Venezuela Seeks to Diversify Markets

While Chávez raises question marks about PDVSA's oil operations in the United States and Europe, he has been engaging in new negotiations with China, and with several countries in South America.

CARACAS, Feb 16 (IPS) – Venezuelan-born independence hero Simón Bolívar, calling for a South American union, once mused that he envisioned himself with his right hand on the Orinoco river (which runs through Venezuela) and his left on the Río de la Plata (between Argentina and Uruguay).

”That means he was looking towards China,” Venezuelan President Hugo Chávez quipped in a speech that he gave to smiling audiences earlier this year in Caracas, when he welcomed Chinese Vice-President Zeng Qinghong, and in Buenos Aires, where he inaugurated the first gas station to be operated by a joint venture between Venezuela’s state oil monopoly PDVSA and the Argentine company Enarsa.

The anecdote invoking the image of a giant Bolívar with his back to the Atlantic Ocean and gazing towards the Pacific illustrates one of the aims of the Venezuelan government: to gradually reduce the country’s heavy dependence on the U.S. market as the main buyer of its oil, through changes in oil industry strategy that have begun to take shape.

Venezuela is the world’s fifth largest oil exporter, and sells around 60 percent of its output to the United States, which covers about 15 percent of U.S. oil consumption.

PDVSA is one of the biggest companies in the developing South, with total assets estimated at 100 billion dollars and fuel refineries and distribution networks in the United States and Europe.

PDVSA may sell some of its refineries in Europe, ”because they don’t bring in a single cent in profits, nor do they pay taxes in Venezuela. That’s economic imperialism,” said the left-leaning Chávez.

The president also complained about the terms under which Citgo Petroleum Corp., PDVSA’s refining and marketing affiliate in the United States, operates. Citgo’s network of eight refineries and 14,000 gas stations supplies eight percent of that market.

Chávez griped that Venezuela sells the United States fuel at a discount, under contracts signed before he took office in 1999. ”We are subsidising the U.S. budget,” he said.

He was referring to the daily 700,000 barrels of Venezuelan crude that are sold to the United States, through Citgo, at a discount of two dollars a barrel because its refineries can handle Venezuela’s heaviest crude oils.

Energy Minister Rafael Ramírez, who is also the president of PDVSA, said ”it does not make sense for Venezuela, which has tremendous social problems, to subsidise ‘first world’ economies.” He announced a freeze on plans to expand Citgo, whose earnings before taxes amount to one billion dollars a year.

But while Citgo CEO Félix Rodríguez said ”the government does not plan to sell off the company’s assets,” analysts say Chávez may be considering such a move in the medium-term, after assessing the profitability of each refinery.

Ramírez, however, did confirm the government’s interest in selling PDVSA’s 50 percent stake in the Ruhr Oel refinery in Germany, and other refineries in Europe. ”We already have an acceptable offer, as part of an agreement that includes British Petroleum and a Russian firm,” said the minister.

”The internationalisation of PDVSA was a bad business deal, because the oil is sold at a discount, and the transport companies take the lion’s share” of the profits, Francisco Mieres, a graduate school professor who specialises in the oil economy, told IPS.

”Venezuela takes in less money per barrel than Mexico, which sells to the United States without having refineries there,” he added.

According to Mieres, ”it’s possible to do good business selling refineries to the Russians in Europe, who have a natural market there. And with respect to Citgo, either the refineries will be sold, or the terms of the agreement for providing oil supplies will be modified.”

Alberto Quirós, a former CEO of Royal/Dutch Shell in Venezuela, commented to IPS that ”selling Citgo is an old threat wielded by Chávez. But perhaps he does want to sell the refineries, and it’s not a bad idea now, when oil prices are sky-high, demand is strong, and he could get a good price for them.”

Citgo’s refineries, which have deep conversion units that transform low-value fuel oil into higher-value products like diesel and gasoline, ”put out the same by-products as others do, but working with heavy crude oils, which are cheaper and thus bring in big bucks,” said Quirós.

While Chávez raises question marks about PDVSA’s oil operations in the United States and Europe, he has been engaging in new negotiations with China, and with several countries in South America.

He and Argentine President Néstor Kirchner sealed a joint venture agreement between PDVSA and Enarsa, involving the production, refining and distribution of petroleum by-products and natural gas.

Chávez also said PDVSA was studying the possibility of purchasing Shell’s assets in Argentina, a one billion dollar business deal. But in the end, the transnational decided not to divest its interests in that country.

The oil supplies agreed with Argentina, worth more than 300 million dollars, will be traded for cattle, agricultural products, and medical equipment.

Agreements are also being negotiated with Brazil, which at one point purchased 100,000 barrels a day from Venezuela, before the giant South American nation began to approach self-sufficiency.

PDVSA is also seeking accords with others nations in the region to create a South American energy company that already has a name: Petrosur.

”PDVSA do Brasil already exists; we are forging ahead with PDVSA Agentina and will do the same with Uruguay (after leftist president-elect Tabaré Vázquez takes office Mar. 1); we provide Paraguay with oil under a special agreement; and Bolivia has invited us to explore joint projects,” said Minister Ramírez.

PDVSA is also interested in building an oil pipeline across Panama to connect the Atlantic and Pacific oceans, as well as a pipeline running from the Venezuelan region along the northern border with Colombia to that neighbouring country’s Pacific coast.

The destination in mind is obvious: the fast-growing energy market in China and other countries of Asia.

”Reaching China is a strategic question. It would be a mistake not to have a presence there. They are switching over from coal to more efficient fuels. We are negotiating agreements, for example, on fuel oil, for which it would be important for us to transport it out of the Atlantic,” Ramírez told the Caracas newspaper El Universal.

”We have reached agreements with China to begin to exploit 15 mature oilfields in eastern Venezuela, that have more than one billion barrels in reserves, and a large part of that oil will come to China,” said Chávez during a visit to Beijing in December.

However, there are pending differences between PDVSA and the China National Petroleum Corp. (CNPC) over an accord for producing orimulsion, which basically consists of two parts heavy crude and one part water, and is used to fuel thermoelectric plants and steel factories.

PDVSA, under the guidance of one of its vice-presidents, Bernard Mommer, wants to stop producing orimulsion in order to use the heavy crude oils that now go into that fuel to make synthetic crude oils, which are lighter and more profitable, instead.

The Venezuelan and Chinese companies are negotiating an agreement for Venezuela to produce enough orimulsion to at least live up to prior commitments.

The planned elimination of orimulsion has been criticised in Venezuela by former oil industry executives as well as academics from the nationalist left.

But leaving aside that hurdle, Venezuela has a clear interest in selling oil to China, despite the high costs arising from the distances involved and the fact that the Asian giant has insufficient deep conversion refining capacity.

According to analyst David Edmonds with Stratfor, a U.S.-based intelligence and security consulting organisation, Chávez’s reasoning in seeking what he calls ”strategic ties” with China (and Russia) is economic, not political.

John K. Atchley, another expert in Washington, says a pipeline through Panama may give the Chinese an advantage, because Venezuela could grant it discounts, compensating the costs of transport.

Quirós said that ”in the market there are enough possible formulas to compensate for the problems arising from the large distances involved,” although he did not elaborate on these proposals.

Mieres, meanwhile, said Venezuela could reach ”triangular agreements for Russia to supply clients in China while PDVSA supplies Russian clients in North America, for example.”

Venezuelan oil expert Mazhar al-Shereidah said the Chávez administration’s plans for diversifying markets were positive, because ”the day the current situation changes, any political disagreement with the United States could bring to a halt U.S. purchases of Venezuelan oil.”