Venezuela is one of America's biggest suppliers of crude--and that's the way leftist President Hugo Chavez likes it. He's looking to squeeze more dollars out of the international oil companies that drill there, while keeping prices high. Should we worry?
- From: bromselick@xxxxxxx
- Date: 30 Jan 2006 21:37:59 -0800
OIL'S NEW MR. BIG --
By NELSON D. SCHWARTZ --
October 3, 2005 --
(FORTUNE Magazine) -
Bound for places like Boston, Baltimore, and Port Everglades, the five
supertankers sit low in the shimmering blue-green Caribbean water,
their hulls brimming with oil, gasoline, and jet fuel. Filling at a
rate of 36,000 barrels an hour, these ships can be loaded and on their
way from Venezuela in half a day, which is a good thing, since five
more tankers are waiting in the distance for their fill-up. Americans
are paying $15 million for each cargo, but the plant's manager just
shrugs. "It's business," he says, already focusing on tomorrow's
manifest: 500,000 barrels of high-sulfur fuel oil, destination China.
The problem for the U.S. is that we may have to ante up more--a lot
more--for that petroleum in the future if Venezuelan President Hugo
Chavez has his way. Venezuela is now the key to satisfying America's
oil habit: By some measures this volatile Latin American nation, just a
four-day sail from the U.S. Gulf Coast, has leap-frogged Canada and
Saudi Arabia to become America's leading foreign source of crude. In
the first half of 2005, Venezuela supplied one-seventh of our imported
oil, or 1.6 million barrels a day. And that's helping the fiery
socialist Chavez challenge Big Oil. He's hiking taxes and royalties on
the international giants, even as he strengthens the hand of OPEC and
state-owned energy companies around the world. What's more, Chavez has
threatened to shut the spigot if the Bush administration challenges his
grip on power in Caracas.
Naturally, that's raising the temperature both in boardrooms in Texas
and in the corridors of power in Washington, D.C. In August the Rev.
Pat Robertson made headlines with a call for U.S. special forces to
"take out" Chavez--he later apologized--and even normally cool heads in
Congress are eager to confront what they claim is a dangerous regime
close to U.S. shores. Representative Connie Mack (R-Florida) says, "We
must all recognize that when we purchase Hugo Chavez's gasoline, we
line the pockets of a staunch enemy of freedom." Representative Mark
Kirk (R-Illinois) goes even further, calling Chavez "Venezuela's
Mussolini."
Ironically, even as the political rhetoric gets hotter, with
politicians like Mack arguing that Chavez is "Castro with oil," the
U.S. and Venezuela's oil-fueled symbiosis is growing closer. "He
depends on us as much as we depend on him," says consultant Rob Cordray
of PFC Energy, noting that about 50% of Venezuela's crude exports go to
the U.S. The devastation wrought by Hurricane Katrina has offered
Venezuela an even greater opportunity: In early September, Venezuelan
authorities announced they would send an extra one million barrels of
gasoline north to make up for the output of U.S. refineries shuttered
by the storm. And while the Robertson-Chavez exchange was portrayed as
a dustup between crackpots from opposite ends of the spectrum, Chavez
is a smart, canny operator--and his hunger for both petrodollars and
petro-power is something America needs to take very seriously.
The point man in Venezuela's contentious relationship with the U.S. is
a tall, prematurely gray 42-year-old engineer named Rafael Ramírez. As
both Venezuela's Energy Minister and CEO of its national oil company,
PDVSA (pronounced ped-a-VAY-sa), Ramírez is arguably the most powerful
oilman Americans have never heard of. (If some Americans do know the
name Rafael Ramírez, they're probably thinking of the all-star
shortstop who played for the Atlanta Braves in the 1980s.) But if
you've visited one of Citgo's 14,000 U.S. service stations recently,
Ramírez appreciates your business. Citgo is among America's biggest
gasoline providers and PDVSA owns it. With Venezuela now the world's
sixth-largest oil producer and possessor of the biggest reserves of any
country in the Western Hemisphere, Ramírez is becoming increasingly
visible in global energy circles.
In a rare interview in his spacious Caracas office--which features an
impossible-to-miss portrait of Chavez--Ramírez lays out for FORTUNE
his plan to bend Venezuela's oil industry to Chavez's socialist vision
and change the balance of power between oil-producing countries and
private companies. He may be dressed in a conservative dark suit and
tie, but Ramírez is an agitator of the highest order on subjects like
how to extract more money from Big Oil. He is tightening his grip on
U.S. giants like Exxon Mobil and Chevron as well as European players
such as Shell and Total. Through higher taxes and royalties, all
foreign oil companies are being forced to turn over a bigger share of
their profits to the government in order to fund Chavez's new social
programs. "We are working on becoming a tool for the state to recover
its sovereignty," Ramírez explains. "When the private companies have
control over production, it's impossible to conduct your own national
oil policy."
