falls any lower Chavez could divert power from the Paraguana refinery to use elsewhere. Some analysts believe a shutdown by the 960,000 bpd refinery could drive oil to $100 per barrel very quickly.

Venezuela has gone out for bid and many oil development projects in recent months and normally there are no bidders due to the stringent terms and risk of nationalism. This is why the Eni deal is so strange. Surely Eni management knows they are dealing with a snake that will bite them the moment they let down their guard. However, projects of this size take a long time to plan and move off the drawing board. It is perfectly plausible that Eni expects the Chavez regime to disappear suddenly over the next 12-18 months and the new administration will be willing to do anything to correct the problems they will inherit. That will put Eni in the drivers seat for not only the Orinoco development but as the loan company that offered to deal with Venezuela under Chavez they should be a favored partner on any new post Chavez projects.

Eni may be smart like a fox rather than bag of rocks dumb for signing a deal to invest $18 billion in a very risky proposition.

Jim Brown