I'm normally not much on any commentary done by USA Today, but this is pretty good. I've got some commentary, but I'll have to post it later. http://www.usatoday.com/money/world/2007-04-04-venezuela-1b-usat_N.htm Oil — Venezuela's lifeblood — is also a political flashpoint By David J. Lynch, USA TODAY CARACAS, Venezuela — Hugo Chavez vs. Big Oil. Now there's a showdown without an obvious crowd favorite. The notoriously anti-American president of Venezuela started this fight by tearing up his contracts with four oil industry partnerships, demanding they convert the government's minority stakes into majority control. The oil majors developing the projects, including ExxonMobil, Chevron and ConocoPhillips, fume about having their deep pockets picked, but they don't have much choice. If they can't agree on financial terms by June 26, Chavez could always order the army to seize the oil fields. The battle over Venezuela's Orinoco Belt development highlights the increasingly critical role of Petroleos de Venezuela or PDVSA, (ped-eh-VAY-sa), the national oil company that will control the multibillion-dollar ventures in four weeks. Once recognized as a world leader among state-owned companies, PDVSA today is a troubled entity struggling to cope with responsibilities that far exceed merely pumping oil. Chavez taps the state-owned giant to finance an array of social programs at home and to cement his regional influence through subsidized oil exports to allies such as Cuba and Bolivia. But as PDVSA prepares for the Orinoco takeover, some question whether its already stretched managers are up to the job. "Can they do it as well? A lot of people say no," says Pietro Pitts, editor of the Caracas-based trade publication LatinPetroleum. If an overtaxed PDVSA stumbles, the United States could feel the reverberations. In January, Venezuela, a leading member of the Organization of Petroleum Exporting Countries (OPEC), was the USA's fifth-largest source of imported oil, shipping 955,000 barrels of crude each day. That figure is 23% below the level of one year ago, reflecting the aging of Venezuela's oil fields and its compliance with OPEC production quotas. For such a vital national institution, PDVSA is in surprisingly rickety condition, independent analysts say. During the 1980s and 1990s, it enjoyed an enviable reputation among oilmen worldwide for technical competence. But after Chavez was first elected in 1998, PDVSA emerged as a focal point of opposition to the socialist president. Subsequent political confrontation with the government left it demoralized. In 2002, PDVSA officials backed a general strike aimed at toppling Chavez, bringing daily oil production from 3.3 million barrels to a near trickle of 700,000 barrels. But Chavez broke the strike and then retaliated against what one of his ministers labeled "enemies of the country" by sacking 19,500 veteran PDVSA employees, roughly half the firm's workforce. Today, employment exceeds pre-strike levels, and Venezuela claims to be producing 3.3 million barrels of oil per day. But the International Energy Agency in Paris puts current production at 2.43 million barrels, and analysts say PDVSA continues to suffer the lingering effects of the political battles that consumed it in recent years. Its efforts to quickly recoup lost production after the failed strike also may have damaged the country's underground oil reservoirs in ways that will hasten future production declines, says the U.S. Energy Information Administration. "It's in awful shape," says David Mares, a political scientist at the University of California, San Diego, who co-wrote a new study of the Venezuelan oil company. Just to maintain current production, PDVSA must invest $3 billion annually in its aging fields, EIA says. But Chavez has drained PDVSA's coffers to fund generous health, education, literacy and food programs, leaving insufficient funds for its core operations. The oil company's obligations to the poor appear to be mushrooming. PDVSA last week disclosed that it spent $13.3 billion last year on social programs, almost twice as much as in 2005 and more than it invests in its oil operations. Incredibly, at a time of sky-high oil prices, the company's net income last year fell 26% to $4.8 billion on $101 billion in revenue, according to unaudited financial results published in Caracas. That's less profitable than other state-owned oil producers such as Norway's Statoil, which last year was twice as profitable as PDVSA in terms of net income as a percentage of revenue. Instead of selling more oil to the USA at top dollar, Chavez is using increasing amounts of PDVSA oil in barter or low-profit trades with Caribbean and Central American countries designed to boost his regional clout. Some of his political allies pay for discounted oil with bananas or sugar; the Cubans, who receive nearly 100,000 barrels per day, send doctors to treat the poor. "Chavez says Venezuela will be a small world power but a large world energy power. … Oil is a geopolitical weapon," says historian Albert Garrido. PDVSA on Tuesday sold $7.5 billion in bonds to finance planned expansion of daily production to 5.8 million barrels by 2012, a figure no one outside the Chavez administration believes will be attained. Indeed, the oil company's latest projections for future investment and drilling "lack credibility and are quite risky," according to Mares' study, published this month by Rice University's Baker Institute. Extracting Orinoco's oil If PDVSA is to have any hope of significantly increasing production, its "Magna Reserva" project in the Orinoco fields must succeed. Officially, the country ranks seventh in the world, with reserves of 80 billion barrels. But the government says additional exploration of the Orinoco region before the end of 2008 will boost