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Venezuelan Oil Policies: Boosting Others at Own Expense

By Stratfor 02/10/2003

Analysis

Venezuelan President Hugo Chavez put forth a proposal in Caracas on Oct. 1 saying that OPEC's price band of $22 to $28 per barrel should be raised to between $25 and $32 a barrel. Venezuelan Energy and Mines Minister Rafael Ramirez added separately that Venezuelan officials had requested that the cartel study the issue during OPEC's recent meeting in Vienna.

Chavez's proposal reflects the Venezuelan government's growing worries about its rapidly deteriorating financial situation. Oil accounts for about three-quarters of Venezuela's total exports, nearly 45 percent of government revenues, and about 30 percent of the gross domestic product. However, Venezuelan Central Bank Director Domingo Maza Zavala recently told a National Assembly hearing in Caracas that fiscal revenues from oil exports have not recovered from a two-month oil strike at Petroleos de Venezuela (PDVSA),in which workers sought Chavez's resignation. The strike fell apart at the end of January 2003.

Venezuela's president might have expected his proposal to generate some discussion in the oil markets and among other OPEC producers. But the oil markets barely reacted to Chavez's call for a higher OPEC price band, and major OPEC producers like Saudi Arabia simply ignored Chavez's suggestion. The markets clearly no longer view Chavez as having much influence on oil prices as long as he doesn't completely suspend Venezuelan oil production. Chavez will not do this because he needs oil revenues to survive in power.

It's also clear that Saudi Arabian and Venezuelan geopolitical interests have diverged since their successful alliance in 1999 to drive up global prices by restoring an OPEC production quota system that Riyadh abandoned in 1986. In fact, the 4-year-old Saudi-Venezuelan alliance within OPEC is dead. One of the main reasons it's over is that Venezuela's oil industry is no longer an international competitive threat to Saudi Arabia's commercial and geopolitical interests.

Chavez unwittingly saw to that by implementing energy policies that financially crippled PDVSA, and relegating the oil industry's managerial autonomy to the political dictates of the Energy and Mines Ministry (MEM). One of the key policy advisers who coached Chavez on changing Venezuela's oil policies and legislation was Bernard Mommer, a German-born Marxist with well-established ties to the Oxford Institute for Energy Studies in England, which Saudi Arabia and other Arab oil producers and banking interests partially fund.

The Saudi Connection

Stratfor does not believe Saudi Arabia worked through individuals like Mommer to cripple Venezuela's oil industry and diminish the threat it posed to Saudi hegemony. This was not a conspiracy, but rather a coincidental convergence of commercial, ideological and geopolitical interests that Saudi Arabia likely quietly manipulated to advance its national interests.

For example, Saudi Arabia wants to protect its hegemony as the largest oil producer in the world, individuals like Mommer are ideologically opposed to private companies owning and controlling strategic national commodities like oil, and Venezuelans who backed Chavez have believed for decades that foreign oil companies are interested solely in stealing Venezuela's sub-soil resources. After all, Venezuela's century-long experience as an oil producer has centered on successive governments trying to assert more control over a national oil industry that foreign oil giants like Royal Dutch Shell and the Rockefeller family's Standard Oil (now ExxonMobil) had been developing since the start of the 20th century.

According to Stratfor sources in London with longtime consulting ties to Saudi Aramco, Saudi Arabian energy officials believed PDVSA and Venezuela was Saudi Arabia's greatest future competitive threat in the world -- until Chavez became president. The sources said that in their view, Mommer was instrumental in persuading Chavez to enact new oil policies that crippled Venezuela's potential to threaten Saudi hegemony in the oil markets during the current decade. Chavez and Mommer had their own political and ideological reasons for halting PDVSA's expansion plans. Riyadh stayed in the background and quietly encouraged Chavez, its new partner, to gut PDVSA and bind Venezuela more tightly to OPEC.

A Stratfor source with OPEC's Secretariat in Vienna said that when current PDVSA President Ali Rodriguez made his debut as Venezuela's envoy to OPEC, he received a standing ovation from his Arab colleagues, led by the Saudi oil minister. "They applauded Rodriguez because they realized he knew nothing about oil, and so would be easy to manipulate," Stratfor's OPEC source in Vienna said Oct. 1.