Ramírez isn't just setting his sights on foreign oil firms in
Venezuela. He wants PDVSA to work with national oil companies (NOCs) in
countries like Iran, Saudi Arabia, and Algeria so that the NOCs can
wrest power away from the likes of Exxon and other private corporations
worldwide. "This does not mean we will refuse to work with private
companies," says Ramírez. "But when oil companies have the high hand
over a country, there is no way for a country to resist the pressure
coming from these companies." Ramírez also wants a bigger say within
OPEC. Venezuela was a founding member of the cartel in 1960 and remains
its most powerful non-Arab member. Before Chavez took over, Venezuela
routinely flouted OPEC's production quotas. That's no longer the
case--and Ramírez wants to make sure OPEC enforces its quotas in order
to keep prices high.
Even as Ramírez challenges the status quo in the oil arena, his boss
Chavez is upsetting Washington by courting U.S. foes like Cuba and
Iran. He makes no secret of his admiration for Fidel Castro and
Venezuela supplies Cuba with nearly 100,000 barrels a day of subsidized
oil. In exchange, Venezuela receives medical help from more than 17,000
Cuban doctors and dentists stationed in Venezuela. Chavez has been a
frequent visitor to Havana, most recently in August. A delegation from
Tehran visited Caracas in March, and PDVSA employees are now getting
technical training from Iran, a country the U.S. believes is supporting
terrorists in Iraq. Chavez has also been signing deals throughout Latin
America and the Caribbean to supply cheap oil to his neighbors,
elevating Venezuela's influence--and his own profile.
PDVSA is no longer just an oil company--it's the engine of the Chavez
revolution. After being crippled by an anti-Chavez strike in 2003 that
resulted in the firing of more than 18,000 workers, PDVSA says it is on
track to generate revenues of $75 billion this year. "La Nueva PDVSA,"
as the company is known, has earmarked $4 billion of its internal
budget this year for social programs and projects like new highways and
railroads. Nearly $10 billion more flows into the Venezuelan treasury,
forming the backbone--35%--of the federal budget. "PDVSA was an enclave
within the country with very expensive facilities surrounded by poverty
and misery," says Ramírez, who's become a hero to Venezuela's poor
because of PDVSA's largesse. "That's impossible today." Just in case
anyone forgets who really deserves the credit for this "21st- century
socialism," Chavez's image appears on the back of many company IDs, and
his slogans decorate the hallways of PDVSA.
Like all skilled actors and politicians, Ramírez and Chavez are keenly
aware of their audience. They walk a fine line, alternately assuring
Americans that Venezuela will continue to supply El Norte with 1.6
million barrels of crude a day and telling Venezuelans that they will
cut America's energy lifeline if the Bush administration makes any
hostile moves against Caracas. Given the history of U.S. intervention
in Latin America--encouraging the overthrow of Salvador Allende in
Chile, the removal of Panama's Manuel Noriega by the first President
Bush--it's no surprise that many Venezuelans think a U.S. invasion is a
real possibility. Yet while the current President Bush would be happy
to see Chavez replaced by a more pro-Western leader, any military
action is unthinkable as long as the oil keeps flowing.
And despite this former paratrooper's authoritarian tendencies--he
attempted to seize power in a coup six years before being elected
democratically in 1998 and has recently tried to intimidate opponents
through arrests and a new law aimed at the press--Chavez is hardly
Fidel. At least not yet. Most privately owned media in Venezuela remain
critical of Chavez, and U.S. companies have a major presence. In
downtown Caracas, a sign urging solidarity with Chavez's Bolivarian
revolution sits next to a huge green-and-white IBM billboard.
For the most part, the macho talk coming out of Caracas is just that.
As Ramírez himself notes, America's location and enormous demand make
it Venezuela's most natural customer. But the image of standing up to
the U.S. plays well in the ranchitos, the Caracas slums that are
Chavez's political stronghold. (Chavez has nicknamed Bush "Mr. Danger,"
while Defense Secretary Donald Rumsfeld is "Mr. War.") As Chavez knows,
this kind of rhetoric has helped keep his political idol Castro in
power through ten U.S. presidencies.