that total to 316 billion barrels, vaulting Venezuela beyond Saudi Arabia as the world's No. 1 oil power. That title will be little more than an honorific unless PDVSA can extract the heavy oil from the ground. That isn't always easy in the Orinoco Belt, which the government has divided into four large oil fields named for the major battles of Latin America's 19th-century war of independence from the Spanish empire. The Orinoco takeover illustrates Chavez's determination to regain control of the country's oil resources, which were opened to private investment in the 1990s after almost two decades of nationalization. During his first presidential campaign in 1998, Chavez hammered PDVSA for granting international oil companies what he said were overly generous contracts during the "apertura" or opening to private capital. Reflecting a clear break with the market-oriented policies of the 1990s, Chavez vowed to reassert Venezuela's "oil sovereignty" by placing the government in command of the country's natural resources. Last year, the government converted 32 operating service agreements with foreign oil companies into new joint ventures, with PDVSA holding a majority stake. The 1990s Orinoco deals were reached when low world oil prices made costly exploration in such high-risk projects unattractive. Spread across an area roughly the size of West Virginia, the Orinoco Belt contains relatively shallow subterranean vaults full of thick, ketchup-like petroleum. Moving the goo to the surface requires special submersible electric pumps. And unlike conventional "light" crude, the Orinoco's extra-heavy oil must be converted into a lighter synthetic crude before it can be refined into gasoline. In the 1990s, PDVSA lacked the financial resources to develop the Orinoco. And with oil prices as low as $12 per barrel, the extra risks and costs involved made it hard for the Venezuelans to interest international oil companies in the projects. Only by offering the oil majors especially favorable terms, including royalty payments of just 1%, could PDVSA attract companies such as Exxon, analysts say. "If there hadn't been all these incentives in place, the sector wouldn't have developed as it did," says Enrique Sira, a Caracas-based analyst with Cambridge Energy Research Associates. Since that time, however, oil prices have skyrocketed and the oil companies — after investing a combined total of more than $10 billion — have profited handsomely from their Orinoco projects. The four ventures now produce about 600,000 barrels per day of synthetic crude using state-of-the-art upgrading equipment. Squeezing the oil companies Last year, Chavez raised the independent companies' tax and royalty payments: Income tax rates jumped from 34% to 50%, and the rock-bottom 1% royalties were replaced by a 16.67% levy. Now, the new arrangements he's demanding in the Orinoco projects will boost PDVSA's share of each of the four projects from an average 42% to 60%. The Western oil companies grumble, though none will discuss the negotiations on the record for fear of angering the mercurial Chavez. But while financially painful for the independent oil companies, the new terms aren't so onerous as to spark a full-scale exodus from Venezuela. In a world of $65 oil prices, the restructured deals remain potentially profitable, say analysts such as Sira. Despite Chavez's virulent anti-Americanism and ceaseless talk of "oil sovereignty," even Venezuela's tough new terms are better than those offered by other oil-producing countries with closer political ties to the U.S. After all, Venezuela will continue to permit private companies an ownership stake in exploration and production projects — something prohibited by Mexico and Saudi Arabia. Chavez has said he doesn't want the independent companies to leave. But there are indications that he prefers to deal with state-owned oil companies from Brazil, China, Iran and even Belarus, which already have been awarded exploration contracts elsewhere in the Orinoco region. Their technology, however, is not regarded as equal to that of companies such as Chevron, Exxon or Conoco. The new Orinoco contract terms, however, will raise the break-even price of the four projects from about $18 per barrel to $35, Sira says. And that change, coupled with the political risk associated with operating amid an uncharted socialist revolution, means the private oil companies are unlikely to make the additional investments Venezuela needs. For the private oil companies, the main issues in the ongoing negotiations are the price they'll receive for surrendering control and the details of how the projects will be administered under the new contracts. The IEA says PDVSA may have to shell out $30 billion to buy out the foreign oil companies in what Conoco CEO James Mulva has labeled an "expropriation." "How we're treated in that process is going to have a direct impact on our appetite going forward," Chevron CEO David O'Reilly told analysts earlier this month. If the experience of U.S. companies in other nationalizations is any indicator, the oil companies likely will end up with a reasonably fair price. Big Oil's real fear is that the Chavez government will emphasize political loyalty over technical competence in staffing the restructured partnerships. Synchronizing the operations of the sophisticated equipment needed to turn Venezuela's viscous oil into something that can be sold in world markets is not a job for political hacks. Still, the oil companies are likely to swallow their objections and remain in Venezuela, if only because there are few untapped fields the size of the Orinoco Belt left in the world. "They are not going to leave," says Fadi Kabboul, minister counselor for petroleum affairs in the Venezuelan embassy in Washington. "They can't afford to."
