Tuesday, February 12, 2008


Gustavo Coronel‏

**** The Venezuelan Oil industry in chaos: an unreliable supplier to the U.S.

The model chosen to nationalize the Venezuelan petroleum industry in 1976 was unique and very successful: four integrated operating companies under a financial and strategic planning holding company. Management was very professional, politics did not play a role and, as a result, Petroleos de Venezuela became, for the next 25 years, one of the top oil companies in the world, next to Exxon and Shell. This success story came to an end when Hugo Chavez came into power in 1999. During his presidency Petroleos de Venezuela has lost about 800,000 barrels per day of production capacity, and management has been politicized. U.S. based, fully owned affiliate, Citgo, has become a political tool that distributes subsidized fuel in the U.S. as part of Hugo Chavez’s strategy to establish a political beachhead in that country, with the willing assistance of Joseph Kennedy III and a few members of U.S. Congress.

Venezuela still is one of the key petroleum suppliers to the U.S., sending about 1.1 million barrels per day to that country. Any abrupt disruption of this flow of oil would result in a major blow to the U.S. economy, already in the threshold of a recession. Up to now the possibility of such a disruption had been based upon the unpredictable nature of Hugo Chavez as an authoritarian leader who hates the U.S. There is little doubt that Chavez would interrupt the flow of oil to the U.S if he could. But he cannot. Most of the oil coming to the U.S. can only be refined in U.S refineries and it would take China or India, the other two likely main clients, about five years to build refineries to process Venezuelan oil.

The danger of such an interruption is, therefore, negligible? Not really. There is another reason why this flow could be suddenly interrupted: because the Venezuelan petroleum company becomes unable to fulfill its contractual obligations due to poor management and to a major financial or operational collapse. Even two years ago this would have appeared extremely unlikely but, recently, the company has been deteriorating at an alarming rate. Under investment and lack of maintenance have combined to take production down to very low levels, no more than 2.5 million barrels per day, while domestic consumption is now reaching some 800,000 barrels per day, cutting into the volumes originally destined for exports. Some 300,000 barrels per day go at subsidized prices to Cuba, Nicaragua, Bolivia and some of the Caribbean states. Any further problems of an operational or financial nature would place PDVSA’s production below the volumes contractually committed to the U.S.
What are the chances of these problems getting worse in the near future? They are so high that the U.S. should be prepared for such an eventuality.

The Venezuelan petroleum industry is nearing financial collapse. Recent signs are ominous. The company is demanding payment of exports within eight days, rather than the traditional thirty days, suggesting that the company has a severe problem of cash flow. Some days ago the Venezuelan petroleum company ordered Citgo to obtain an urgent $1 billion loan on its behalf and a few hours ago it requested another $500 million from Citgo as advanced dividends. In a very unusual move cargoes of fuel oil, worth about one billion dollars, have been placed for sale in the spot market at a discount provided they are paid in cash. The Venezuelan petroleum company has obtained a $4 billion loan to China, to pay for debts of the central government that have no relation with the oil company. The Bahamas oil terminal, owned by Petroleos de Venezuela, has been put up for sale, without success. There is an air of panic surrounding the finances of the Venezuelan petroleum company.

But this is not all. As a result of the aggressive political moves during the last two years by Hugo Chavez, who practically confiscated large oil projects of Exxon Mobil and Conoco Phillips in Venezuela, Exxon Mobil has just decided to counter attack and has obtained court orders from the U.K., the Netherlands, the Netherlands Antilles and the U.S. to freeze up to $12 billion worth of Venezuelan oil assets in these countries. This legal action by Exxon Mobil might not impede the daily operations of the company but represents a major financial and psychological blow to the already very weakened Venezuelan petroleum company and to the government of Hugo Chavez. This action might be followed by a similar action by ConocoPhillips,another company that feels wronged by the Chavez government.

The possibility of a major collapse of the Venezuelan petroleum company and of its inability to fulfill U.S. contractual commitments increases as the days go by.

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