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US government reviews oil supply relationship with Venezuela

Platts Oilgram News

VOLUME 83 / NUMBER 9 / THURSDAY, JANUARY 13, 2005 | Caracas - General Accountability Office preparing study on reliability. The US is currently reviewing Venezuela’s position as a leading oil provider following damage to its reputation as a reliable supplier during the presidency of Hugo Chavez, according to documents obtained by Platts.

Sen. Richard Lugar (Republican-Indiana), chairman of the Committee on Foreign Relations, has ordered the Government Accountability Office (GAO) to prepare a study on all aspects of the Venezuelan oil industry and the impact any supply interruption may have on the US. He also called for alternative oil supplies to be investigated as part of a contingency plan.

In a letter dated Nov 29, 2004, and addressed to the comptroller general, Lugar stated: “The prospects of achieving the reliable energy relationship with Venezuela that this country has had for decades has diminished, particularly over the last two years.” He added contingency plans should be in place in case of a supply disruption from Venezuela, “as this could have serious consequences for our nation’s security.”

Investigation team

Committee spokesman Andy Fisher told Platts late Jan 11 the GAO is currently assembling a team to carry out the investigation, but no results are expected for several months. “Something like this is long overdue,” said one US-based industry analyst, who declined to be identified. “The US government does need to understand how real these threats are that Chavez makes.” In Lugar’s letter to the GAO, he cites the two-month oil strike in Venezuela in 2003 that halted oil exports, together with more recent threats to cut off supplies to the US as proof an extensive policy review is needed.

US oil majors are also disgruntled over Venezuela’s surprise decision last October to raise royalties on four extra-heavy crude upgrading projects. Populist Chavez caused a stir last year when he vowed “not one drop” of Venezuelan oil would reach the US in the event of military aggression against him. Venezuela, the world’s fifth-largest oil exporter and a key member of OPEC, has since sought to diversify its client base. Chavez has offered discounted oil to several countries in Latin America and the Caribbean, and promised to help meet China’s growing energy needs during an official visit to Beijing over Christmas.

China competition

Venezuela is now studying a pipeline across Panama that would give it access to Pacific ports. However, foreign minister Ali Rodriguez said last week any increase in shipments to countries like China would not affect supplies to the US, as Venezuela plans to increase output by 1.5-mil b/d over the next five years.

State-owned PDVSA says it is currently pumping 3.1-mil b/d, of which 2.7-mil b/d is exported. Industry observers doubt these figures and put total output closer to 2.6-mil b/d.

Michael Gavin, head of Latin American Research at UBS Warburg, said he doubted anything would come from the GAO review. “There’s not much they can do to replace the country’s third- or fourth-largest oil supplier. There aren’t many plausible alternatives,” Gavin said in an interview. News of the study comes the same week as a visit to Venezuela by three US senators, who included a meeting with Chavez in their timetable.

Sen. Christopher Dodd (Democrat-Connecticut), also a member of the Foreign Relations Committee, stressed the mutual dependence of the relationship with Caracas Jan 10. He said he was optimistic a new page could be turned in US-Venezuelan relations, pointing out the US receives 13% of its oil imports from Venezuela, while Venezuela counts on the US for most of its exports.

State Department changes

Committee spokesman Andy Fisher denied the visit was linked to the GAO review. However, an industry source told Platts the US State Department, soon to be under the new leadership of Condoleezza Rice, may be considering a wholesale review of policy toward Venezuela.

A State Department spokeswoman said Jan 12 she had no information of any change in policy toward Venezuela. Chavez described Rice as “a true illiterate” last year when she called on him to accept the democratic vote of Venezuelans in a recall referendum that he went on to win, and he frequently criticizes President George W. Bush during speeches.

The State Department and the Department of Energy are reported to be sending a team to Venezuela next month to look at the oil industry.

Whether the GAO review signals a shift in US-Venezuelan relations remains to be seen, but Sen. Lugar’s motivation is clear. In a Miami Herald opinion column published shortly before the review request was sent to the GAO, he said: “We must recognize that even though we buy 90% of Venezuela’s oil, Chavez could temporarily try to cut off sales to us. Arrangements with other regional oil producers to replace any Venezuelan shortfall are long overdue.” — Steve Ixer

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