More Joe Duarte comment on Venezuela this am
Today’s Analysis: Venezuela: Running On Empty?
Oil traders seem to be reassessing global oil supply. According to recent OPEC remarks, the world is flooded with oil, and OPEC is ready to produce as much as it needs to keep supplies ample for the winter. But, there is new information that is creating new uncertainty about global oil supply.
Venezuela may have lost access to as much as one million barrels of oil per day. If this is proven to be a certainty rather than an educated guess, a significant amount of adjustment by the financial markets may ensue, and the geopolitical repercussions could shift the balance of power in Latin America and OPEC.
Lending credence to the fact that something big is up in the country is the report that on May 4th, the Venezuelan military took over operations at several key oil producing installations of the state owned oil company, PDVSA.
On May 4, in this space, we reported on a little noticed wire service report from AP that hit the airwaves after the stock market closed. The gist of the report was that Venezuela’s president, Hugo Chavez, had admitted that production levels in Venezuela’s Western oil fields were less than expected. Chavez, according to AP was concerned because production had fallen at least 100,000 barrels from the expected one million barrels per day that the fields can potentially produce.
In our report, we noted the following:
[1) Chavez added some interesting comments as contributing factors, citing “management errors,” and “poor well maintenance,” while adding that they have recovered 100,000 barrels of production in the last several months, but still remain behind in meeting “the production estimate in the budget.”
2) None of that is news, given the fact that since the failed coup in 2001, PDVSA has lost key personnel, and its well maintenance has reportedly been shoddy at best, given the fact that a good number of experienced oil workers, especially at the upper levels of management either left the country, were demoted due to their partciipation in the strike that led to the coup, or have presumably disappeared for one reason or another.
3) What is news is that Chavez is saying anything at all about being behind on production, something that most international analysts and intelligence services have been saying since the oil strike and the failed coup several years ago.
4) That means that he’s up to something. The easy assumption is that he’s trying to talk oil prices back up. However, more than likely, this announcement is yet another well choreographed step in the implementation of his grand strategy, the complete nationalization of Venezuela’s economy, and the eventual attempt to take his revolution internationally.]
We offered a two pronged conclusion: “Venezuela has now crossed the critical point of no return. Chavez’ Bolivarian revolution is no longer stoppable by the United States. The only hope that the U.S. has is to keep it from spreading. And even that is no longer assured. Here is a thought though. If oil continues to fall, Chavez, and his Bolivarian revolution are in deep trouble, at least in the short term. And that of course brings us back to Mr. Chavez’ interestingly timed announcement about oil production in Venezuela. “
Revelations And Confirmations
Some new information has recently surfaced that clarifies the situation further and creates a rather interesting scenario.
According to Stratfor.com, things are actually worse in Venezuela than even the most pessimistic analysts have forecast.
As Stratfor sees it there are several important to considerations to ponder:
1) “Venezuela's true level of crude oil production is unknown. The government officially claims that the Venezuelan oil industry currently produces 3.2 million bpd, a figure that includes PDVSA and foreign oil companies (some of whom recently lost their operating contracts or have strategic joint ventures with PDVSA).”
2) Stratfor reports that independent analysts, including OPEC’s own, of which Venezuela is a member, estimate that the actual figure is more like 2.6 million barrels. A good portion of that comes from non PDVSA production delivered by foreign oil companies. Stratfor estimates the foreign oil company production to be “about 1 million bpd” that is produced “under strategic associations in the Orinoco Heavy Oil Belt and the recently nullified 32 operating contracts and strategic associations.”
Stratfor estimates that since Chavez has been president, starting in 1998, “PDVSA has lost about 1.5 million bpd of its net crude oil production.”