The Man Behind the Scenes

Mommer is a naturalized Venezuelan citizen, who has a bachelor of science degree in mathematics and a doctorate in Social Sciences from Eberhard-Karl University in Tubingen, Germany. He arrived in Venezuela in the 1970s, sources in Caracas say, and for several years was associated with Caracas Central University's Center for Development Studies, called Cendes, a Marxist think tank that opposes free enterprise and advocates strong state controls over economic activities -- particularly those associated with strategic industries like oil and natural gas.

From his earliest days in Venezuela, Mommer also reportedly developed close personal ties with Rodriguez and Douglas Bravo. Both Rodriguez and Bravo are former senior leaders of armed leftist insurgencies that sought to establish a revolutionary government in Venezuela during the 1960s, with financial and logistical support from Fidel Castro in Cuba.

In the early to mid-1990s, Mommer started working as an external consultant to PDVSA subsidiary Maraven, and subsequently was brought into PDVSA's strategic planning department. The individual responsible for persuading then-PDVSA President Luis Giusti to hire Mommer refused Stratfor's interview requests. Several former PDVSA board members, however, have confirmed that Mummer was a key adviser to Rodriguez -- and subsequently to Chavez -- beginning in the early to mid-1990s.

After Chavez became president, Mummer was brought into the government as an adviser to Rodriguez. In that capacity, he was a key player in the constitutional and legal reforms that strengthened state control over PDVSA through MEM. For instance, it was Mommer's idea to sharply raise the royalty payments the government extracts from PDVSA, improving the government's cash flow but eating away at PDVSA's investment capital reserves. Mommer also advocated transferring direct control over contracts with foreign oil companies from PDVSA to the MEM.

After Rodriguez became PDVSA's president in April 2002, Mommer Continued to advise him on oil policy but was transferred to the OPEC Secretariat in Vienna. However, sources say that he is currently living in London, where he appears to be wearing two hats -- acting as adviser to PDVSA's London office on intelligence matters relating to OPEC, and a senior research fellow with the Oxford Institute for Energy Studies. Sources say Mommer is seeking to obtain British citizenship.

Fiction, Truth and Consequences

Chavez claims that his decision four years ago to scrap PDVSA's capacity-expansion programs in favor of policies to strengthen OPEC and drive up prices has been a spectacular success. Instead of pursuing PDVSA's strategy of expanding capacity to capture more market share at lower prices and maximize revenues by boosting export volumes, Chavez adopted a strategy of relying on OPEC production controls to raise prices. That strategy has failed, as Stratfor predicted three years ago. The clearest evidence of that failure is Chavez's Oct. 1 proposal for a higher OPEC price band.

Chavez also claims that, after his purge of more than 18,000 PDVSA employees in the wake of the failed strike, Venezuela now has a more efficient and profitable oil industry. But PDVSA asked the U.S. Securities and Exchange Commission on Oct. 1 for a 30-day extension to the deadline for its annual report. U.S. law requires all foreign companies with operations in the United States to submit such reports. PDVSA's report originally was due on June 30, 2003.

Stratfor sources in Caracas say that PDVSA's external auditors requested more time to complete their work, suggesting that PDVSA's financial statements are chaotic because the company no longer has sufficient qualified financial personnel. Finally, Chavez frequently insists that PDVSA's oil production is averaging more than 3.3 million barrels per day. Since he became president, however, PDVSA has lost nearly 1.5 million bpd of crude production capacity because Chavez axed investments needed to maintain existing capacity to enable the government to use PDVSA's capital reserves for non-oil expenditures.

The collapse of PDVSA's crude production capacity is not immediately apparent to the casual observer because foreign companies engaged in operating old marginal oil fields and heavy crude strategic associations are producing about 1 million bpd independent of PDVSA. Nevertheless, by first-quarter 2004 the implosion of PDVSA's crude production capacity will be too obvious for even Chavez to ignore.

