False news report planted to hurt Venezuelan government, analyst says

By OGJ editors

HOUSTON, June 26 -- A recent news agency report stating that Petroleos de Venezuela SA (PDVSA) planned to increase its oil production by 400,000 b/d apparently was a deliberate lie planted to embarrass the Venezuelan government, said Paul Horsnell, head of energy research for London-based JP Morgan Chase & Co.

That report, attributed to an anonymous source in Venezuela's state oil company, also may have been aimed at disrupting the discipline among members of the Organization of Petroleum Exporting Countries at their meeting Wednesday in Vienna. OPEC ministers voted Wednesday to extend current production quotas through September.

The report of a possible unilateral increase in production by Venezuela, one of OPEC's founders, triggered a small decline in energy futures prices last Friday before being rejected by traders as "highly dubious," Horsnell said in a report issued Tuesday.

He said, "We doubt that Venezuela currently has the ability to run 400,000 b/d above quota for 6 months. We suspect that the known difficulties with oil production capacity would impinge before Venezuela reached so high a level."

He added, "We have seen no reports that traders are seeing increased offers of crude oil from Venezuela; indeed, the traders' grapevine seems to be suggesting that there might be less on offer."

However, there is "a genuine issue" involving upgraded heavy oil—"synthetic crude produced from the upgrading of ultra-heavy oil deposits in the Orinoco basin"—that "does create confusion over Venezuelan (production) numbers," said Horsnell.

The Orinoco deposits are too heavy to count as conventional crude under OPEC definitions. "However, it has been a moot point as to whether the upgraded, i.e. effectively semi-refined, oil does count, and whether all or just some of it counts," Horsnell said.

"It is not inconceivable that some of the upgraded oil is being double-counted in market balances, i.e. it is being included under both the category of OPEC production of conventional oil and also in the OPEC production of 'near' oil that does not count towards quotas," he said.

Tyler Dann, energy analyst for Banc of America Securities LLC, a subsidiary of Bank of America Corp., earlier raised the question of whether the report of a pending increase in Venezuela's production may have been "a trial balloon of sorts."

Apparent cheating on production quotas among OPEC members "may be more coordinated than might be evident on the surface," he said. Any attempt to raise production to satisfy market demand before OPEC ministers next meet in September might be "more likely to come from 'leakage' rather than from an official quota increase," said Dann (OGJ Online, June 25, 2002).

However, Horsnell was scathing in his criticism of PDVSA officials who apparently planted the false report.

"To put it very mildly, elements within (PDVSA) have been a major source of opposition to Venezuelan President Hugo Chavez. Their current agenda would appear to be to increase friction within OPEC, reduce the chances of the current Venezuelan energy minister being elected as secretary general of OPEC, and generally to bring down oil prices in such a way as to weaken the Venezuelan government," Horsnell said.

"Given that background, it is a little hard to believe that the anonymous source is a disinterested individual motivated only by a burning interest to improve the quality of the information held in the oil market."

The mercurial, populist Chavez resigned in early April under military pressure in the wake of a strike by hundreds of white-collar workers at PDVSA in protest of his having replaced veteran top executives of the state oil company with political loyalists in February (OGJ Online, April 15, 2002).

A transitional government was named that was expected to increase PDVSA's oil production and employment as a means of ending that strike. But that government lasted less than 48 hours before pro-Chavez demonstrators forced his return to office.

To appease his middle-class and business opponents, Chavez moved quickly to reinstate the PDVSA professionals. He also named OPEC Secretary General Alí Rodríguez Araque, a Venezuelan, as the new president of PDVSA (OGJ Online, May 1, 2002).

That appointment appeared to tie PDVSA to OPEC policies, analysts said at the time. Both Rodríguez and Chavez endorsed OPEC's strategy of curtailing production to raise world oil prices back to the cartel's target range of $22-28/bbl.

OPEC members Wednesday appointed Alvaro Silva Calderon, Venezuela's energy minister, as OPEC's secretary general through December 2003, effectively completing Rodríguez's term of office.