Still, foreign oil giants are definitely feeling the heat. In fact, the
Venezuelan tax authority has created a special branch focusing
exclusively on private oil companies. Ramírez accuses Big Oil of
systematically cheating on their taxes, and back-tax claims of at least
$1 billion are likely. Is this the start of a campaign akin to the
Kremlin's attack on Yukos, the Russian oil giant that was bankrupted
and then nationalized after being hit with back-tax penalties? "I don't
think the situation is that bad," says Ramírez. "Most companies are
willing to pay, and they are paying."
The key element in Ramírez's squeeze play is the forced renegotiation
of 32 operating agreements under which foreign firms pump 500,000
barrels a day of oil that they deliver to PDVSA for a set fee. Instead
of the old 34% levy, profits from these deals will be taxed at a 50%
rate. And rather than operating agreements, Ramírez is insisting on
joint ventures, with Venezuela controlling at least 51%. By forcibly
rewriting the contracts, Ramírez can earn more per barrel and also
avoid paying hundreds of millions in incentive payments that were due
to foreign companies under the old agreements. What's more, in the tar
sands of the Orinoco belt, where Exxon, Total, Chevron, and others have
separate agreements and have invested billions to extract oil from
what's basically asphalt, royalties on each barrel of oil are being
raised from 1% to nearly 17%.
The new terms haven't been finalized, but they're not just being
applied to U.S. giants; all foreign companies, including NOCs like
Brazil's Petrobras and China's CNPC, are being hit. Most, if not all,
are likely to swallow the changes Ramírez is imposing. If they don't
go along, they'll lose access to Venezuela's 80 billion barrels of
proven oil reserves--one of the biggest energy prizes on the planet.
That's why powerhouses like Chevron have adopted a remarkably
accommodating stance toward Venezuela. Although tax auditors raided a
Chevron office in Maracaibo in July, the company isn't protesting while
it awaits a possible back-tax bill. Vice chairman Peter Robertson
insists Chevron has "a good, excellent relationship with the Venezuelan
government." His boss, CEO Dave O'Reilly, adds, "Venezuela will work
its way through this. Ramírez is a very straight shooter." Indeed,
O'Reilly says Chevron would like to invest more in Venezuela.
After challenging some deductions and applying the tax hike
retroactively, auditors recently slapped Shell with a $132 million tax
claim. But the head of Shell's operations in Venezuela, Sean Rooney,
isn't complaining. "The government of Venezuela is auditing the
majority of oil companies' returns," he says. "We were lucky enough to
be the first." In fact, Rooney is determined to stay, come what may.
"It is hard to turn away from the tremendous opportunities in
Venezuela," he says. "The Venezuelans can and will be extracting higher
rents, and we expect and accept that. We are prepared to pay more when
the opportunity merits."
The only foreign giant fighting hard against Ramírez's moves is Exxon.
It's threatening to sue the Venezuelan government and bring
international arbitration proceedings, citing the legal sanctity of the
original contracts. But Ramírez is betting it won't go that far. He
hasn't spoken to Exxon CEO Lee Raymond directly but says, "I have a
hunch that they finally read the clauses of the contract and realize we
are right." An Exxon spokesperson says that while arbitration remains
an option, the company "wishes to explore an amicable resolution."
Ramírez has an ace up his sleeve in negotiating with Big Oil--Asian
rivals eager for a foothold. Any Western corporation that exits
Venezuela could eventually be replaced by a Chinese or Indian firm. The
flirtation is mutual. Ramírez himself went to Beijing in August to
open PDVSA's first office in China. And an agreement signed in June
calls for Venezuela to supply 30,000 barrels of fuel oil to China. As
Ramírez says, "There is a lot of interest from China and India, that's
a brand new condition.... Yes, they have huge, deep pockets."
A longtime friend of Chavez who founded a natural-gas company before
going to work for PDVSA, Ramírez speaks in a soothing voice that's
barely above a whisper. But his message is a provocative one in a
country whose rocky relationship with Big Oil goes all the way back to
the Rockefellers and the first Venezuelan wells in the 1930s.
Of course, fresh oil is a lot harder to find now than it was then, and
Western giants like Shell desperately need new prospects around the
world. So the case of Venezuela is just one more example of the way
regimes from Russia to Nigeria to Kazakhstan are challenging Big Oil
for a larger slice of the burgeoning profit pie, says PFC's Cordray.
"These big oil companies are used to operating in some of the most
unfriendly political environments on earth," he says. And with the last
potential gushers increasingly in government hands in places like
Kuwait, Saudi Arabia, and Russia, there's really nowhere else to go.
"It would be hard for me to see a scenario where they just up and walk
away from Venezuela," says Cordray.