Before Chavez was elected president in December 1998, PDVSA was Embarked on a capacity expansion plan that sought to turn Venezuela into one of the world's largest oil producers outside the Middle East. If Chavez had not scrapped PDVSA's expansion plans in early 1999, Venezuela would be producing 5.5 million bpd of crude oil or more, and by 2010 could expect to be producing 8 million bpd. Most of that oil would be exported to the United States, making Venezuela the most important U.S. ally in the Western Hemisphere, eclipsing even Mexico and Canada in exports to the United States.

Chavez further damaged the Venezuelan oil industry with his enactment of a new constitution and hydrocarbons law in 2000-2001, which imposed significant restrictions on private investment in the oil sector and sharply raised energy taxes and royalties. Chavez recently said that all existing PDVSA contracts with foreign oil companies would be reviewed and brought in line with the new tax, royalty and ownership restrictions his government has imposed on private oil companies.

Who Benefits from PDVSA's Implosion?

Not Venezuela. Only five years ago, PDVSA was on the road to becoming a global oil producer and exporter comparable to Saudi Arabia. Today PDVSA is a shambles. Its production capacity is dwindling rapidly because natural oil reserve depletion rates are discouraging any

investment in reversing annual capacity declines of 20 percent to 24 percent. Chavez says PDVSA is more independent today than it has ever been in its 28-year history as anational oil company. But the truth is that Venezuela is increasingly dependent on foreign oil companies to sustain its crude-production levels.

The direct beneficiaries of PDVSA's implosion are Saudi Arabia, Russia and Mexico.

Saudi Arabia no longer faces a competitive threat from expanding PDVSA production capacity. At a time when Riyadh's relations with Washington are on shaky ground because of the Saudi monarchy's ambiguous position on Islamic extremism, PDVSA's collapse gives the Saudis some unexpected geopolitical leverage in dealing with Washington: Venezuela is in no position to boost its oil exports to the United States in the foreseeable future. The Bush administration might wish to diversify U.S. oil supplies away from the Middle East and Saudi Arabia, but it will be years before Venezuela could even begin to factor into a scenario involving U.S. oil supplies from non-Arab states.

Russia is a big winner too. A Stratfor source that does business with Russian entrepreneurs in the oil and gas industry said Oct. 1 that he attended a recent dinner in Moscow where President Vladimir Putin and several Russian oil magnates toasted Chavez's folly in crippling PDVSA. In fact, Russia's crude production is expected to rise by about 900,000 bpd in 2003 -- nearly the same amount of capacity that PDVSA has lost over the last several years.

A former PDVSA president agreed that Chavez has been an unexpected boon to Russia's oil industry. "Thanks to Chavez," this source said, "Russia is expanding its oil production rapidly and is attracting billions of dollars in foreign investment from companies like ExxonMobil that might otherwise have gone into Venezuela, which is much closer to U.S. gasoline and oil markets than Russia's oil fields."

Mexico has benefited as well. So far, the United States' southern neighbor has been politically incapable of opening its energy sector to foreign investment. This political refusal has undermined Mexico's economic development, but Mexico's membership in NAFTA with the United States and Canada partially compensates for it. Close to 90 percent of Mexico's exports go to the United States.

Don't Cry for Me, Venezuela

If Chavez had not interrupted PDVSA's expansion plans in 1999, Venezuela easily would be producing 5.5 million bpd and shipping at least 4 million bpd to the United States. That volume of exports from Venezuela would displace both Mexico and Saudi Arabia in terms of their relative geopolitical importance as foreign oil suppliers to the United States, since they export only about 1.5 million bpd each to the United States. By 2010, Venezuela likely would have been producing 8 million bpd and exporting between 6 million and 7 million bpd to the global superpower.

The unanswered question that bothers some observers of PDVSA's collapse is why the Bush administration stayed in the background while the Venezuelan national oil company, which arguably has vital long-term strategic importance to U.S. national interests, collapsed. It's possible that senior officials in the Bush administration don't assign a high geopolitical priority to Latin America. However, it's also possible that the oil companies with known links to the Bush administration are waiting for Chavez to finish strangling the golden goose that PDVSA once was, and then get recalled or booted out of power. Then they would be free to come in and pick up the pieces.

 



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