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Sunday, February 13, 2005

THERE'S SOMETHING STRANGE ABOUT HUGO

What’s going on with Venezuela? President Hugo Chavez, whose socialist ideology has never been sympathetic to the U.S., seems suddenly to be backing up his words with actions. Not only has Venezuela’s state-owned oil company Petroleos de Venezuela (PdVSA) decided to sell CITGO, its U.S. fuel production and distribution subsidiary, it has also put the kibosh on ConocoPhillips agreement to develop the Corocoro field in eastern Venezuela, which at one time was expected to produce 70,000 bbl/d by 2006. It has also recently revamped its military doctrine to focus on repelling a U.S. attack, and purchased new military equipment to back up the plans. These moves together may be the beginning signs of a real strategic shift for the Latin America’s largest oil producer.

While Chavez has occasionally threatened to turn of the oil spigot enjoyed by the U.S.Venezuela is the United State’s fourth largest source of foreign oil—the threat was easy to brush aside as socialist rhetorical bluster. Venezuela has always been more dependent on the U.S. as a purchaser than the U.S. is on Venezuela as a supplier. Venezuela’s net oil exports were approximately 2.2 million bbl/d in 2003. Of that, more than half, 1.39 million bbl/d, was shipped directly to the United States. More importantly is one that revenue meant to the government and economy: in 2003 oil revenues accounted for a third of Venezuela’s GDP, half of its government revenues, and three quarters of its export revenues. To drop the U.S. as an oil trading partner was practically unthinkable.

Top Suppliers of Crude to U.S. (2002)

Rank

Country of Origin

Thousand bbl/d

Percent

1

Saudi Arabia

1,519

16.6%

2

Mexico

1,500

16.4%

3

Canada

1,445

15.8%

4

Venezuela

1,201

13.1%

5

Nigeria

589

6.4%

6

Iraq

459

5.0%

7

United Kingdom

405

4.4%

8

Norway

348

3.8%

9

Angola

321

3.5%

10

Colombia

235

2.6%

11

Kuwait

216

2.4%

12

Gabon

143

1.6%

13

Ecuador

100

1.1%

14

Russia

85

0.9%

15

Argentina

70

0.8%

16

Other

505

5.5%

Total

9,141

However, times have changed a bit. Consistently high oil prices for the past year have significantly increased Venezuela’s revenues, giving it the fiscal breathing room to be more deliberate with its resources. Chavez may finally be making good on his 1997 claim that “oil is a geopolitical weapon,” and ConocoPhillips may be the first major casualty. It took a first hit when PdVSA unexpectedly increased royalty taxes for overseas operators in its Orinoco oil projects, including ConocoPhillips. Then in January, in a surprise move, PdVSA rejected ConocoPhillips business plan for the development of the Corocoro field, considered to be one of the most promising untapped oil fields in the country. Also in January, PdVSA refused further drilling rights to Houston based Harvest Natural Resources Inc., which had long had exclusive rights to much of Venezuela’s field development.

Taken alone these moves are tough on the companies involved, but not geopolitical in nature. The geopolitics comes in with recent bi-lateral discussions between Venezuela and China and Venezuela and Russia. In December of last year Venezuela and China signed agreements that will allow Chinese firms to operate 15 oil fields in the east of Venezuela, which could produce more than one billion barrels. Russia’s Gazpromneft too is rumored to be pursing an agreement with PdVSA, while France’s Total said last week that it is talking to PDVSA about investing in a $5 billion expansion of a heavy-oil joint venture.

Most strikingly geopolitical is the announced shift in Venezuela’s military doctrine to a posture aimed at thwarting a U.S. attack. According to Gen. Melvin López, head of Venezuela’s National Defense Council (Venezuela’s equivalent to the National Security Council), the new doctrine will focus on “asymmetric war” wherein an inferior fighting force attempts to repel a superior fighting force by using guerrilla tactics such as in Afghanistan or Iraq. Venezuela’s recent purchase of 40 Russian helicopters and 100,000 AK-47 assault rifles is presumably meant to lend a little firepower to the doctrine as well.

The U.S. would be wise to take Chavez’s threats to move away from U.S. markets seriously. With plenty of potential anti-U.S. allies out there, especially oil hungry ones like China, Venezuela may be seriously tempted to apply the principles of the Bolivarian revolution to its geopolitical practice.

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