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Saturday's
Lagniappe
OPEC's
Venezuela meeting to test Chavez influence
By
Myra
P. Saefong
Venezuela, and its stridently nationalist president, Hugo Chavez,
will host next week's meeting of the Organization of Petroleum
Exporting Countries in what is likely a test of the South American
country's ability to influence cartel policy.
The meeting Thursday is OPEC's first since crude-oil prices
scaled to record heights above $75 a barrel.
Venezuela has been tightening its hold on its oil operations,
forcing oil companies to renegotiate their contracts, and encouraging
other countries in the region to nationalize their mining and
natural-resources industries.
But Chavez's ability to influence OPEC's policy on production
quotas is limited because Venezuela currently isn't meeting
its own allotment, and so can't act as a swing producer, analysts
say.
That could change, however, if the country is able to tap into
its huge potential reserves of heavy oil.
Venezuela's conventional oil reserves are pegged at around 80
billion barrels, but the country believes it has some 235 billion
barrels of recoverable deposits in the Orinoco Belt, according
to Sean Brodrick, an editor at Weiss Research.
"Venezuela needs the Orinoco Belt tar sands reclassified,
and it needs strategic partners to help it develop those deposits
and bring them to market," said Brodrick.
If Venezuela can reclassify its heavy-crude deposits, the country's
proved crude-oil reserves may even surpass those of Saudi Arabia,
which according to OPEC data currently holds the world's largest
proved reserves of crude, 264.3 million barrels.
But Venezuela's inability to meet even its current OPEC quota
"weakens its standing in the cartel," said Brodrick.
"It doesn't have any extra production, so of course it's
always on the side of cutting production."
The front-month contract for crude futures rose to an intraday
high of $75.40 on April 24 and remains at around $70.
OPEC's basket price, which tracks the performance of 11 types
of crude oil, stood at $63.91 on May 25. Its yearly average
price for 2005 was $50.64.
With prices at lofty levels and U.S. crude supplies near an
eight-year high, analysts have said Thursday's OPEC meeting
is unlikely to result in a change to the group's production
quota, which has remained at 28 million barrels a day since
July 1.
Even so, Venezuela has been pushing OPEC to reduce its output,
which could well bring prices back to the all-time high of late
April.
It's really not an unusual move on Venezuela's part, since it
wants to maximize its oil revenue, analysts said.
"They say that at every meeting," said Brodrick. "They
want higher prices. They think they're selling oil on the cheap."
Taking control
Latin American countries have been eyeing the oil industry's
rising revenue - and deciding that more of those riches should
stay at home.
Venezuela may use its position as host Thursday to "trumpet
resource nationalism," said Michael Lynch, president of
Strategic Energy & Economic Research.
For
its part, Venezuela seeks a 60% controlling stake in four heavy-oil
projects in the Orinoco River basin, according to published
reports.
The Orinoco basin, southeast of Caracas, along the Orinoco River,
holds some of the world's largest untapped oil reserves, according
to Venezuela. And the country has already taken as much as 80%
control of other oil fields across the country that had been
run by private companies under contract, according to the Associated
Press.
OPEC countries will likely take an " 'After you, Alphonse'
response," to both Venezuela's calls for resource nationalism
and lower quotas, Lynch said. He expects Iran will probably
offer moral support, he said.
"The recent tax policies and changes to operating agreements
with foreign oil companies have made these companies wary of
investing additional funds in Venezuela," said James Williams,
an economist at WTRG Economics.
And thus far, "Venezuela has not invested sufficient capital
to increase its production," he said, noting that output
is more than 500,000 barrels a day short of meeting the OPEC
quota. "Having reserves on paper is entirely different
than being able to produce oil from those reserves," he
said.
Regardless of Venezuela's comments, OPEC seems "content
to let the market dictate price direction," said Emanuel
Balarie, senior market strategist at Wisdom Financial.
Among the things Venezuela and Iran have in common, both "hate"
the U.S., subsidize domestic gas prices to keep their citizens
happy, and depend heavily on rising oil prices, he said, calling
the alliance between the regimes a "powerful Axis of Oil."
Together, they produce about 7 million barrels of oil a day,
about 8% of the world's total output and 23% of the total OPEC
pumped in April, according to Weiss Research's Brodrick.
"Working together, they can shake the market. Heck, they
can shake the world," he said in a recent article on MoneyandMarkets.com.
Read the full article.
Powerless
for now
Then again, Venezuela won't be able to advance its position
in OPEC until oil from its untapped reserves can be produced
economically.
And Saudi Arabia Oil Minister Ali al-Naimi warned this month
that oil prices may fall if an economic crisis forces industrialized
nations to find alternative energy sources, the AP reported.
In a monthly report released in mid-May, OPEC forecast 2006
world oil-demand would grow 1.4 million barrels a day to a total
84.6 million -- down 60,000 barrels a day from its previous
estimate, as high prices helped damp demand, mainly in developed
countries.
"One way to help the global economy would be to lower oil
prices by increasing quotas," said Brodrick.
Saudi Arabia is the only swing OPEC producer right now, with
the Energy Department estimating its spare output capacity at
900,000 to 1.4 million barrels. WTRG's Williams pegs its spare
capacity at the low end of that range.
"Saudi Arabia, Kuwait, [the United Arab Emirates and] Qatar
would not be upset to see oil prices fall to the $50-to-$60-per-barrel
range, and would raise capacity -- if they could -- to bring
oil prices down," said Bernard Picchi, senior managing
director at Foresight Research Solutions.
So if Venezuela wants a production cut and Saudi Arabia decides
to support an increase, it's possible that "the Saudis
and Venezuelans will be at loggerheads at the meeting,"
said Brodrick.
In the end, "OPEC will want to appear to be driving down
prices by leaving quotas unchanged or even raising them, while
responding to weaker demand by letting production drift down
slightly," said SEER's Lynch.
Lowering production quotas -- as Venezuela wants -- when prices
are above $70 "would provoke a firestorm of protest,"
he said.
Myra
P. Saefong is
a reporter for MarketWatch in San Francisco. Petroleumworld
not necessarily share these views.
Editor's
Note: This commentary was originally published in by MarketWatch,
on 05/26/2006. Petroleumworld reprint this article in the interest
of our readers.
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Petroleumworld
News 05/20/06
Copyright©2006
Myra P. Saefong/MarketWatch. All rights reserved
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