OPEC's Weakest Link Venezuela Finally Sees Payoff in Oil Freeze

(Bloomberg) -- The deal struck between Saudi Arabia and Russia this week to cap oil output was the first meaningful response by producing countries to the collapse in crude prices. It was also a personal victory for the man who promoted it, Venezuela’s Energy Minister Eulogio Del Pino.

The Stanford-educated engineer was at the center of a lobbying campaign that led to the agreement in Doha, the first between OPEC and non-OPEC countries in 15 years. While the pact isn’t likely to raise prices enough to fix the South American country’s economic problems, it shows one of the group’s most desperate member still retains clout.

“Without doubt Venezuela has an important role in these developments,” Venezuela’s former Energy Minister 

Alirio Parra said by phone. Del Pino has been “very insistent in trying to get some form of agreement. So I think this has gone along the lines that he’s been looking for.”

Venezuela has been searching for more than a year for some way to reverse the oil-price slump that plunged its economy deeper into crisis. In November 2014, as prices first started to fall, former Energy Minister Rafael Ramirez brought together some of the world’s biggest producers, including Russia and Saudi Arabia, but failed to convince them to back a coordinated production cut. Del Pino has succeeded where his predecessor failed, albeit by lowering the nation’s ambitions.

“The initial purpose of Del Pino’s trips was to gather support for cutting production, not freezing it, so this is like a second-best solution,” Carlos Rossi, president of Caracas- based consulting firm EnergyNomics, said by phone.

While the freeze won’t “bring back oil prices to $100,” Saudi Arabia’s shift away from a “we don’t care” position is a big improvement, Olivier Jakob, managing director of Petromatrix GmbH, said by phone.

Saudi Arabia has resisted making any cuts in output to boost prices from a 12-year low, arguing that it would be losing market share unless its rivals also agreed to reduce supplies. The output freeze is “simply the beginning of a process” that could lead to “other steps” in coming months, Saudi Oil Minister Ali al-Naimi said Feb. 16.

Al-Naimi’s comments on stabilizing prices were “key,” said Parra, who has also represented Venezuela at OPEC. “There’s a fundamental change of attitude coming about.”

Saudi Rapprochement

The diplomatic campaign of Del Pino echoes the successes achieved by Ali Rodriguez, who was oil minister in the first government of Hugo Chavez in 1999 before becoming OPEC secretary in 2001. Rodriguez was instrumental in a rapprochement between Saudi Arabia and Venezuela and played a key role in OPEC politics for several years as a power broker.

The cordial relations that Rodriguez and his successor, Alvaro Silva Calderon, developed with al-Naimi, their Saudi counterpart, became central to OPEC policy-making in the early 2000s. The relationship between Caracas and Riyadh soured over the years under Rafael Ramirez, who was oil minister between 2004 and 2014.

Venezuela’s Information and Oil Ministries didn’t respond to e-mails seeking comment on Del Pino’s diplomatic efforts.

“With this historic agreement, Venezuela, a founding OPEC country, assumes once again a unifying role,” Del Pino said in an e-mailed statement from national explorer Petroleos de Venezuela SA Feb. 16. The agreement will restore “the stability of prices in the international market.”

The deal’s success hinges on the participation of other producing countries, notably Iran, which has vowed to raise production by 1 million barrels a day after sanctions on exports were lifted last month. The Persian nation, once the second- biggest producer in OPEC, said Wednesday it supports the output freeze without committing to restrict its own production, throwing doubt on whether the deal will significantly impact oil supply this year.

Capping output shouldn’t be a “big sacrifice” for Venezuela, according to Jakob at Petromatrix. Production has sagged as asset expropriations, cost controls and continuing rule changes deter investment. Output averaged 2.6 million barrels a day in 2015, falling by about 5 percent over a year, according to data compiled by the Joint Organisations Data Initiative. That’s down from 3.3 million barrels 14 years ago.

Gasoline Prices

The deal is unlikely to rescue an economy that depends on oil for 95 percent of its export revenue. Even as Del Pino shuttled between OPEC capitals this month, investors predicted Venezuela is on course for the biggest-ever emerging-market sovereign debt default. President Nicolas Maduro hiked gasoline prices for the first time in two decades on Wednesday as part of a package of measures to address triple-digit inflation and the deepest recession in over a decade.

The remedies are “too little, too late,” said Parra, who was energy minister from 1992 to 1994.

“Among OPEC members, Venezuela is in the worst economic situation as a consequence of the slump in oil prices,” Giovanni Staunovo, an analyst at UBS said by e-mail.

Ultimately the impact of the Doha agreement on Venezuela may at best be cosmetic, said BNP Paribas.

“Saudi Arabia is paying lip service to Venezuela’s efforts after they pushed so intensively for an accord,” said Harry Tchilinguirian, the head of commodity markets at the bank. “It allows Venezuela a means of saving face.”

Whatever oil analysts make of it, the Doha deal allowed Del Pino to show fellow Venezuelans that the founding OPEC member continues to wield influence in the fraying organization.


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