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Sunday, April 24, 2005


Just three years ago, Venezuela’s President Hugo Chavez was ousted from office by a vibrant opposition movement. That ouster lasted only two days. Beset by confusion, the opposition failed to consolidate its newly won power and Chavez was able to regain control of the government.

Now at the height of his popularity –Chavez allies won control of 22 of the 24 regional governments and 75% of the 335 city governments in the October 2004 elections—Chavez is making bold moves to consolidate his power. He has tightened control over foreign oil companies operating in the country, created oil alliances with some of Washington’s greatest foes, and rapidly embarked on a military build-up. He has even created a Presidential militia answerable directly to him.

Chavez has always held extreme views. He is now creating a state capable of acting in the service of those views. While Venezuela’s economy and government are far too dependent on the U.S. to make a sharp break, Chavez has made clear that he will do as much as he can to move toward that ultimate goal.


On April 14 Venezuela’s Energy and Oil Minister Rafael Ramirez announced that the government would restructure 32 oil production agreements signed more than a decade ago. According to Ramirez, the agreements, which involve over a dozen companies from around the world producing oil in Venezuela, resulted in a loss of $260 million dollars in 2004. He also said that a majority of those companies had evaded paying taxes on the projects and would be expected to repay some $2 billion once the investigations are complete.

Although few details on the pending restructuring were released, the Energy Ministry said all foreign-run development projects would be reorganized into joint ventures in which the Venezuelan state run oil company Petroleos de Venezuela (PDVSA) will have a 51 percent stake. Foreign firms would also have a maximum income cap instead of the per barrel fee arrangement currently in place.

On April 18 Ramirez further announced that tax rates on oil company profits would be raised to 50 percent from 34 percent. He offered no details on when the new rates would go into effect, saying only that they would not go into effect “today.” None of the companies most effected by the change, which include ChevronTexaco, ConocoPhillips, Royal Dutch/Shell Group of Companies, BP Amoco PLC, Repsol YPF SA, Petroleo Brasileiro SA, Petro-Canada, Statoil, AB Nynas Petroleum, China National Petroleum Corp. and Japan's Teikoku Oil Co. Ltd., have commented on the announcement.

These changes –or at least changes along these lines—are not entirely unexpected. In November 2001 Chavez enacted the new Hydrocarbons Law to replace the 1943 law then in place. Under the new legislation private investors cannot own 50% or more of the capital stock in upstream joint ventures, with the exception of the four extra-heavy crude oil and bitumen development projects situated primarily in the Orinoco Oil Belt. However, Chavez announced in October 2004 that foreign oil company royalties of between 0% and 1% in Orinoco Oil Belt projects would be raised to 16.6%, in accordance with 2001 Hydrocarbons Law.

The motive and timing for the changes is clear. With oil prices maintaining near-record levels, Chavez is taking the opportunity to reap maximum windfall profits. He has said that he plans to raise Venezuelan crude production from its current 2.6 million bbl/d level to 5 million bbl/d by 2009. Given the current production in place and the condition of currently producing fields –many are old or damaged from Venzuela’s rush to resume production following the 2002 strike—this kind of increase will entail huge near-term capital investments. Chavez hopes to raise at least part of those investment funds by collecting higher the higher taxes and royalties.

However, Venezuela will still need the help of foreign oil companies in order to undertake expensive and technologically complex development projects. Chavez is thus walking a fine line between raising revenue and scaring away already leery foreign partners. One indication of how Chavez plans to realign Venezuela’s oil alliances will appear as the contract restructurings and tax investigations commence. Companies from more Chavez-friendly countries like France, Spain, China, and Brazil could fare much better than U.S. companies, allowing them a greater –and safer—share of the pending investment contracts. While it is unlikely that U.S. companies would be shut out –or entirely shy away—from Venezuelan projects altogether, Chavez now has the opportunity, and certainly the will, for a major realignment of the country’s oil alliances.


The first step toward that realignment took place last October with Chavez’s announcement while on a visit to Beijing of eight energy agreements with China. A rapprochement between the two countries began in 2001 with the leftist Chavez’s election and has steadily progressed as the Venezuelan leader has consolidated power. In signing the eight agreements, Chavez said his country had taken the first step toward ending 100 years of U.S. domination over Venezuela’s oil industry.

The October agreements involve Chinese participation in Venezuelan oil production and the construction in Venezuela of new pipelines, refineries and petrochemical plants. The two countries hope eventually to build a pipeline from Venezuela to Columbia’s pacific coast in order to facilitate increased Venezuelan exports to China. Venezuela and Columbia resumed talks on the pipeline in February after they had stalled during an unrelated diplomatic rift.

Subsequent talks have arranged for China to receive 100,000 bbl/d of Venezuelan crude and 1.8 million tons per year of Orimulsion boiler fuel. However, there is more to these recent agreements than meets the eye. The Boscan crude slated to be shipped to China is usually sent to the U.S., which has the refineries tooled to process the heavy oil. China will have to undergo an expensive retooling of some of its current refining capacity in order to process the Venezuelan oil. Such a retooling would prove most cost effective if it planned to increase such shipments. Similarly, the Chinese will have to construct a specialized receiving port to handle the Orimulsion fuel deliveries, also suggesting a long-term and perhaps growing arrangement.

