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Sunday, August 14, 2005

OPI WEEKLY: TIT FOR TAT DIPLOMACY WITH CARACAS

Relations between the U.S. and Venezuela continued their downward spiral last week. In a series of diplomatic tit for tats, the U.S. revoked the visas of six senior Venezuelan National Guard officers assigned to counter-narcotic operations. The move was based on DEA assessments that these officers were actively obstructing operations to interdict cocaine and arrest drug traffickers. The U.S. State Department also said it was considering sanctions against Venezuela, including blocking cheap credit for businesses and counternarcotics aid.

Venezuelan Vice President Jose Vicente Rangel responded by accusing the U.S. Drug Enforcement Administration of conducting espionage operations against his government, trafficking in drugs, and ignoring established legal protocols for running drug stings in Venezuelan territory. Venezuelan officials also announced that American citizens could be denied visas to visit Venezuela as ‘reciprocation’ for the U.S. move against the Venezuelan National Guard officers.

The deterioration in relations between the two countries, of course, raises concern about the future of Venezuelan oil exports to the U.S. Venezuela remains the fourth largest crude oil supplier to the U.S., supplying it with 13% of its crude oil. And Venezuelan President Hugo Chavez has made the most of the power that oil exports grant him, both vis-à-vis the U.S. and U.S. companies, as well his Latin American neighbors.

OIL DIPLOMACY

In the past year, Chavez has been active in making energy cooperation agreements with South American and Caribbean nations in need of oil. Support for Castro’s dictatorship has become one of Chavez’s favorite thumbs to stick in the eye of the U.S. In late 2004 Venezuela upped its delivery of oil to Cuba from 53,000 bpd to 90,000 bpd. Although details of the most recent agreement were not disclosed, Cuba is likely obligated to repay as little as 25% of the oil. The agreement is believed to be for a term of 15 years. Not long after the enlarged oil deal was closed, Venezuelan state owned oil company Petroleos de Venezuela (PdVSA) opened an office in Havana, Cuba, which will serve as the company’s headquarters for its Caribbean operations.

Venezuela earlier this year agreed to provide roughly 43,000 b/d of oil to Uruguay on favorable financing terms. While 75% of the tab will be paid within 90 days, the remaining 25% will be paid in-kind with shipments of Uruguayan cement.

Venezuela is also sponsoring the creation of PetroCaribe, an oil company that would allow Caribbean nations access to Venezuelan oil under preferential terms. In addition, Chavez is pushing for the creation of PetroSur, a similar venture to PetroCaribe for South America, as part of an energy cooperation agreement between Venezuela, Brazil and Argentina. Venezuela has been supplying Argentina with emergency fuel oil since last year.

With oil trading over $65 per barrel, these energy cooperation agreements provide substantial relief for struggling South American and Caribbean economies. Most importantly for Chavez, the agreements help ensure that those countries will cooperate with Venezuela in its struggle against U.S. influence in the region.

THE TAXMAN COMETH

In April Venezuela’s Oil Minister and President of PdVSA, Rafael Ramirez, announced that the government would restructure 32 oil production agreements signed prior to his ascension to power. The agreements involve over a dozen foreign oil companies and, according to Ramierez, resulted in a loss to the government of $260 million dollars in 2004.

Although few details on the planned restructurings were released, the Energy Ministry said all foreign-run development projects would be reorganized into joint ventures in which PdVSA would have a 51 percent stake. Foreign firms would also have a maximum income cap instead of the per barrel fee arrangement currently in place.

Last week the first of those agreements were announced. Eight oil companies on Thursday signed transition accords with PdVSA. The companies include Spain’s Repsol YPF, China National Petroleum Corp., and Houston-based Harvest Natural Resources. Negotiations are reportedly underway with 14 further companies.

Ramierez also claimed ion April that a majority of the foreign operators in Venezuela had evaded paying taxes on the projects and would be expected to repay some $2 billion once the investigations were complete. In addition, he announced that tax rates on oil company profits would be raised to 50 percent from 34 percent. However, he offered no details on when the new rates would go into effect.

In July the tax bills started to come in. Royal Dutch Shell was the first foreign operator to get hit. The total, including fines, amounts to roughly $131 million. When Shell contested the bill, Venezuela’s tax authority asked a local court to freeze Royal Dutch Shell’s Venezuelan assets, worth more than $130 million. In the government’s most aggressive move yet to force foreign oil operators to pay back tax claims, Venezuelan authorities also ordered the temporary closure of one of Shell’s offices in the country.

Houston based Harvest Natural Resources was the next to get hit. Earlier this month Harvest’s 80%-owned Venezuelan subsidiary Harvest Vinccler was handed an $85 million bill for unpaid income taxes between 2001 and 2004 and levied an additional $9 million in fines. According to Venezuelan authorities, if the company fails to pay the sum by next week, it could face fines of up to 125% of the original $85 million owed.

Although companies involved in Venezuelan development have tried their best to put a business-as-usual face on Chavez’s moves, the markets are starting to see through the guise. Harvest stock plunged nearly 18% on Monday after the company announced the back-tax claim and fine.

In addition to the actions against Royal Dutch Shell and Harvest, Venezuelan tax authorities issued a $24 million tax bill to Italy’s Eni for alleged unpaid income taxes on the 60,000 b/d production at the Dacion field. Eni has the option of appealing the ruling but could be forced to pay 250% of the total bill if tributary courts rule against it in the dispute. The Venezuelan government also reportedly seized documents from the offices of Chevron in Caracas.

CONCLUSION

The conflict between Chavez and the U.S. will not soon abate. It will most likely spread to surrounding Latin American nations as Chavez uses oil and other diplomacy to align his neighbors in an anti-U.S. stance. The U.S. will attempt to thwart Chavez’s efforts with economic diplomacy of its own –the recent passage of the Central American Free Trade Agreement being a case in point.

But what about oil? It remains unlikely that Chavez will curtail oil exports to the U.S. They are, after all, the life-blood of his economy. However, diplomatic games of chicken have a way of producing unintended consequences, and neither Bush nor Chavez has a habit of swerving out of the path of danger.

5 Comments:

At 3:50 PM, Blogger David Amulet said...

Great conclusion. I do wonder how far this will continue to spiral downwards, and I look forward to your continued analysis! -- d.a.

 
At 7:12 PM, Blogger David W. Martin said...

Thanks, David. My intuition about Chavez is that he has one foot firmly placed outside the bounds of rationality, which means things may get worse than realist theory would otherwise suggest.

 
At 7:47 PM, Blogger David Amulet said...

If that's true, what will work? Will he recognize any signals to stop ... will any of the usual diplomatic (or even extra-diplomatic) efforts matter? -- d.a.

 
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At 8:24 PM, Blogger rs6471 said...

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