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Analysis on Venezuela - USA oil relationship

By Pedro Mario Burelli

Comments: when reading articles like the one below from Stratfor it seems like an unraveling in the oil supply chain that has been the mainstay of Venezuela is in the works. Whatever the merits of focusing on developing other markets – and there are certainly many - a precipitous and emotional move vis-à-vis supplying oil to the US will certainly produce uncharitable havoc. But, since it seems like Chavez wants to elevate himself to global “enfant terrible” status via direct and personal confrontation with George W. Bush (and/or vicariously with President Uribe whom he refers to as “Bush’s lap dog” in private) we cannot rule out that he will follow through on his numerous threats to cut oil supply to the US. When he fired the 18,000 most qualified employees of PDVSA he showed complete disregard for the welfare of Petróleos de Venezuela (a.k.a. “the goose that lays the golden eggs” or more aptly “the revolution’s ATM”) not to mention the future of Venezuela. His venomous anti-US rhetoric shows no sign of abatement as he seems to relish every opportunity to needle the US or its interests.

Chavez has boasted – in public - that he deliberately incited the oil commotion that lead to his brief ouster in April 2002, and was also instrumental in provoking the two-month oil strike which began later that year and which left the US (and many smaller countries in the region that have now become submissive to his will in exchange for cheap barrels) without a drop of Venezuelan oil for almost two months. His unilateral and capricious management of oil matters has translated into one undeniable fact: while many foreign oil companies in Venezuela continue to hold on to their “options”, very few projects are truly underway and the prospects for many signed agreements are iffy at best (remember Lukoil and the French in Saddam’s Iraq?). Why should we find comfort in the idea that Chavez will “always keep the oil flowing”? Why is it that we have failed to understand that his aims are radically different than ours and as a result his means are bound to continue surprising those that underestimate or appease him?

I once spent six hours discussing oil with Hugo Chavez. That was back in early 1998 when he had 3% in the polls. My conclusion then: charming, nimble, ignorant and irresponsible. My conclusion today: not as charming!

Note: last week Platt’s informed the world that at least someone in the US was taking Hugo Chavez’s repeated threats seriously. Attached you will find the letter that Senator Richard Lugar, Chairman of the powerful Foreign Affairs Committee in the US Senate sent to the General Accountability Office on the matter of Venezuelan Oil. The letter speaks for itself and it would seem certain that the GAO will deliver a report that will help defuse Chavez’s oil bargaining/blackmailing card while mapping the demise of almost 80 years of stable and mature oil relationship between our countries.

Venezuelan President Hugo…

From Stratfor

January 17, 2005 | Venezuelan President Hugo Chavez has been ratcheting up the rhetoric over cutting off U.S. markets from Venezuelan oil supplies during the past several weeks.

On the surface the idea seems preposterous. Along with Mexico, Canada and Saudi Arabia, Venezuela has ranked among the top four U.S. oil suppliers for decades and currently supplies approximately 11 percent of U.S. oil needs.

Located just across the Caribbean from the U.S. Gulf Coast, it is ideally situated to supply the U.S. market. Denying that in order to supply customers in Asia or Europe would cut deeply into Venezuela's profit margins.

However, Chavez's primary rationale is not economic, it is political. Opposition to the United States is an ideological fact for him, and he wants to reduce Venezuela's economic links to the superpower to his north -- even if it means a little less cash for his coffers.

Now, we do not take Chavez exactly at his word. We never expect him to stop all shipments to the United States, not out of love or kindness, but because the primary customer for Venezuelan crude in the United States is CITGO, a subsidiary of PDVSA, the state-owned Venezuelan oil company. Chavez might be many, many things, but he is not about to cut off supplies to one of his own companies -- or at least not before he sells it (although that is another issue we will get to in good time).

CITGO uses about 860,000 barrels per day to supply its refineries and approximately 700,000 bpd of that total comes from PDVSA. To fill domestic refinery needs, Venezuela keeps about another 1.3 million bpd at home, of which some 900,000 bpd of product is shipped abroad with the remaining 400,000 bpd being used at home. That leaves Venezuela with only about 600,000 bpd of additional crude exports to play with. In a global system where demand is at about 80 million bpd, 600,000 bpd can be mopped up pretty quickly.

But Chavez has even selected where he wants his country's crude to go: China. Chinese representatives have been hop scotching all over Latin America during the past few months attempting to pen trade and investment deals. For China, energy security is an acute issue. The Persian Gulf states enjoy a near monopoly on exports to Asia, resulting in a stiff premium on supplies. Venezuela's heavy crude might be of inferior quality to the lighter, sweeter streams that come from the Middle East, but it does not have to steam past regional rivals Australia, India, Singapore or Vietnam to reach Shanghai.

The lower cost of Venezuelan crude -- not to mention the lack of a premium -- should also offset the higher transport cost of getting it across the Pacific.

Venezuela is already in advanced negotiations with Panama to trim some of that transport cost. Panama possesses a pipeline -- the Petroterminales de Panama -- that transports crude from its Pacific to its Atlantic coast.

Chavez wants to reverse the flow so Venezuelan crude can reach the Pacific basin. The process is rather simple and cheap -- and with oil prices where they are Venezuela can afford it. Should an agreement be struck, Venezuelan cargos could be steaming to Asia by August. At maximum capacity the Petroterminales de Panama can handle 800,000 bpd.

The one hitch in the plan is that Venezuelan crude is so thick that very few Chinese refineries can run it at all. Refitting sufficient capacity to use the stuff could take up to two years. Currently, China could handle no more than 100,000 bpd according to sources in the U.S. Department of Energy.

But even here Venezuela has a bridge to make things work out. Singapore currently has spare capacity of about 300,000 bpd which is capable of handling the Venezuelan crude, and the U.S. West Coast has plenty of refineries that would be willing to take a few cargos to supplant or supplement -- Middle Eastern deliveries even if only on a temporary basis.

When Venezuelan crude oil hits the Pacific, Chavez will have his pick of potential customers -- even if the Chinese are not among them at first.

That leaves only the pesky issue of CITGO , a front on which no moss is gathering. On Jan. 13, Chavez restructured the PDVSA board of directors and installed Bernard Mommer, until now PDVSA's U.K. director, in the new lineup. Mommer favors PDVSA selling all of its international holdings. Add that PDVSA President Rafael Ramirez's first assignment for the new board was to completely review all of PDVSA's contracts and agreements with foreign firms, and it appears ground is being laid for a rolling Venezuelan disengagement from the United States.

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