Alexander's Gas & Oil Connections = Venezuela USA Chrisis?

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Analysis on the Venezuela-USA oil relationship



17-01-05 Venezuelan President Hugo Chavez has been ratcheting up the rhetoric over cutting off US markets from Venezuelan oil supplies during the past several weeks. On the surface the idea seems preposterous. Along with Mexico, Canada and Saudi Arabia, Venezuela has ranked among the top four US oil suppliers for decades and currently supplies approximately 11 % of US oil needs.

Located just across the Caribbean from the US Gulf Coast, it is ideally situated to supply the US market. Denying that in order to supply customers in Asia or Europe would cut deeply into Venezuela's profit margins.



However, Chavez's primary rationale is not economic, it is political. Opposition to the United States is an ideological fact for him, and he wants to reduce Venezuela's economic links to the superpower to his north -- even if it means a little less cash for his coffers.

Now, we do not take Chavez exactly at his word. We never expect him to stop all shipments to the United States, not out of love or kindness, but because the primary customer for Venezuelan crude in the United States is CITGO, a subsidiary of PdVSA, the state-owned Venezuelan oil company. Chavez might be many, many things, but he is not about to cut off supplies to one of his own companies -- or at least not before he sells it (although that is another issue we will get to in good time).



CITGO uses about 860,000 bpd to supply its refineries and approximately 700,000 bpd of that total comes from PdVSA. To fill domestic refinery needs, Venezuela keeps about another 1.3 mm bpd at home, of which some 900,000 bpd of product is shipped abroad with the remaining 400,000 bpd being used at home.

That leaves Venezuela with only about 600,000 bpd of additional crude exports to play with. In a global system where demand is at about 80 mm bpd, 600,000 bpd can be mopped up pretty quickly.



But Chavez has even selected where he wants his country's crude to go: China. Chinese representatives have been hop scotching all over Latin America during the past few months attempting to pen trade and investment deals. For China, energy security is an acute issue.

The Persian Gulf states enjoy a near monopoly on exports to Asia, resulting in a stiff premium on supplies. Venezuela's heavy crude might be of inferior quality to the lighter, sweeter streams that come from the Middle East, but it does not have to steam past regional rivals Australia, India, Singapore or Vietnam to reach Shanghai.



The lower cost of Venezuelan crude -- not to mention the lack of a premium -- should also offset the higher transport cost of getting it across the Pacific. Venezuela is already in advanced negotiations with Panama to trim some of that transport cost. Panama possesses a pipeline -- the Petroterminales de Panama -- that transports crude from its Pacific to its Atlantic coast.

Chavez wants to reverse the flow so Venezuelan crude can reach the Pacific basin. The process is rather simple and cheap -- and with oil prices where they are Venezuela can afford it. Should an agreement be struck, Venezuelan cargos could be steaming to Asia by August. At maximum capacity the Petroterminales de Panama can handle 800,000 bpd.



The one hitch in the plan is that Venezuelan crude is so thick that very few Chinese refineries can run it at all. Refitting sufficient capacity to use the stuff could take up to two years. Currently, China could handle no more than 100,000 bpd according to sources in the US Department of Energy.

But even here Venezuela has a bridge to make things work out. Singapore currently has spare capacity of about 300,000 bpd which is capable of handling the Venezuelan crude, and the US West Coast has plenty of refineries that would be willing to take a few cargos to supplant or supplement -- Middle Eastern deliveries even if only on a temporary basis.



When Venezuelan crude oil hits the Pacific, Chavez will have his pick of potential customers -- even if the Chinese are not among them at first. That leaves only the pesky issue of CITGO, a front on which no moss is gathering. On Jan. 13, Chavez restructured the PdVSA board of directors and installed Bernard Mommer, until now PdVSA's UK director, in the new line-up. Mommer favours PdVSA selling all of its international holdings.

Add that PdVSA President Rafael Ramirez's first assignment for the new board was to completely review all of PdVSA's contracts and agreements with foreign firms, and it appears ground is being laid for a rolling Venezuelan disengagement from the United States.



Source: Stratfor