Venezuela's regional energy program Petrocaribe wobbles

When Guatemala announced it would join Petrocaribe, the alliance where Venezuela sends petroleum to 17 countries at below-market prices, there was little worry about the program’s future. Oil was trading at more than $100 per barrel and Venezuela was sitting atop the world’s largest reserves.

But that was 2008.

Since then, President Hugo Chávez succumbed to cancer, leaving behind a Venezuela with serious economic concerns that put in question his ideology of “Socialism for the 21st Century,” and how flagship programs at home and abroad might be affected.The future of Petrocaribe, a pillar of Mr. Chavez’s foreign policy, is top of mind.

Guatemala announced in early November that it was pulling out of the alliance as the cost of staying within it increased. Guatemala's decision was the clearest sign yet that the program could be on the verge of serious changes.

“Either they save their own regime, or they keep doing what they’re doing, which is contributing oil wealth to friends and associates and comrades. In that case, the whole thing [Petrocaribe] collapses,” says Evanan Romero, an energy consultant who served on the board of PDVSA, the Venezuelan state oil company, until 1999.

While the Venezuelan government has promised to keep Petrocaribe intact, it has quietly cut oil shipments, and may be contemplating pushing up interest rates and modifying repayment terms. Any such changes could have deep and lasting impacts on small countries accustomed to propping up their economies with the shipments.

“The Venezuelan Petrocaribe Initiative provided a partial and temporary solution for [regional energy needs] but this solution is unlikely to be sustainable,” Trinidad & Tobago’s Acting Minister of Energy and Energy Affairs Bhoendradatt Tewarie told leaders this week at the Caribbean Community Energy Week in Port of Spain.

Changing contracts

Guatemala’s Vice President Roxana Baldetti said her country backed out of the pact because the terms of the deal had changed.

Under most contracts, countries pay 40 percent of a bill in the first 90 days and finance the rest at a 1 percent interest rate over 25 years. (Countries are required to pay more of the bill up front if the price of oil slips to $80 per barrel or below). But Guatemala was offered a repayment interest rate of between 2 percent and 4 percent with more of the bill paid up front, Ms. Baldetti said.

Guatemala is not the only country to see unexpected changes to its deal with Venezuela. The Dominican Republic, one of the leading recipients of petroleum shipments under Petrocaribe, is receiving about half of the 50,000 barrels per day it was promised, according to government advisers familiar with the contract.

“It’s not the only country that is not receiving its quota,” a person who has seen Petrocaribe contracts for various governments says. This individual asked not to be identified because doing so would threaten business agreements with the governments. 

“What’s frightening for them is that the deals are structured so that the terms of repayment can change with 30 days advance written notice.”

In 2008, when Guatemala began negotiating for a spot in the organization, Honduras signed on. It expected some 20,000 barrels of oil per day. Tegucigalpa, however, is still awaiting its first Petrocaribe shipment because of problems with Venezuela’s refineries. Meanwhile, neighboring El Salvador now appears reluctant to join the pact.

The Venezuelan authorities did not respond to numerous requests for comment. But the country’s oil minister, Rafael Ramírez, said recently that Petrocaribe is sustainable, even if oil prices fall as low as $40 per barrel. Crude was trading around $94 per barrel this week. 

However, Venezuela’s oil production has been stagnant in recent years, despite the ample reserves.

The Organization of Petroleum Exporting Countries (OPEC) November oil market report found that independent sources put Venezuela’s production at 2.35 million barrels per day, nearly unchanged in the previous 3 years.

The OPEC report contradicts Venezuelan government statistics, which put production closer to 2.8 million barrels per day. The country announced Wednesday that 2014 production would reach 3.1 million barrels per day, close to the late 1990s peak of roughly 3.3 million.

Bigger friends?

But a portion of Venezuela’s oil is promised to countries such as India and China, where it's sending 640,000 barrels per day, half of which is sent to repay $40 billion in loans. Sending oil to those countries is more financially beneficial to Venezuela than shipments closer to home, where countries are repaying their debts in-kind with products like black beans and chicken parts. 

China and Venezuela are soon expected to begin negotiating the renewal of a $20 billion credit line that would further oblige the South American country to send its oil to Asia.

“The production is not there to keep up with all these commitments,” Mr. Romero says. “For those countries that are not fully allied politically, [Venezuela] might just look the other way.” 

Analysts expect that Venezuela will begin to quietly roll out further changes at meetings scheduled in Caracas this week and next month. However, it is unclear what terms will change.

“That’s the big question. The Venezuelan government is remarkably quiet when it comes to any changes,” says Alexis Arthur, who follows Venezuela as an energy policy associate at the California-based Institute of the Americas. “I think we all expected this right after Chávez died. … What we’re seeing now is the first signs that’s actually happening.”

Trouble at home

Chávez’s March death prompted fears that his hand-chosen successor, President Nicolas Maduro, would make wholesale changes to the eight-year-old pact as economic problems at home continue to mount.

Economic problems reached a crescendo this week when President Maduro forced retailers to slash prices on imported goods and said he established “percentage limits for profits in all sectors of the economy.” The country has been experiencing sporadic shortages of basic goods on store shelves and saw inflation hit a 16-year high last month.

Throughout this trouble at home, Venezuela has sent 232 million barrels of oil to Petrocaribe nations on preferential terms, including providing some 40 percent of the energy needs of its 14 Caribbean partners. Economists say the foreign dollars that those oil shipments could bring in if sold on the open market would help ease pressure on the nation’s overvalued currency, the bolivar.

The threat of any change to the Petrocaribe repayment terms is especially frightening for small islands that are heavily reliant on Venezuelan oil. Without Petrocaribe shipments, they will be forced to turn to the open market, where they will pay the going rate without the long-term financing option.

Observers say that Mr. Maduro’s uneven leadership style adds to the uncertainty over Petrocaribe’s future.

“What’s most intriguing is recognizing that the architect of the deal and the individual who had power to comfort these countries is no longer there,” says Anton Edmunds, a consultant who advises corporations and Caribbean governments on energy policy.

“That’s the cold water in the morning in everyone’s face. Since the passing of Hugo Chávez, the whole climate and arrangement with Venezuela is no longer certain.”