So obviously the oil companies are right and the mere "crowd favorite" is irrational and wrong. Poor oil companies. Vicious democratically elected strongman leaves them with no choice. How would a reader know who these "lot of people who say know". Could they be the crowd who is willing to sabotage the Venezuelan economy,whether pissed off wealthy Venezuelans or the neocon/oil crowd in the US? Seems like OPEC sales are down worldwide an Americans could be consuming less with increased costs of energy. Is the aging of Venz oil fields the only or main reason? It is true that the oligarchy used their control of the oil company to try to sabotage the economy and drive Chavez out of the country. I guess this lead to morale problems among the rest of the economic sabateurs. There are as would be expected lingering problems within the oil company after the rightist with US backing tried to topple the democratically elected president by using the oil company. The US should have forseen this. Stupid Chavez. Not only is he failing to nurture an aging PDVSA he is being "generous" with the masses who elected him to do just so. That is beyond the pale and should be grounds for invasion or at least destabilization by the US special forces, who should be able to train some disgruntled Venezuelan oligarchs who want control of their country back. Is South Fla available to train these folks for the invasion? I expect those fiendish Scandinavians are "Teutonically" efficient. This at least should land Chavez at the Hague. "discounted oil for bananas and sugar"!!! " A right wing think tank controlled by the oil guys. Not surprising they oppose Chavez. But the government says additional exploration of the Orinoco region before the end of 2008 will boost that total to 316 billion barrels, vaulting Venezuela beyond Saudi Arabia as the world's No. 1 oil power. I think the Venezuelan economy is doing about as well now as it has done in previous decades. . Maybe yes. Maybe no. I can understand why the "oil majors" would argue the absolute necessity that they receive "especailly favorable terms".Cambridge Energy Research Associates. It is understandable that they wish to continue profitting "handsonmely". Well maybe they each think they have a good deal that is not available to the other and therefore they want to keep their dealings close to the vest-- you know secret corporate strategy?. I would argue that Chavez is a tough negotiator and that is what the Venezuelan people who elected him want. Why would they want any different? Well maybe if Bush Cheney hadn't approved of the coup that almost toppled him, he wouldn't switch to state owned non-American oil companies. Could this be why the Chavez government is seeking out state owned oil companies to deal with? Wel naturally. NOt bad for a country run by a "mercurial" looney. I bet even the loyal TJ and Basso don't think this is "big oil's real fear." Well there we have it on good source from the author himself. Where did a Venezuelan get a name like Fadi Kabboul. Has the "mercurial" Chavez government imported Iranians or Iraqis to run petroleum affairs. Surely this runs afoul of the Patriot Act and a preventive war is required.
Glynch, while I am reading your posts, I am always struck by an irrational desire to run out and become a neocon, which thankfully dissipates as soon as I finish reading. You and Trator_Jorge are two sides of the same paranoid and combative coin.
