www.controlrisks.com © Control Risks Group Limited

17 March, 2017

Raúl Gallegos, Senior Analyst, Andean Region

Opportunities and risks for oil companies

CRUDE NATION:

VENEZUELA’S OIL PATCH

2 © Control Risks Group Limited

Country view: Chavismo on the horizon 03

Oil: Opportunities for the bold 09

Conclusions 14

Contents

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POLITICAL &

ECONOMIC OUTLOOK

Politics: Chavismo grows more radical

High political risk

Maduro delays elections until

convenient and may even

delay presidential elections in

2018.

Maduro disqualifies

opposition leaders from

holding public office, jails

others.

Maduro will continue to nullify

congress with help of

Supreme Court.

Military keeps dissent under

control.

Photos: Flickr Creative Commons

An economy in free fall

Imports fell by 50% in 2016… …with inflation exceeding 460%…

…and a low oil price outlook.

Source: PdVSA, BCV, Oxford Economics

Economic risks

Economy to contract

3.7% in 2017.

Government will keep

capital and price

controls in place.

Fewer dollars

available for imports

of raw materials and

staple goods.

Shortages of basic

food and consumer

goods will return in

2017.

0

100

200

300

400

500

2011 2012 2013 2014 2015 2016

Inflation %

460%

0

10

20

30

40

50

60

70

2012 2013 2014 2015 2016 2017 2018

A 70% drop in four years

0

20

40

60

80

100

120

2012 2013 2014 2015 2016 2017

US$45.72

(03/10/2017)

Av. US$/Barrel

Leadership Axis Dictatorship

Democracy

State Control Free Market

VP. El-Aissami VP Isturiz

Min Torres

Min Jaua

MADURO

Diosdado

Lopez Capriles

Chavista Leaders

Opposition Leaders

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Alternative scenarios

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OIL FOR THE BOLD

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Politics and oil

PDVSA president Eulogio Del

Pino and Orlando Chacin run

things. Knowledgeable people

remain in control.

More operational control for

private sector in oil projects.

No immediate plans for flexibility

in fiscal and royalty terms for the

oil industry.

State-owned CAMIMPEG to

involve military in oil. Will operate

near Colombian border. Military

secures Orinoco Belt projects.

0

0.5

1

1.5

2

2.5

3

2013 2014 2015 2016 2017

Mb/d

2.15

OIL PRODUCTION DECLINE

IOCs: Better business terms in the horizon

Importance of foothold in world’s

largest oil patch.

Opportunities to work with trust

fund mechanisms to funnel money

directly to oil projects.

Cash-strapped government likely to

offer higher stakes in projects

(assuming low oil prices).

More opportunities open to state

owned players. But friendly private

companies likely to benefit too.

OPPORTUNITIES CHALLENGES

Need deep pockets / financing to

participate.

Unrealistic exchange rate makes

OPEX costly.

Future legal / political challenges to

deals struck without congressional

approval.

Oil services: Payment in oil

Opportunity to be paid in oil. The

first time Venezuela does this.

Oil services companies get more

freedom to operate and address

security and political risks.

Low likelihood of asset seizure,

especially while oil remains

depressed.

More drilling rounds likely in 2017

and 2018 as PDVSA becomes

desperate to increase output.

OPPORTUNITIES CHALLENGES

Need financing to participate. Few

banks willing to take the plunge.

New oil payment terms may take

time. Meanwhile, PDVSA still

strapped for cash.

Organized crime and radicalized

unions pose threats to operations,

undermine output.

Oil Cos

Interested in entering Venezuela?

Manageable barriers to

entry given PDVSA

urgency to increase

output.

High reputational risk

for companies given

lack of transparency of

PDVSA and corruption

in the industry.

Potential legal

challenges to oil deals

in the future.

ABOVE GROUND RISKS

When do I get

paid?

Politicized

and criminal

oil unions

PDVSA is

unreliable

partner

Organized

crime

The need for

financing

Expensive

OPEX (FX)

Conclusions

Chavismo will remain in charge through 2018 – likely with Maduro still at the helm

– despite his low popularity, international pressure and imploding economy.

A Maduro departure in 2017 can happen if the military exerts pressure for him to

cede power to another Chavista. This seems unlikely however.

Desperation will offer interesting opportunities in the oil business. This is

especially the case for IOCs and oil services companies with a high tolerance for risk

of non-payment and a capacity for self-financing.

Organized crime as well as radicalized and mercenary oil worker unions will remain

a challenge.

High reputational risks. PDVSA’s lack of transparency, corruption and political

ethos will pose future integrity risks for partners and contractors.

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15 © Control Risks Group Limited

For more on Venezuela…

“Superbly reported” – The Wall Street Journal

“A timely, important book” – Publisher’s Weekly