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Sunday, August 21, 2005

OPI WEEKLY: CHAVY ON THE SPOT

Political unrest in Ecuador has shut in most of that country’s 400,000 plus bpd of production. Although not a huge total by world standards –Ecuador ranked 30th overall in oil production in 2004, 5th among Latin American producers—more than half of Ecuador’s exports is shipped directly to the U.S. Specially tooled refineries in California and Texas refine approximately 144,000 bpd of Ecuador’s heavy, sour crude into gasoline and other high-quality petroleum products.

Given the recent up-tick in tensions between the U.S. and Venezuela, one might imagine that Venezuelan President Hugo Chavez would be pleased to see the U.S. squeezed a bit more at the pump. Such, however, is not the case. Chavez announced on Saturday that Venezuela will lend Ecuador crude oil cost-free to cover exports shut in by the unrest. Although no details of the plan were announced, Venezuelan foreign minister Ali Rodriguez said there would be a meeting in Caracas on Monday to study the request and the availability of Venezuelan crude. With Venezuelan production still lagging its pre-strike highs, it is not clear where Venezuela will find the extra barrels of oil to send Ecuador’s way.

The political turmoil in Ecuador has taken the form of disruptive protests in the country’s eastern oil provinces of Orellana and Sucumbíos and a strike by workers at foreign and state owned oil production facilities. Protesters invaded oil fields in the two provinces on Monday, dynamiting pipelines, vandalizing pumping machinery and blocking highways. Orellana and Sucumbíos produce three-quarters of state oil production and about half of private oil production in the country. The protesters are demanding that the oil companies invest more of Ecuador’s oil revenues in local social and infrastructure needs and provide more jobs to local residents.

Although the armed forces said on Thursday evening they had secured the embattled provinces and the protest leaders have officially halted their attacks, production on Sunday had increased to only 54,000 bpd and oil exports had stopped altogether. Some PetroEcuador officials already estimate losses to the state-owned oil company alone of close to $450 million through September, saying it will take that long to reverse the 200,000 barrel per day reduction in oil production caused by the strike and unrest.

Chavez’s decision on Saturday to lend oil to Ecuador is not only typical of Chavez’s pattern of using oil diplomacy to gain allies in the region, it is also the second time in a month that he has been prominent in Ecuador’s political instability. Conflict between President Alfredo Palacio and former Economy Minister Rafael Correa ended in the latter’s resignation on August 5th after Palacio opposed Correa’s plans to sell up to $300 million in Ecuadorian government debt to Venezuela’s government. Palacio has resisted Correra and others in his cabinet who have urged him to distance himself the United States and pursue a closer alignment with Chavez.

Chavez’s offer to replace Ecuador’s lost exports will not make life any easier for Palacio, whose political days may well be numbered. This is true even if the Venezuelan crude isn’t actually delivered or is only delivered in part. Either way it is a relatively easy way for Chavez to look ever the man of the Latin American people and to help ensure that Palacio ultimately is replaced by a more left leaning, and anti-U.S., administration.

22 Comments:

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So what happens if Pat "Hitman" Robertson totes an Ak down to Caracas, knocks off Hugo, and then heads to the Middle East to whack the new Iranian President and the Saudi ruling family? Any impact on the oil markets?? :)

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