Ottomaton, why not stick to the subject of Venezuela or Chavez,instead or resorting to an ad hominem attack? BTW I don't think Hugo is infallible or God like. Ottomaton, I'm sorry but I sense that you feel that because you are sort of middle of the road that this makes you per se reasonable or correct. BTW you are a fairly reasonable and intelligent and informed poster. I think your dislike of me may be largely based on some emotional reaction to my being to the left of you --or perhaps more argumenative, which again does not make me wrong or you right. I know you don't llke Chavez and he may indeed be proven wrong in his economics. You and I have discussed Chavez before and if I remember you made the same intemperate conclusory statments about me being irrational. See the recent Barbara Walters' interview with Chavez. It might change your prejudices or at least open you up to the point where we can talk about Chavez intelligently. Now that I think about it more. Perhaps you are just reacting emotionally and not intellectually to Chavez in Venezuela as you find his style irritiating, like you admittedly do mine.
Sorry for taking so long to add my commentary. PDVSA is being run into the ground, and it will take Venezuela with it. When Chavez fired all of the striking workers, he replaced them with workers with absolutely no petroleum experience. The turnover at the top of PDVSA and the oil ministry is ridiculously bad. The Chavez government has rarely reinvested profits, rather used that money to subsidize grocery stores and other of his social programs. So production is dropping, the government refuses to put money into it to increase it, and they've rid themselves of the most productive workers. Foreign investment could raise production, but foreign investment is logistically limited, so they have to choose between several areas. Of the hard to get oil, Venezuela is after Canada, Russia, the North Sea, the Gulf of Mexico, and the Western US, entirely because the oil companies are afraid that Chavez will steal their investment. (That's what nationalization is.) Right now, the oil price is high enough that PDVSA makes money in spite of itself. When the oil price drops, what is going to fund the social welfare programs? The chocolate industry? The only really good oil jobs left in Venezuela are with the major oil companies, and their employees are fearful for their jobs. They are one of the few middle-class groups left. They all think that Venezuela will nationalize all of foreign oil investments. At the least, they will have their pay cut severely. They worry about losing their jobs just like those in PDVSA did. Since they are middle class, they are assumed to be on the "wrong" side of the revolution. The old Venezuelan government was plenty corrupt, but PDVSA was run as a business. Chavez has run it as a government agency, hiring and firing based on political affiliation. He better pray every day that the oil price stays high. If not, Venezuela will pay severely for his incompetence.
I have nothing to add on Mr. Chavez or his policies. With the exception of his political ascension to temporary emperor, I would describe his policies as good for Venezuela. As a man I will reserve comment. To perhaps better clarify, both you and TJ thrive on a steady diet of sarcasm, and you both generally categorize everybody who disagrees with you as either mentally or morally deficient. My comments are appropriate, because they are the only thing in this thread that elicits a strong reaction one way or the other.
I had a detailed response that I deleted. Suffice to say, no irony was intended by my comments (a vital component of sarcasm), and I can come up with more than a few threads where I defend viewpoints that I disagree with. Your arrow wildly misses the mark.
Too bad we can't discuss Chavez or Venezuela. As you might note I deleted my response. I returned to delete it and found that you were still intent on not discussing Chavez or Venezuela. Maybe another thread. Another time. Hey, at least we are both Rocket fans. Maybe you can join Hayes and me for a drink at Valhalla, assuming it still exists, when Hayes returns from his latest tax haven. Hayes might find that funny.
