Venezuela looks to new OPEC role

Crude oil markets are in limbo, with traders hoping Organization of Petroleum Exporting Countries (OPEC) energy ministers will act to improve fundamentals when they meet in Vienna on June 24. OPEC and a few non-OPEC producers recently pledged to reduce global oil production by roughly 1.5 million b/d in total, in a bid to revive oil prices after they hit a 10-year low (OGJ, Mar. 30, 1998, p. 23).

May 25, 1998

3 min read

David Knott
London
[email protected]

Crude oil markets are in limbo, with traders hoping Organization of Petroleum Exporting Countries (OPEC) energy ministers will act to improve fundamentals when they meet in Vienna on June 24.

OPEC and a few non-OPEC producers recently pledged to reduce global oil production by roughly 1.5 million b/d in total, in a bid to revive oil prices after they hit a 10-year low (OGJ, Mar. 30, 1998, p. 23).

But production estimates for April showed OPEC did not manage to cut exports by the total 1.245 million b/d promised in March, suggesting that tensions among members may continue (OGJ, May 18, 1998, p. 40).

OPEC member Venezuela is a key player in the unfolding drama. State firm Petroleos de Venezuela SA reluctantly shaved 200,000 b/d off exports but remains keen to hike output above 6 million b/d beyond 2000. After the cutbacks agreement with Saudi Arabia and Mexico that initiated the recent price recovery, Venezuela notified customers it would be unable to comply with some supply contracts and invoked force majeure clauses.

The fall in oil prices led Pdvsa to lower its projected export price for the Venezuelan oil basket to $13/bbl from the earlier estimate of $15.50/bbl. At the same time, the government pegged back public spending by about 6%, forcing Pdvsa to trim 1998 spending to $5.6 billion from $6.4 billion.

Setback

This near-term penny counting is a setback for Pdvsa, which is looking to hike production dramatically. Whether this goal will put Venezuela in a position of defying its OPEC production quotas in the future remains to be seen.

Before the price collapse, Pdvsa was aiming to boost its production to 3.6-3.8 million b/d this year and to double that amount by 2006. Venezuela is determined to raise output so high that it can share power on more even terms with Saudi Arabia, currently the dominant player both within OPEC and in the global energy market.

Venezuela wants to see OPEC's production quota system scrapped and is aiming to turn the organization's attention to other issues, such as increasing market share, fighting carbon taxes, and building closer relations among OPEC state oil companies.

New deal

Venezuela's Energy and Mines Minister Erwin Arrieta said the Saudi Arabia-Mexico-Venezuela agreement ushered in a new type of cooperation among oil producers, making OPEC's production quotas obsolete.

"The quota system," said Arrieta, without even a hint of irony, "created unfair competition amongst us. Some (OPEC members) were failing to respect it. Now we can write that the system of quotas forms part of OPEC's history."

Pdvsa Pres. Luis Giusti said Venezuela's oil strategy will be to continue to strengthen its market position and not relinquish market share. He cited Saudi Arabia's continued growth in production capacity.

Roughly 90% of Venezuela's oil exports go to the Americas and the Caribbean, with the rest being shipped to Europe and Japan. Venezuela has boosted its North American market share at the expense of Saudi Arabia.

Arrieta explained Venezuela's intentions diplomatically: "We are going to analyze the behavior of the market, and afterwards we could look at adjustments either upwards or downwards. We are on the threshold of a new era in which OPEC is embarking on new realities."