The two countries also announced plans for a joint project involving PDVSA and China’s National Petroleum Corporation (CNPC) in the development 14 marginal gas and oil fields in Venezuela’s eastern Zumano region. The fields currently produce 25,000 bbl/d of crude oil but hold an estimated 400 million barrels of oil and 3 Tcf of natural gas.


Iran and Venezuela, while in many ways so different –Catholic and Muslim, Western and Eastern, tropical and arid— share two very important characteristics: they are both oil rich, and they both despise the U.S. While the two countries have talked about cooperation on energy development –Iran reportedly has expressed some interest in Venezuelan gas field development—the real strategic cooperation is more purely geopolitical. During a recent visit by Iranian President Khatami to Caracas, President Chavez went out of his way to lend his support to Iran in its battle with the U.S. and Europe over Iran’s nuclear program. Chavez described both Iran and Venezuela as victims of U.S. imperialism.

While the exact character of Venezuelan-Iranian cooperation is not clear –the two countries are still in the ‘getting to know you’ stage of alliance-building—they can only help each other. Iran can certainly assist Venezuela through petrochemical and other types of technology transfer and could even assist with military tactical training of Venezuelan forces. For Iran, an ally in the Western hemisphere –especially one that is one of the United States’ largest crude suppliers—is a strategic benefit. Chavez appears finally to be strong enough to invest in politically, and Iran will be happy to make that investment.

India is similar to China in its large and growing oil needs. Already the sixth largest oil consumer in the world, its demand will increase several fold as it enters a period of rapid growth and industrial development. With limited resources at home, India has aggressively sought foreign oil development opportunities, often competing for those opportunities with China. As Venezuela looks to diversify its oil production and export base, India is thus an obvious candidate. Chavez visited India in March, where he discussed future cooperation with the Indian leadership.

In fact, India and China may also have another ally in common: Iran. One of the primary ways that India will solve its domestic energy needs will be through imports of natural gas. Some of those imports could come from Turkmenistan, but most will likely come from gas-laden Iran. In January the the Indian State run oil company reached an agreement with the Iranian firm Petropars to develop a gas bock in the gigantic South Pars gas field, home of the world’s most abundant reserves. While India enjoys good relations with the U.S., it also has not shied away from doing business with Washington’s foes, including recent oil development projects with Sudan.

India, Iran, and China all constitute new allies for Venezuela, ones that maintain a significant degree of independence from –and in the cases of Iran and China, resistance to—U.S. power. It is likely that Chavez will seek to develop these relations as long as he remains in power.


Last fall President Chavez announced a change in its military doctrine. Henceforth, the President said, Venezuela would focus on asymmetrical threats –i.e., an attack by the more powerful United States. In months since then, Chavez has completed with arms deals with Russia, Spain, and Brazil that have given at least a semblance of substance to the statements. From Russia, Venezuela will receive 100,000 AK-47 assault rifles and 10 military helicopters. They have also discussed the purchase of up to 50 Russian MIG fighters, but no deal has been reached. Spain has agreed to sell Chavez helicopters and airships, ostensibly to patrol the coast and assist in thwarting drug traffickers. However, some reports have claimed that the Spanish purchases will include four guided missile corvettes that will be equipped with Exocet missiles. From Brazil, finally, Venezuela will purchase two dozen military aircraft.

One may ask, as Donald Rumsfeld recently did, what the Venezuelans are going to do with all these new weapons. After all, Venezuela at present has only 82,000 individuals in its armed forces, and that includes reservists. Part of the answer is that Venezuela plans to increase the size of its military. In fact, Chavez announced recently the creation of a special Presidential Guard that will answer directly to him. In swearing in the leaders of his new guard, Chavez claimed that it was the first step in a ‘new military doctrine’ which will include local militias to help defend Venezuelan sovereignty against “imperialist aggression.” Chavez said the guard would ultimately grow to be 2 million strong. Not bad for a nation that has only 25 million citizens.


So where is all this going? Is this Venezuela’s bid to join the axis of evil, or is it merely the bluster of a lonely Marxist that finally has gained control over his state. The answer, of course, lies somewhere in between. Chavez would join the axis of evil if he could, but he can’t. His country and government are far too dependent upon the U.S. In 2003, 80 percent of Venezuela’s exports were oil and petroleum products and 60 percent of that went to the U.S. The petroleum industry, in turn, provides half of Venezuela’s government revenues. Venezuela is clearly dependent upon the U.S.

But that can change over time. As Iran has amply demonstrated, oil wealth can be had without the U.S. as a buyer. Venezuela’s recent dealings with China, Iran, and India are a step in that direction. Chavez also appears to be creating much more militarized state than previously indicated, which will allow him to back bluster with bullets if ever needed. Indeed, Chavez, always willing, is finally able to make the state more reflective of his own image.


At 10:02 AM, Anonymous Anonymous said...

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At 10:15 AM, Anonymous Anonymous said...

So is it possible the terrible things we are always hearing about in Columbia are related to something besides drugs?


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