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Venezuela's Oil: A Step Toward Ending U.S. Domination
Dec 29, 2004
Summary
Venezuelan President Hugo Chavez says Chinese oil and gas companies will be assured access to contracts in Venezuela ranging from exploration and production of crude oil and gas, to the construction of refineries and petrochemical plants. Chavez wants to break free of Venezuela's decades-old energy relationship with the United States, and is banking on China's thirst for oil to achieve that goal.
Analysis
President Hugo Chavez has signed eight agreements in Beijing that lay the foundations for granting Chinese oil companies preferential access to oil and gas projects in Venezuela, including exploration and production, and the construction of new pipelines, refineries and petrochemical plants. Expanding energy relations with China, he said, is Venezuela's best option for breaking with "100 years of U.S. domination" over the country's oil industry.
Chavez's public assurances in Beijing mean that Chinese oil companies will receive preferential access to Venezuela regardless of whether their bids are the most competitive. His remarks constitute a significant change in the direction of Venezuela's energy policy -- away from its decades-old bilateral relationship with the United States. Chavez already has started to realign Venezuela's armed forces with Russia, China and France. Now he is doing the same with Venezuela's oil industry, setting in motion a process intended to reduce the U.S.-Venezuela energy relationship.
This process of reducing what the Chavez government perceives as a dependency on the United States that threatens Venezuela's national security will not happen quickly -- if at all. Chinese companies may find good deals in Venezuelan oil and gas projects but, like other foreign oil companies, they will choose projects carefully and negotiate contract terms aggressively. Venezuela currently has an investor-unfriendly environment, particularly for oil and gas companies. The country's restrictive 1999 Bolivarian Constitution, its 2001 Hydrocarbons Law, and recent presidential decrees unilaterally raising tax and royalty rates on foreign-owned strategic joint ventures with Petroleos de Venezuela (PDVSA) in the Orinoco Tar Belt are not positive incentives for prospective investors.
However, Venezuela's huge crude oil and natural gas reserves are an appetizing prospect for oil companies and countries that need incremental access to energy resources. China's thirst for energy already has taken it to the Middle East and Africa, where it is competing for a growing share of exportable energy supplies. Given the political importance that Caracas and Beijing both assign to closer energy relations, it is likely that both governments will find ways around the restrictive investment rules.
China frequently has been willing to invest in higher-risk energy projects of dubious profitability. The key factor for Beijing will be whether Chavez gives Chinese investors assurances that the Venezuelan state will not intervene in or obstruct their investments. Chavez appears to have made such assurances. His Dec. 24 remarks in Beijing made it clear that oil investment decisions will be made directly by the presidency of Venezuela, and not by lower level officials at the Energy and Mines Ministry or PDVSA.
However, the process will gather momentum slowly, since Chinese refineries are not engineered to process heavier gravity Venezuelan crude and likely will have to undergo some retooling to accept incremental volumes of Venezuelan oil in the coming years.
Meanwhile, Chavez likely will not actively seek to curtail the activities of U.S. oil companies, such as ChevronTexaco, which has operated in Venezuela for 80 years and has close to $3 billion invested in heavy crude upgrading and offshore natural gas projects in the country. Chavez has nothing to gain economically by tightening the screws on U.S. oil company investments in Venezuela. Moreover, any move seen as illegally restricting private U.S. oil operations in Venezuela would fuel tensions with the Bush administration and upset foreign lenders that specialize in funding major energy projects.
As a result, Stratfor thinks it is likely that the Chavez government simply will favor energy projects involving Chinese and other non-U.S. oil companies and investors. This tendency will gradually become more obvious over the next five to 10 years as Venezuela's oil and gas sectors expand. Venezuelan oil exports to the United States likely would remain unchanged at about 1.5 million barrels per day (bpd), or could even drop over the coming five to 10 years to 1 million bpd or less. New exportable production capacity coming on stream would be shipped to new markets, mainly in China. The planned Venezuelan-Colombian pipeline from western Venezuela to Colombia's Pacific Ocean coastline is an integral element in Chavez's long-term strategy of reducing Venezuelan oil supplies to the United States by redirecting them to Asia.
It also is likely that Spanish, Russian, French, Indian and Middle Eastern energy companies will be favored players in the future expansion of Venezuela's oil and gas industries. Chavez has invited companies from these countries to invest in Venezuela's energy sector during frequent foreign trips over the past year. However, China is by far the most strategically important player in Chavez's grand scheme to expand Venezuela's oil and gas industries while simultaneously diminishing its bilateral energy relations with the United States. This is because China's growing thirst for energy eclipses demand in all other countries except the United States.
The Bush administration has not responded publicly to Chavez's pledge to Beijing. However, China's now-privileged access to Venezuela's energy resources gives Beijing a potential edge that Washington does not have in Caracas. As the largest foreign investor historically in Venezuela's oil industry, U.S. oil firms still enjoy political clout in Caracas. The U.S. era in Venezuelan oil has peaked, however, and the new major players in the coming years likely will be Chinese and other non-U.S. companies.
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