IHS Global Insight Perspective | |
Significance | In a meeting with Venezuelan president Hugo Chavez that was heavy on symbolism, Russian prime minister Vladimir Putin solidified a series of energy and military accords with the Venezuelan leader, deepening the growing economic and political ties between their two countries. |
Implications | Putin's first-ever visit to Venezuela—trumpeted by Chavez as the start of a "new, multipolar world"—was highlighted in the energy sphere with an official signing of an accord between PDVSA, the Venezuelan state oil firm, and a consortium of Russian energy companies to develop the Junin 6 oilfield, which holds reserves of an estimated 53 billion barrels. |
Outlook | The Junin 6 deal between Russia and Venezuela reflects Russia's desire to expand both its economic and political influence in Latin America, and while other South American countries—notably Bolivia—are more than willing to strengthen ties with Russia, for the most part these ties remain limited to energy and military accords. |
Clinching the Deal
In his first ever visit to Venezuela, Russian prime minister Vladimir Putin received a veritable hero's welcome from his host, President Hugo Chavez. In advance of Putin's arrival early on Friday (2 April), Chavez told reporters that Putin's visit was "a very important day for the country and for Latin America...We are building a new, multipolar world." Chavez's penchant for hyperbole notwithstanding, the Russian prime minister's visit did help to strengthen the economic and political ties between Russia and Venezuela that have been developing over the past few years. The two countries have signed 12 military agreements since 2005, worth US$4.4 billion, according to an Agence-France Presse (AFP) report, and Chavez thanked Putin for helping Venezuela "bolster its defensive potential," citing 'threats" from the United States to Chavez's leftist regime.
Putin's trip to the Venezuelan capital, Caracas, effectively re-affirmed Russia's commitment to those earlier military deals, but the prime minister also had an important bit of business to tie up with regards to an oil deal in Venezuela. Although an agreement between PDVSA, the Venezuelan state oil firm, and a consortium of Russian oil companies to develop the Junin 6 oilfield had already been agreed, Putin's visit to Venezuela effectively cemented the deal, lest there was any doubt (see Venezuela - Russia: 11 September 2009: Venezuela, Russia Sign Accord on JV in Orinoco Belt and Russia - Venezuela: 2 February 2010: Russian Companies Sign Investment Deal for Junin 6 Oilfield in Venezuela). Under terms of the agreement, Russia's "National Oil Consortium"—comprised of Gazprom, Rosneft, TNK-BP, Surgutneftegaz, and LUKoil, each with a 20% stake—will partner with PDVSA for the development of the Junin 6 field, which has reserves estimated (optimistically) at 53 billion barrels. PDVSA and the National Oil Consortium are to set up a joint venture (JV), with PDVSA holding a 60% stake and the Russian oil group holding the remaining 40%.
Venezuela anticipates that the Junin 6 field can begin production of 50,000 b/d by the end of 2010, although Orinoco crude is extra heavy and must be processed before it can be refined. The new Venezuelan-Russian JV is also expected to build an upgrader facility, with output capacity of as much as 450,000 b/d. As part of the deal, the Russian companies are paying a signature bonus of US$1 billion, including an initial US$600-million tranche. Total investment in the project could reach US$30 billion, according to Venezuelan oil minister Rafael Ramirez.
Outlook and Implications
The sheer size of the Junin 6 project, in terms of investment capital and planned output capacity, makes it clear why both sides were keen to cement their political and economic ties with Putin's visit to Caracas. An addition of 450,000 b/d of heavy Orinoco crude from the Junin 6 field would provide a major boost to Venezuela's oil production, while the major financial commitment that the project entails from the Russian perspective makes it that country's largest foreign oil exploration and development project. To that end, Gazprombank, the banking affiliate of the Russian energy giant, is expected to play a major financing role. Last July, Gazprombank said it would provide a US$4-billion loan towards the development of minerals and other raw materials in Venezuela.
Venezuelan vice-president Elias Jaua said on state-run television ahead of Putin's trip that the Russia prime minister's visit would take Venezuela's relations to "the next phase of cooperation with Russia, which no longer will be limited to energy and military matters, but now also includes social, cultural and health issues". Chavez did take Putin on a tour of various cultural sites in Caracas, including the tomb of national hero Simon Bolivar, yet Putin's visit was nevertheless dominated by those very same energy and military issues. Likewise, Putin's meeting with Bolivian president Evo Morales, who travelled to Venezuela for talks with the Russian premier, largely focused on energy and military co-operation, with Russia seeking to clinch proposed energy investments and Bolivia aiming to ensure the delivery of Russian military hardware and equipment. Russia is eager to expand its economic and political influence in South America, and the leaders of both Venezuela and Bolivia, in particular, are more than happy for Russian direct investment in their energy industries (in exchange for deals to buy Russian weapons and other military paraphernalia), but the depth of this bilateral co-operation, so far, is quite shallow.