Not all news out of Venezuela is shortages and protest. While the economy grinds to a halt and the government issues a new bill worth 20,000 Bolívares, the government of Venezuela has been busy pursuing foreign investors and subscribing new deals to revive oil production and exploit its vast mineral deposits. The government maintains that it will own 55% of every JV and an equal share of profits and collect tax revenues and sow the riches. Is it possible, under Venezuela’s present conditions, to attract investment and obtain favorable terms? What can Venezuela accomplish? and what does it tell us about the consequences of punishing investors with unfriendly policies?
In 2016, perhaps the worst year in recent history for Venezuela in terms of economic performance, the government took two initiatives to reverse its economic decline. It created a new oil and minerals state company under military control, Camimpeg, and designated a vast area, the Orinoco Mineral Arc, as an investment target. The AMO, by its Spanish acronym, contains a wide array of traditional and strategic minerals, including coal, manganese, gold, iron, bauxite, copper, nickel, diamonds, phosphates, coltan and graphite. The mineral reserves of this area are supposed to be extraordinary. The government of Venezuela says it has reserves of 7,000 tons of gold, second largest in the world after the U.S. Mining companies from all over the world are interested, sending emissaries and signing deals. The creation of the AMO itself may even improve Venezuela’s dismal Moody’s ratings of Caa3, as the minerals themselves can act as collateral to investment.
So what is actually happening? So far, Camimpeg has entered into a strategic alliance with Southern Procurement Services (SPS) and helped Petrocedeño, an arm of PDVSA, resume 1,ooo barreals a day oil production in the state of Anzoátegui. It’s not exactly the dream team in action. SPS, and its parent company, the SCZ group, have been in the oil business for less than a decade. According to the SCZ website, they specialize in trading petrochemical products (such as PVC, Resin, Monomer) and have recently expanded to parts and raw materials. They provided interface cards to Petrocedeño. They may help with some bottlenecks, but they don’t seem to have either capital nor technological capacity necessary to turn Venezuela’s oil production around. The strategic alliance between Camimpeg and SPS may be profitable for its members, but will have little impact on Venezuela’s oil production.
The mining initiatives may hold more promise, including that of opening a new chapter in resource dependence for Venezuela.
The government of the state of Cojedes signed a 6 LOIs with Havan Chang Holdings, also a company belonging to the SCZ group, to mine granite and for several related processing plants. But the more interesting news relates to Gold Reserve Inc. The company is coming back to Venezuela after the government seized its Brisas gold and copper mine project in 2008, bringing with it a settlement for $770 million handed to the company by ICSID, the World Bank’s dispute resolution entity. Venezuela also agreed to buy the company’s mining data for $240 million and enter into a jointly owned company for a 18,000-hectare claim including the Brisas Cristinas deposit (Source: BloombergMarkets). The mining company Rusoro also won an arbitration settlement for the expropriation of its assets in 2012 for $1 billion.
It is highly unlikely that Venezuela will make good on these payments any time soon, given the state of its national accounts. But it will pay in kind. With new concessions and attractive terms, including generous and long-lasting tax exemptions, which will seriously reduce the benefit to the country of exploiting its mineral resources. And eventually, when the country’s fiscal accounts recover, Venezuela may have to pay the settlements anyway.
The recent governments of Venezuela have made a sport of burning bridges with business. But the enemy always sprouts a new head and comes back, enticed by the very government that expelled it. And a new cycle begins.