Weslinder, Another interesting article from USA by the same guy. I happend to see this one from the actual paper. ******** Enlarge By Jack Gruber, USA TODAY A worker on the GM assembly line in Valencia, Venezuela, attaches parts to a Chevy Spark. FOCUS VENEZUELA Part 2 of a 3-part series An audacious anti-American president is steering his nation on a socialist course. USA TODAY examines developments in this vital supplier of oil to the USA. Part 1: Is Hugo Chavez Mr. Misunderstood? By David J. Lynch, USA TODAY VALENCIA, Venezuela — You might think a country headed by the ferociously anti-American President Hugo Chávez would be a lousy place for American companies to do business. Think again. Amid an oil-fueled boom, scores of well-known U.S. corporations are notching impressive sales in Venezuela. This nation of 26 million people is entering the fourth year of a robust economic expansion and, despite sour relations with the United States, consumers are gobbling up American cars, appliances, fast food and shampoo. PHOTO GALLERY: U.S. companies are doing well in Venezuela Few manufacturers are doing better than General Motors. The automaker last year sold a record 92,000 cars and trucks in Venezuela and expects to reach almost 160,000 this year. "The industry is going really fast. … Today, I have a waiting list for every single product," says Ronaldo Znidarsis, 42, GM's local managing director. GM, which has sold cars here since World War II, literally can't make vehicles fast enough to satisfy Venezuelan buyers. Its local plant, housed on "General Motors Avenue" in an industrial district near this city's airport, added a third shift in 2006 and is running flat-out producing more than 20 models. But rather than expand capacity to meet ravenous demand, GM — like other U.S. companies — is importing additional products. With Chávez, a self-described revolutionary, promising a grandiose "socialism for the 21st century," new multibillion-dollar investments are just too risky. "Commercially, the country's in a good moment. But I don't think this is sustainable in the long term. … The truth is there's no more investment coming in," says Michael Penfold, former executive director of Venezuela's investment promotion agency. From an annual level that fluctuated for much of the past decade between $400 million and $700 million, investment from U.S. companies last year collapsed to no more than $50 million, according to Edmond Saade, president of the Venezuelan-American Chamber of Commerce & Industry in Caracas. GM's last major investment here, a $55 million paint shop, occurred seven years ago. Economywide, the lack of investment means Venezuela's economic growth is producing fewer jobs and higher inflation than it otherwise might. Economy is dependent on oil Venezuela's unbalanced growth is reflected in statistics on the growing trade between the two political antagonists. The U.S. exported to Venezuela $9 billion worth of products last year, up 89% from 2004. Cars, oil field equipment, chemicals and computer gear were among the leading items. Venezuela's shipments to the USA also rose, but by only 49%. And almost all of its $37 billion in exports to the USA were crude oil and other petroleum products. Venezuela has made little progress diversifying its economy: Oil revenue accounts for more than three-quarters of Venezuela's exports and about half of its government budget. Aides to Chávez deny any problem. Alberto Muller Rojas, one of the president's top foreign policy advisers, insists that foreign companies are investing. Venezuela also compares favorably with such market-friendly countries as Chile in terms of the ability of foreign companies to repatriate profits, he says. "If you've been to a shopping mall here, you've seen how socialism is killing us," he said sarcastically. Few leaders are as passionate in their anti-Americanism as Chávez, a former military officer re-elected in December with 63% of the vote. He's accused the U.S. of seeking a global dictatorship that "threatens the very survival of the human species" and routinely accuses President Bush of plotting to overthrow or assassinate him. As relations between Caracas and Washington continue to deteriorate, some companies with significant local manufacturing and distribution arms have grown gun-shy about discussing their Venezuelan operations. Johnson & Johnson, Procter & Gamble, Cargill, Kellogg and 3M all declined interview requests. 3M employs more than 350 people in Venezuela, Kellogg more than 200 workers. By most measures, Venezuela is booming. The economy grew at an annual rate of more than 9% each of the past two years; this year, it's expected to slow somewhat to a still-healthy 7%. Under Chávez, the government has directed a torrent of oil money into the domestic economy, jacking up spending on health, education and training programs. Government spending shot up to 41% of gross domestic product from 33% the year before, according to the Institute of International Finance. The president also has lavished benefits on his military, granting sweetheart deals on new cars to graduates of the officers academy. Many of the vehicles are built by GM. The American presence here is reflected along the highway between Caracas and Valencia, 100 miles to the west. Billboards for familiar names such as Maytag, Goodyear and McDonald's line the road. "This market is a very good market for U.S. companies," says Saade. "They're selling a helluva lot of product." Homegrown socialism For now. The question is how the mercurial Venezuelan leader will treat the private sector in the future. Chávez, who said earlier this month that he was re-reading Che Guevara's writings