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The
Venezuelan Oil Industry in Chaos: An Unreliable Supplier
to the U.S.
By Gustavo
Coronel
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.
Gustavo
Coronel is a 28 years oil industry veteran, a member
of the first board of directors (1975-1979) of Petroleos de
Venezuela (PDVSA), author of several books. At the present
Coronel is Petroleumworld associate editor and advisor on the
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Petroleumworld News 02/09/08
Copyright© 2008 Gustavo Coronel. All rights
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