LONDON, UK (miningweekly.com) – With violent antigovernment demonstrations petering out and many of his leading opponents now muzzled, Venezuelan President Nicolás Maduro might be forgiven for thinking his administration is now on firmer ground.

However, the underlying causes for the disturbances and dissatisfaction remain: the country suffers from rampant inflation, Byzantine currency controls, the shortage of basic goods and an ageing oil and gas infrastructure.

The government’s response has been a slow and often reluctant move towards rapprochement with the private sector and foreign investors.

“I think the government realises that it can no longer run the economy under a strict State-controlled strategy,” Rubén Eduardo Luján told Mining Weekly Online. “If it wants to keep up, it will need to give private businesses greater room to manoeuvre.”

Among his areas of expertise, Luján is cohead of Norton Rose Fulbright’s banking and finance practice for Latin America and of the mining practice in Caracas.

Risk consultancy Control Risks VP for global services in South America Daniel Linsker concurred. “There are still a lot of dark clouds on the horizon, mainly owing to Venezuela’s economic situation,” he noted. “I think the government is starting to realise that the system they have in place is unsustainable.”

But while evidence of the reluctant rapprochement is apparent in the oil and gas sector, there is still considerable debate whether the government will extend this into the mining sector.

FUNDED BY FUEL

Earnings from the oil and gas sector prop up the edifice created by Maduro’s predecessor, Hugo Chavez. “The oil and gas industry is the heart of the country,” Luján stated, adding that if it suffered or experienced financial distress, then the whole country would go into distress, including the government.

Venezuela was the world’s ninth-largest exporter and twelfth-largest producer of petroleum in 2013. Yet the country has the largest global reserves at almost 298-billion barrels, which compares with Saudi Arabia’s 266-billion barrels, according to the US Energy Information Administration (EIA). In addition, Venezuela’s Orinoco heavy oil belt could hold up to 513-billion barrels of crude oil, a resource that will require significant investment and expertise to fully tap.

But despite the potential scale, Venezuela output had declined in recent years, standing at 2.49-million barrels a day petroleum and other liquids in 2013, according to the EIA. This compares with 3.2-million barrels a day in 2005.

Part of the problem stems from Petroleos de Venezuela SA (PDVSA) having to divert significant earnings away from investing in infrastructure and development. State-owned PDVSA holds a minimum 60% stake in Venezuelan oil projects.

The company is expected to set funds aside for social programmes or dedicate exports for the servicing of national debt. For example, a new $4-billion credit line signed with China on July 21 will be repaid with oil shipments.

Notwithstanding the risks associated with Venezuela, the country’s oil and gas sector remains attractive for investors because of the immense opportunities. For example, on June 4 it was announced that Eni and Repsol would each invest $500-million into developing and exploiting the gas reserves in Venezuela’s Perla field. The companies will hold 20% each in the resulting joint venture, with the remainder controlled by PDVSA through a subsidiary.

“In the oil sector, you can see the government is looking at private companies to increase their investment levels into the country and to provide international financing,” Luján pointed out, noting that, in recent years, there had been several deals ranging between $500-million and $2-billion to $3-billion. "In terms of single international investments into a country, these figures can well be the envy of many other Latin American jurisdictions.”

BLESSINGS AND CURSES

But Venezuela is not only blessed with oil and gas; opportunities abound in metals and minerals. For example, the country comprises a major part of the continent’s Guiana Shield, with highly prospective possibilities for gold.

“The promise is definitely there; you have some of the largest proven gold reserves in South America, with some fantastic project potential,” Linsker highlighted.

But the drive to nationalise and expropriate during Chavez’s tenure, particularly in the gold sector, continues to cast a long shadow on Venezuela’s appeal as a mining jurisdiction. Many believe the political risk in mining remains equally high under Maduro.

“And beyond the political risk there are other issues. For example, there’s a lot of illegal mining a company might have to contend with, while Colombian FARC guerrillas are allegedly involved in the gold sector of Venezuela’s Bolívar State,” Linsker added, saying even the army appeared to be involved in illegal mining.

In addition, the government’s enthusiasm for mining remains muted. “In some ways mining has been overlooked by the government because of the oil sector, which is the main focus of its policies,” Luján said.

Yet the need for alternative revenue streams is at least prodding the Maduro administration to take some form of action. So far, this has taken the form of attracting Russian or East Asia investors.

“We’re seeing different types of investors entering the sector, particularly from Asia. They have different risk profiles compared with the more traditional investors into the country, such as those from the US, Canada and Western Europe,” Luján explained.

ANOTHER AVENUE

If it was inclined to, Venezuela might adopt a mining model based on the one used for oil and gas, Linsker mused. This would involve establishing mining ventures with a State-controlled entity holding majority ownership.

“However, there are two things to consider here,” he added. “Firstly, the government is without [mining] expertise. Secondly, there’s no large-scale, State-owned mining company currently in place. Using subcontractors [as the State’s proxies] wouldn’t work because the expertise isn’t available there either.”

“Hypothetically, it wouldn’t be impossible for the government to organise a large-scale, State-owned mining company. But it would also face the same issues surrounding illegal mining and armed groups. I don’t know if the government would want to bother,” Linsker said.

Although conditions are unfavourable, companies with experience in the wider region should at least monitor Venezuela. When the time is right, the first-mover advantage could be enormous, as witnessed in neighbouring Colombia over the past 15 years, for example.

Some are already taking the first steps. “There are international companies cautiously looking at Venezuela because they know the scale of the resources and that they haven’t been fully explored or exploited,” Luján said.

“Ultimately, these companies know that the government is unable to run the economy in the way it has been doing,” he noted. “So, when the right time comes, Venezuela could pose a great opportunity for first movers.”