Chavez's death brings uncertainty to the oil and gold sector

Oil markets don’t seem to be reacting this morning to the death of Venezuelan President Hugo Chavez, with the price of crude increasing only slightly on Wednesday.

Crude barely rose in electronic trading in New York to $91.05 per barrel. That is eight times the price of a barrel when Chavez took office 14 years ago.

However, the possible consequences for the oil market are still unclear, say analysts. The consensus seems to be that the overall impact of Chavez’ death, who passed away Tuesday after a two-year battle with cancer, may not be felt until Venezuela chooses a new President.

The new leader may have different views than his predecessor, who saw the state-owned oil company PDVSA’s production fall 25% from 3 million to 2.4 million barrels per day since 1998. This happened despite the fact that Venezuela holds the largest oil reserves in the world, at more than 500 billion barrels.

In the meantime, the country faces near-term political uncertainty that could bring further turmoil to its oil industry.

“President Chávez's immediate successor will inherit a country facing widespread violent crime (one of the highest per-capita homicides rates in the world), high inflation and frequent electricity and food shortages,” said Carlos Cardenas, deputy head of Latin America country analysis at research and analysis firm IHS.

According to Cardenas there were 4,981 protests in Venezuela during January-November 2012, but he thinks that none of the groups organizing these demonstrations are likely to show the new leader the same loyalty and patience they did with Chavez.

“Without Chavez's charisma, the new president is likely to encounter frequent bouts of nationwide unrest. This is likely to take the form of road blockades, arson against vehicles, confrontations between protesters and security forces,” Cardenas says.

One thing to expect, says the expert, are improvements to the oil sector regulatory framework.

“Venezuela currently has one of the toughest fiscal regimes in the world,” Cardenas says.

“We assess that the government will inevitably need to ease the fiscal terms in the sector in order to incentivize a rise in production, particularly as higher production is needed to provide some respite to PDVSA's finances,” he adds.

He warns that changes are unlikely to be immediate and that the most probable scenario is an intensification of PDVSA's current problems, which will eventually force the authorities to introduce incentives in the sector.

Chavez unwillingness to invest in the oil industry, along with a strike at PDVSA in 2002 that took some of the company’s best talent away, led to deterioration in Venezuela's most important industry.

The defunct president nationalized some oil and gas companies owned by international oil companies, such as Exxon Mobil, in order to make PDVSA the majority stakeholder in all Venezuelan projects. That prompted Exxon and others to leave Venezuela, further reducing the country's access to oil and gas technology and expertise.

In 2011 he continued with the gold industry, passing a decree that allows the state to collect a 13% royalty on gold mining, but smaller operations are only be subject to a 3% tax. Military zones were also established to crack down on illegal mining operations.

Gold companies wanting to do business in Venezuela are, since then, forced to become minority partners with the government, which is another key issue the new authority might want to change, say analysts.

That law also eliminated the option for companies to avail themselves of international arbitration; should disputes occur, they will be solved in Venezuelan courts.