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Oil markets barely notice Chavez’s death - El Paso Inc.: Headlines

Oil markets barely notice Chavez’s death

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Posted: Sunday, March 10, 2013 6:00 pm

HOUSTON – President Hugo Chavez relished using Venezuela’s oil wealth to project power internationally, nudging OPEC to raise oil prices when he could, showering allies like Cuba and Nicaragua with subsidized oil shipments, and mocking the United States while selling it his crude.

But Chavez’s death Tuesday has had surprisingly little impact on global oil markets, highlighting how Venezuela’s dwindling crude production and exports have undercut its global power in recent years.

International oil prices have barely moved since Chavez died. OPEC has decided to increase shipments to the United States and Europe this month, using oil from Saudi Arabia and other Persian Gulf states.

Oil company executives, long frustrated by Chavez’s nationalizations, are voicing only tepid hopes that they could possibly return in full force to what was once one of their crown jewels.

Venezuela’s annual oil production has declined since Chavez took office in 1999 by roughly a quarter, and oil exports have dropped by nearly a half, a major economic threat to a country that depends on oil for 95 percent of its exports and 45 percent of its federal budget revenues.

“Venezuela’s clout on OPEC and on world oil prices has been greatly diminished because of its inability to exploit its enormous resources,” said Michael Lynch, president of Strategic Energy and Economic Research, a consultancy. “In the 1990s, their production was booming and they could thumb their nose at Saudi Arabia and get away with it, but now they have become OPEC’s poor cousin.”

In a fundamental geopolitical turn, Venezuela now relies far more on the United States than the United States relies on Venezuela.

Venezuela depends on the United States to buy 40 percent of its exports because Gulf of Mexico refineries were designed to process low-quality Venezuelan and Mexican crudes that most refineries around the world cannot easily handle. But in recent years, the United States has been replacing its imports of Latin American crudes with oil from Canadian oil sands fields, which is similarly heavy.

U.S. imports of Venezuelan oil have declined to just under 1 million barrels a day, from 1.7 million barrels a day in 1997, according to the Energy Department.

Depends on US

And while Venezuelan exports of oil are in decline, its dependency on U.S. refineries for refined petroleum products has grown to nearly 200,000 barrels a day because of several recent Venezuelan refinery accidents.

Experts expect Venezuela to send barrels no longer needed in the United States to China, as payments in kind under oil-for-loans contracts. Venezuela’s broken refinery sector has left shortages of gasoline and diesel in parts of Latin America, opening the door for valuable markets to U.S. refiners.

Over his 14 years in power, Chavez relied heavily on oil revenues to finance his social programs. Energy experts say his gasoline subsidies doubled domestic consumption, cutting deeply into exports, but that his hostility to foreign investment and mismanagement of the state oil company Petroleos de Venezuela were the primary reasons for the steep decline in production.

A strike and the firing of management talent and 20,000 workers at the oil company in 2002 led to a steep decline in the company, which has been underscored by the refinery accidents.

“Venezuela is a fraction of what it used to be,” said Sadad Ibrahim al-Husseini, a former head of Saudi Aramco’s exploration and production division, “and that’s really because Venezuela’s technocrats have scattered over the world and are no longer active in Venezuela.”

Chavez further overhauled oil exploration and production with a nationalization program in 2006 that ordered a renegotiation of contracts with foreign companies, mandating that Venezuela’s oil company get a minimum 60 percent share in all production projects. Sixteen foreign companies, including Royal Dutch Shell and Chevron, went along with the new rules, while Exxon Mobil, Conoco Philips and other companies resisted and their holdings were nationalized.

Venezuela has huge reserves, including its Orinoco heavy oil belt, which the U.S. Geological Survey estimates to have 513 billion barrels of recoverable oil – enough potentially to make Venezuela one of the top three world producers. But foreign oil companies have been wary of investing.

Jose Valera, a Houston energy lawyer, said that if Vice President Nicolas Maduro or another member of the Chavez’s movement was elected president “it is reasonable to expect continuity of a substantial portion of the policies.”

But as for Venezuela’s economy, he argued, “the situation right now is not sustainable and it’s only a matter of time before some significant changes will have to be instituted.”

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