Confirming more of our observations Stratfor added the following: “PDVSA's capacity decline could be worse than Stratfor estimates. One indication of this was Chavez's first-ever public admission on May 1 that PDVSA was producing 100,000 bpd less than its 2005 budget estimate. The militarization of PDVSA's Western Division -- which Gen. Melvin Lopez Hidalgo said May 5 would include deploying elite armed civilian reserve units at key PDVSA installations -- also points to a harsher reality than the official figures suggest.
According to Stratfor: “Chavez's militarization of PDVSA represents an effort to stop the company from imploding. However, putting generals in charge of refineries and colonels in charge of oil fields will not reverse PDVSA's production collapse because Venezuelan officers do not know anything about operating an oil industry.”
On April 25th, in this space, we wrote: “A new axis is rising. The increasingly tight relationship between Cuba, China, and Venezuela should be of concern to Washington as all three countries have one thing in common, disdain for the United States.”
Recently, multiple sources have reported that Venezuela has opened a PDVSA office in Havana, with the intent of using Cuba as some kind of routing or business conducting hub. Chavez has reportedly pledged to invest some $400 million in Cuba. Recently China has infused at least $7.5 million.
And now for the coup de gras, courtesy of Stratfor: If Venezuelan generals take over PDVSA “the Cuban government will be able to exert more direct control over Venezuela's oil industry through Cuban military and security linkages with the FAN. Chavez's inauguration last week of PDVSA's first regional commercial office in Havana, and his announcement that PDVSA-Cuba would manage Venezuela's Caribbean region oil and gas transactions provides another indication of the Cuban government's growing direct control over PDVSA.”
Conclusion
If Venezuela’s Western oil reserves, have been damaged beyond repair, as Stratfor suggests, and if some 10,000 wells have indeed been rendered useless, then several things don’t add up.
Chavez is promising to send China oil. Chavez is promising to send Cuba oil. And Chavez still has commitments to the United States. Of the three, the only one with real money when the chips are down is the United States.
Chavez is investing money in all kinds of places, aside from Cuba. Recent reports suggest that there is Venezuelan money going into Panama, in order to expand the Panama canal and facilitate Venezuelan tanker routing to China. There are rumors that Chavez may support Colombian rebel group, the FARC, and perhaps others. Chavez is trying to cut deals with India, and has ongoing commercial conversations with other geopolitically unstable countries such as Bolivia.
Chavez is arming the poor people of Venezuela. He is buying jets and rifles. He is trying to develop oil and natural gas deals with Russia, and has ongoing discussions with regard to buying heavy equipment machinery from Iran.
But, if his oil production is only 50% of what it is supposed to be, where is all the money going to come from to pay for all these things? This scenario becomes extremely relevant if oil prices break significantly.
And what will happen when Russian, Indian, and Iranian engineers go to Venezuela and see that the infrastructure of the highly vaunted oil wells is beyond repair?
To run his expansionary schemes, Chavez has to come up with dollars or Euros, which he can only get by selling oil.
At some point, we would expect that Mr. Chavez is going to start writing hot checks. If and when that happens, it will be very interesting to see what happens to the currency and bond markets, not to mention what will happen to the price of oil.
Unless we’re missing something, Mr. Chavez, Mr. Castro and the Bolivarian revolution seem to be building their hopes of empire on a very fragile house of cards that is sitting on a very slippery slope. Yes, if oil prices rise then Chavez will be able to fund his plans. But, if he has less oil than he could deliver, the pace of his implementation could be slowed significantly, and not be as smooth as it has been so far.
The fact that the United States has now moved Latin America to a higher priority spot on its international agenda suggests that Washington has finally understood the extent of the potential from the “Bolivarian” revolution.
So, while a few days ago we concluded that the U.S. is too late in its bid to stop Chavez, this latest information, suggests that the U.S. has a chance to at least neutralize Chavez. If they can do so long enough, and oil prices fall, the whole PDVSA situation might just crash and burn around Chavez and Castro.
The markets, in our opinion, have yet to sort through this newly emerging dynamic, which means that we could be in for a new round of volatility in the oil pits. |