As for Ramírez, he is well aware that Exxon is on track to earn more
than $30 billion this year, and he naturally thinks that kind of
windfall would be better spent by Chavez on social programs. "We are a
country with huge resources, but we have millions of poor people--80%
of the population is poor," he says. "We have work to do."
Omar Bravo is not political. In a country that's fiercely divided
between Chavistas and los escualidos ("the squalid ones," as
anti-Chavistas are known), the deputy manager of Venezuela's biggest
refinery happily describes himself as a pragmatist. When PDVSA's
workforce went on strike to protest Chavez's left-wing policies, Bravo
crossed the picket lines and stayed. "I was doing what I had to do,
saving my job," he says. Bravo's wife of 30 years, Irma, saw things
very differently--she supported the PDVSA workers who walked off the
job and were subsequently fired by Chavez. Indeed, at the height of the
strike, she joined them in nightly protests outside the Bravo home, a
few miles from the refinery.
"I don't like this government--I am a democratic person and I believe
in freedom," Irma says, sitting next to her frowning husband in their
sunny living room. "You have to wear a red hat to work in this
country," she adds, referring to a popular Chavista symbol. "That's not
true!" Omar Bravo exclaims. "Typical escualida. Typical." In the two
years since the strike, the Bravos have reconciled--mostly. That's not
the case for other PDVSA workers. Friends and neighbors who were fired
for striking still won't come over or talk to Omar Bravo. "Many of them
are still unemployed or driving taxis or selling cheese on the street.
But it was wrong to strike--Venezuela's economy depends on PDVSA," says
Omar.
Indeed it does--a third of its GNP is generated by oil, and energy
accounts for 80% of its exports. So PDVSA is watched by Venezuelans
with a passion usually reserved for soccer teams--it even has its own
radio station, 105.7 on the FM dial. These days, PDVSA is the subject
of a fierce debate over just how much damage the strike caused and
whether Chavez's policies will further weaken it.
PDVSA may be state-owned, but its daily production rivals that of
foreign giants like Total. If it falters, that could create a shortfall
for refineries on the Gulf Coast. Critics like former PDVSA chairman
Luis Giusti say management isn't investing enough to develop new
projects. Instead, he says, PDVSA is merely scrambling to pump as much
oil out of the ground as it can now to fund Chavez's social programs.
"There were political pressures in the past, but PDVSA was run like a
private company," says Giusti. "Now it's part of the state, and it's
been severely mismanaged. We've gone back 20 years."
Ramírez and other execs admit that the strike--they call it "the
sabotage"--crippled the company. But Ramírez insists that Venezuela's
output has recovered and now stands at 3.3 million barrels a day. The
U.S. Department of Energy and outside observers like Giusti say
Venezuela's daily production is more like 2.6 million barrels. That
adds up to billions in lost income for PDVSA and the Venezuelan people,
says Giusti.
In Caracas this summer, Ramírez and other PDVSA officials promised
FORTUNE that a long-delayed 2003 SEC filing was "weeks away." It has
yet to appear, and prospects for the 2004 report to the SEC are murkier
than the waters of Lake Maracaibo. But they did open the books to go
over what they say are the company's latest results. Through May 2005,
according to PDVSA director Eudomario Carruyo, the company's sales
totaled $31 billion, and it's on track to ring up $75 billion for the
full year. That's up from $64 billion last year. Net profits totaled
$3.4 billion for the first five months of 2005.
That windfall, says Carruyo, will enable PDVSA to spend the billions it
has earmarked for social programs, while leaving $5.6 billion for new
projects. Carruyo is confident the company will never have to choose
between money for social programs and finding oil. "Oil prices might
drop," he says, "but it will never drop below $50."
It's not just PDVSA's future that's being wagered on high oil
prices--so are the expectations of ordinary Venezuelans. In the poor
Caracas neighborhood of Sucre, a shedlike former public bathroom has
been converted into an educational center for adults. A circle of
middle-aged men and women go over the day's lessons. "We're here
because of PDVSA," says the center's director, Juan Eduardo Mendoza.
Critics like Giusti may worry that Ramirez is spending the oil windfall
rather than investing it in PDVSA, but ordinary Venezuelans like
Mendoza don't want to hear it. "If Chavez believes in Ramírez, we
believe in him. Before, we didn't even know about PDVSA. Now the whole
country knows who Rafael Ramírez is."
The world, too, is beginning to know the extent of Venezuela's oil
ambitions. But despite Chavez's outrageous rhetoric and occasional
threats, the crude will most likely keep flowing north. If he has his
way--and there's no reason to suppose he won't--American oil companies
and consumers alike are going to end up paying more for it.
REPORTER ASSOCIATE Jenny Mero
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