Oil and Gas Features

Energy dynamics under Hugo Chavez

By Fred Stakelbeck Jun 7, 2006, 20:51 GMT

Using a rare mix of bravado, Latin American charm and old-fashioned arm twisting, Venezuela’s President Hugo Chavez has propelled his country to a position of leadership on the global energy scene.

Hosting the Organization of the Petroleum Exporting Countries (OPEC) ministers meeting last month, Chavez once again demonstrated why he has become the unofficial spokesperson for OPEC and a key player in determining global oil prices. “It is now recognized within OPEC that President Chavez played a fundamental role in improving [oil] prices,” noted Alvaro Silva Calderon, former secretary general of OPEC.

Although revered by supporters for his efforts to empower both OPEC and Venezuela, Chavez is viewed as a controversial figure in global energy markets. Since taking office in 1999, Chavez has actively lobbied OPEC to expand the organization’s eleven members to include other oil-rich Latin American nations such as Bolivia and Ecuador, while increasing calls for steady reductions in global oil production. Many industry analysts see these maneuvers as an attempt to maintain current elevated price levels while at the same time, creating a strong and influential “Latin bloc” within OPEC.

Chavez has benefited greatly from the recent rise in oil prices, owing his political survival in large measure to the oil windfall from the state-controlled energy monopoly Petroleos de Venezuela (PdVSA). As the country’s largest employer, PdVSA has a considerable impact on the overall national economy, accounting for 80 percent of export earnings, approximately 33 percent of GDP and 50 percent of the government revenues. Recognizing the importance of PdVSA to his own political future early on in his administration, Chavez took a keen interest in the company’s business model, operations and plans for expansion.

In 1999, Venezuela made over US$18 billion in oil revenues, as oil stood at US$15 a barrel. Recently, PdVSA officials announced that oil-revenue figures are expected to climb to US$85 billion in 2006. According to government sources, total oil production, which has been the subject of heated debate among industry analysts, is expected to hit 4 million bpd by 2012. However, independent assessments show that Venezuela’s oil production has dropped from a high of 3.5 million barrels per day (bpd) in 1997 to approximately 2.6 million bpd in 2005, making PDVSA estimates suspect.

Following in the footsteps of countries such as Russia, Algeria and Bolivia, Chavez continues to reconfigure the country’s energy industry, initiating a foreign energy reclamation initiative as part of a comprehensive nationalization program. “Latin America is in the midst of a historic moment with governments rising up with dignity in the name of their exploited citizens to recover strategic control of their raw petroleum resources,” Chavez said recently.

In May, Chavez raised taxes on foreign oil companies such as ChevronTexaco of the U.S., Brazil’s Petrobras, Britain’s BP and Royal Dutch/Shell from 16.7 percent to 33 percent, calling it a “tax on extraction.” He has repeatedly accused foreign companies of exploiting the country’s petroleum resources without properly compensating the Venezuelan people. Given an ultimatum to pay or leave the country entirely, many foreign corporations have agreed to Chavez’s demands of shared ownership and increased royalties. “With the high price of petroleum on the market, we are going to share in the excess earnings of the strategic associations,” said Mario Isea, president of the hydrocarbons commission in the country’s National Assembly.

Chavez has proven he is no Rafael Caldera; the country’s former president who invited foreign firms into the country in the 1990’s to operate domestic oil fields using a generous basket of incentives. Chavez has criticized such contracts and has ordered that they be converted into joint ventures with state-controlled PdVSA as a majority owner.

Although Chavez’s domestic and international energy influence has grown steadily over the past few years, several inescapable challenges loom on the horizon. First, the country’s heavy, sulfurous crude oil requires special refineries which could make its oil less attractive to foreign buyers. Second, the geographic proximity of the U.S. market to Venezuela remains an undeniable benefit for Caracas – only five days by tanker -- making Chavez’s recurring threats to sell oil bound for the U.S. to Asian and European markets less practical. Third, Venezuela continues to suffer from a damaging 2003 strike by oil workers which resulted in the firing of over 18,000 experienced engineers, researchers and support staff.

Fourth, the Venezuelan economy remains undiversified, with oil accounting for more than three-quarters of the country’s export revenues, about half of total government revenues and about one-third of GDP, making the country vulnerable to extreme fluctuations in oil prices. Any lost energy revenues would immediately endanger the social and economic programs sponsored by Chavez. Fifth, the government has forced foreign oil companies into new contracts and imposed a tough new tax structure which may deter future energy sector investment. Moreover, analysts at various global energy consulting firms have noted that Venezuelan oil production is in fact declining, which would place Chavez in a quandary. Since Chavez took office, no new significant oil reserves have been identified.

Finally, Chavez’s ambitious US$26 billion multi-year expansion plan for the country’s  aging oil and natural gas industries is expected to increase production. But without substantial foreign investment, the plan will never get off the ground. Ali Moshiri, Chevron’s America exploration and production group, noted in April that the country needed an estimated US$200 billion to develop existing oil reserves.

In addition, Moshiri predicted that 90 percent of the country’s oil production in the future will come from the underdeveloped Orinoco Belt, a 54-square mile region, placing greater urgency on government efforts to develop the region. If foreign investors decide to remain in Venezuela, the Orinoco Belt could provide huge profits. Always the consummate strategist, Chavez has boldly proclaimed that the region holds approximately 235 billion barrels of oil, intriguing enticing foreign investors.
According to a Deutsche Bank report released recently, a total of US$17 billion has already been invested in the Orinoco Belt. As a result, the petrodollars generated from these investments will allow Chavez to spread his ideas concerning global production levels, pricing and the structure of energy markets for years to come.

For countries like the U.S., the idea that Chavez, an avowed critic of U.S. global policies, has at his disposal billions of unexploited oil reserves presents a foreign policy dilemma. Venezuela consistently ranks as one of the top four crude petroleum exporters to the U.S., along with Canada, Mexico and Saudi Arabia. According to statistics released by the Energy Information Administration (EIA), Venezuela delivered approximately 1.2 million bpd to the U.S. in March. The country ranks third in total petroleum products exported to the U.S. sending 1.5 million bpd to the states during the same time period, up from 1.4 million bpd in February.

Adding to Washington’s concerns, Venezuela’s state-run PdVSA, Latin America’s largest oil company, has worked feverishly to increase energy cooperation with foreign countries such as Russia, China and Iran, as well as Latin American neighbors Bolivia and Cuba. Energy discussions with Russian energy conglomerate Gazprom on oil and natural gas exploration, production and pipeline construction have accelerated recently. Moreover, Caracas has also identified China as a potential long-term energy partner. “China offers the best option for breaking 100 years of U.S. domination over Venezuela’s oil industry, Chavez said recently. Chavez’s intimate dealings with Tehran on issues of joint oil and natural gas exploration and transport also raise important national security concerns for the Bush White House and the U.S. Congress.

By using the “oil card,” Chavez has secured, a least for the time being, a significant leadership role on the global energy scene. With over 77 billion barrels of proven oil reserves and a firm grip on power, Chavez finds himself in a position of profound strength. Nevertheless, an unexpected slump in global oil prices, an abrupt disruption in production, the failure to bring new oil fields on-line and a lack of foreign investment pose serious risks for Chavez that could jeopardize his administration in a relatively short period of time. 

Chavez’s world revolves around the worlds most sought after commodity -- oil. Only time will tell whether this is a blessing or a curse for Latin America’s most conspicuous leader.  

Fred Stakelbeck, Jr. is a foreign affairs writer based in Philadelphia. He can be reached at Frederick.stakelbeck@verizon.net.

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