White House concerned over Venezuela's tumultuous oil strike

Maureen Lorenzetti
Washington Editor

WASHINGTON, DC, Dec. 20--US policy makers are worried that a widespread strike by Venezuelan oil workers could impact US energy markets if the situation isn't resolved soon.

"We're following the events in Venezuela very closely when it comes to the energy situation, Venezuela being a major exporter to the United States," a White House spokesman said.

US officials said that the Department of Energy has been monitoring events to determine if the US would suffer "negative impacts" on oil supplies if there is a "prolonged" disruption in Venezuelan oil exports.

Before the strike Venezuela produced a total of 3 million b/d of crude and liquids; it exported more than 1 million b/d of crude and 200,000 b/d of product into the US market. For global oil exports, the net loss of supply is about 2.4 million b/d, a volume that is roughly equal to the Organization of Petroleum Exporting Countries' current spare oil production capacity, according to analysts at Merrill Lynch.

Moreover, because of the medium heavy and sour paraffin properties of Venezuelan crude, its largest buyers—most notably state oil company Petroleos de Venezuela SA's refining arm Citgo Petroleum Corp and ConocoPhillips (OGJ Online, Dec. 16, 2002)—are already struggling to find replacement feedstocks.

Venezuela and Mexico are the two primary exporters of the heavy crude that is the only type of oil some US Gulf Coast refineries process. The two countries supplied on average 89.6% of that US market during the first 10 months of this year, jumping to 93% in October (OGJ Online, Dec.18, 2002). However, industry observers say it would be impossible for Mexico to increase its heavy crude exports enough to make up for the loss of Venezuelan crude.

White House officials said the US government recently took what it views as a proactive step to reduce possible supply problems. DOE is deferring 6.5 million bbl of deliveries into the Strategic Petroleum Reserve, now at 86% of its capacity until September 2003. But US officials stopped short of suggesting any kind of US supply crisis is expected because of Caracas's woes; they noted that DOE is not currently considering either a release or exchange of oil due to the temporary loss of Venezuelan crude.

The White House affirmed this view later in the week as well. "The Strategic Petroleum Reserve is, by design, to be used for severe disruptions of the market. That is a type that has not occurred," a White House spokesman said Thursday.

Market worries
DOE, however, could find itself under increasing pressure to consider an SPR drawdown if oil prices continue to climb. US crude prices this week pushed past $30/bbl, largely in response to the Venezuelan work stoppage; the strike is now in its third week with no signs of waning.

Other oil producers—most notably from OPEC, of which Venezuela is a founding member—are warning they may not be able to make up a supply shortfall if production from both Venezuela and Iraq occurs, a possibility given current tensions between Washington and Baghdad. If there are sudden supply shortages that translate to a dramatic price increase, SPR may be used, US government officials have said.

In Venezuela, no end to civil unrest is yet apparent.

Most PDVSA employees, from top executives to the rank and file, remain deeply unhappy with the way leftist Venezuelan President Hugo Chavez is running the state petroleum company. Chavez is said to mulling a declaration of emergency measures that would expand his powers and limit civil rights. Meanwhile, his opponents have ignored a temporary Supreme Court order for industry workers to return to their jobs.

Last week, the US called for early elections to resolve the stalemate.

But US officials were careful not to explicitly endorse a coup d'etat or "unconstitutional alteration" of the country's constitution. "The Venezuelan people must be able to decide which democratic, constitutional electoral option is most viable to resolve the crisis peacefully," US State Dept. officials said.

"We recognize the situation in Venezuela is volatile;, it's deteriorating rapidly," said a State Department spokesman. "The United States believes that a solution must be found quickly to avoid further polarization that could erupt into violence."

US State officials are concerned that a growing gasoline shortage in Venezuela may exacerbate an already dangerous situation.

Analysts view
Venezuela's potential near-term impact on the oil market is difficult to predict, noted oil analysts with Merrill Lynch. But in a note to clients Wednesday, they said they do not expect Venezuela's woes alone to have the potential to disrupt what they call the "delicate" political balance in OPEC.

"It will take time to rebuild lost capacity [in Venezuela]; decline rates are running at 8-9%, and the international community is likely to be cautious on investment until the political situation stabilizes," analysts said.

Currently, international companies produce about 650,000 boe/d in Venezuela, Merrill Lynch said. "However, it is worth noting that Venezuelan production does not account for more than 10% in any of the major foreign players," analysts said. Among the least exposed are the super majors such as BP PLC, ExxonMobil Corp., and Royal Dutch/Shell Group.

Merrill Lynch said it's hard to know when or what the resolution will be with regard to Chavez. But they said that his position appears "increasingly untenable, particularly given (that) the government appears to (be) becoming more and more isolated from the international community."

In the event that Chavez cedes power, Merrill Lynch predicted that "an interim government led by political parties (Coordinadora Democratica), the national workers confederation (CTV), the military, and other sectors of the economy would likely take charge and call for early elections shortly thereafter. A full resumption of oil exports by PDVSA would resume shortly thereafter."

Deutsche Bank AG analyst Adam Sieminski observed that the drop in Venezuela's production has lifted crude prices to an 8-week high and refining margins to a 2-year high.

Investors who continue to look past this near-term support into a weaker 2003 market should remember that inventory levels were extremely low even before this outage, Sieminski said.

"Not only do we expect higher settling-out prices and refining margins, but we also highlight that the shape of current inventories is similar to the winter 1999-2000 energy price environment that presaged the refining margin boom of 2000-2001," he said.

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