on Soviet economic policy, vows to construct a homegrown socialism that will improve on the discredited models of the past. He came to power in 1998 after Venezuela's embrace of market-oriented policies known as the Washington Consensus backfired and deepened poverty. In the late 1980s, the government here began instituting austerity measures demanded by its lenders at the International Monetary Fund. Price increases for public transport in 1989 sparked major riots, known as the caracazo, ushering in two decades of coups and political turmoil. Venezuela hit bottom after an opposition general strike paralyzed oil production for two months beginning in December 2002. The economy shrank by 8.9% that year and an additional 7.7% in 2003. Now, Chávez, 52, is redirecting oil revenue to help the poor. But the Venezuelan president has not defined the precise contours of the socialism he seeks, leaving a pronounced air of uncertainty about the future. The government has ripped up contracts with four oil industry giants engaged in development of its Orinoco Belt region, wanting to renegotiate more favorable arrangements. And when Chávez announced in January that he would nationalize Electricidad de Caracas, an electric company, and telecommunications provider CANTV, the stock market plunged by one-third. But Chávez's decision to pay for the foreign-owned stakes rather than seize them outright eased investor fears. Venezuela paid AES Corp. $739.3 million for Electricidad de Caracas and paid Verizon $572 million for its stake in CANTV, helping the Caracas exchange rebound about 15% from its mid-January low. Still, it's not clear whether additional companies will be nationalized. And executives wonder where the government's proclivity for regulation will end. Price controls in some sectors already have led to shortages of products such as meat. Yet, inflation continues to rise, topping an annual rate of 20%. "It's a completely new ballgame. We just have to see how we can play," says Saade. "I'm not sure how, at this point." Some companies aren't waiting to see what happens. Procter & Gamble, which maintains its Latin American headquarters in Caracas, has been gradually reducing the number of personnel it has in Venezuela while shifting some manufacturing operations elsewhere in Latin America. "P&G has been phasing out very quietly," says Robert Bottome, editor of the VenEconomia newsletter in Caracas. Doug Shelton, a P&G spokesman, said he could not confirm any changes in the company's Venezuelan operations without being provided more specifics. Meanwhile, at GM, Znidarsis is drawing up plans for another record year. A native of São Paulo, Brazil, the 42-year-old finance specialist could be a poster boy for the globalized auto industry. Since joining GM more than two decades ago, he's done stints in Detroit, Zurich, Singapore, Shanghai and South Korea. In Venezuela, he enjoys a market of motivated buyers. The boom means middle-class Venezuelans have plenty of cash. Controls on foreign exchange keep the money trapped in the domestic market, and rising inflation means consumers who dawdle face higher prices. Interest rates are low, making car loans attractive. The government also provides a partial value-added tax exemption for some small cars and trucks, which this year will act as an effective 11% price cut. Demand is so strong, GM has been able to increase prices an average of 6% in real terms. "Venezuelans see a vehicle as a way of saving money. It's a hard asset," Znidarsis says. That's one reason graphic designer Karen Lopez, 25, bought a Chevy Spark last month after idling on a waiting list for five months. "Everyone said that the dollar would shoot up, and prices would rise on everything, including cars, because of the instability of the (December) elections. So I hurried. … In the five months — from September to February when I got the car — the price went up from 19 million bolivars ($8,837) to 21 million ($9,767)," she said. Selling cars here may be easy. But building them is another matter. The Valencia factory is one of GM's most complex, producing scores of different models from small commuter cars such as the Spark to hefty Chevy TrailBlazer sport-utility vehicles. The 24-acre factory employs almost 3,200 workers. One bottleneck is the country's principal seaport, Puerto Cabello. Each day, vessels bearing about 1,700 shipping containers arrive in the northern port. It can process only about 1,000 of them, leading to backlogs for manufacturers like GM that rely on imported parts. Paperwork delays The government in December also introduced without warning a new regulation that makes it more difficult and time-consuming for manufacturers to import needed parts. Now, to purchase the U.S. dollars needed to pay his foreign suppliers, Znidarsis must obtain a certificate from the Ministry of Light Industry and Trade confirming that domestic parts aren't available. GM must obtain separate certificates each time it orders one of several thousand parts. Paperwork delays are complicating the task of stockpiling the proper amount of each part for just-in-time production. Assembly lines at local Toyota and Ford plants earlier this month were slowed or stopped by the new regulation. So far, GM appears to have navigated the tricky Venezuelan scene better than most. But it's hard to know how long the good times will continue. " '07, I believe, is going to be a great year. The reason we don't show 2008 and the out years (on forecasts) is that it's a big question mark. If petrol prices stay the same, and there's no significant change in government policies, then '08 could be reasonable," says Znidarsis. "I don't know about '09."
