Wednesday :: Apr 12, 2006

Beating The Oil Drums Of War - Part I

by pessimist

Recent events in Venezuela have been overshadowed by the atomic clock ticking in the Persian Gulf. But what is going on in the Caribbean openly exposes the motivations of Bu$hco toward using American military might elsewhere in the world for the benefit of American oil companies - places like Afghanistan, Iraq, and Iran.

Venezuelan President Hugo Chavez has been embroiled in a conflict with foreign oil companies operating in his country over allegations that these companies haven't been paying their fair share of taxes to his government. Whether these allegations are true or not will be dealt with on the flip side, but he has taken over - at least temporarily - assets assigned to these companies, including Exxon Mobil and Chevron Texico. First we look at the Bu$hCo reaction to the challenge Chavez represents to Big American Oil:

Venezuela Says U.S. Preparing For Invasion

Posted: Tuesday, April 11, 2006

A U.S. aircraft carrier strike group is moving into the Caribbean this week to start two months of naval exercises. "There's no other symbol of American power like the carrier," said the Southern Command's chief of staff.

[A]nalysts say the show of force sends a signal to Chavez and other Latin American leaders about U.S. strength.

Play ball in our league, by our rules (which say we always win), or face trouble? Isn't that called extortion? It's OK to extort Chavez into behaving as Washington desires because he's seen by Washington as extorting from Big Oil?

Clear evidence that 'Might Makes Right' is the only form of morality Bu$hCo recognizes.

The Oil War Drum Song opens with an examination of the stakes involved in this latest Bu$hCo gamble:

A Political Minefield in Venezuela's Oil Fields

By Chris Kraul, Times Staff Writer

April 12, 2006

In the uneasy world of petroleum politics, fears that Venezuela will nationalize its oil industry may not rank at the moment with possible war in Iran or civil unrest in Nigeria.

But Venezuela's recent actions directed at foreign energy companies are contributing to oil's relentless march toward record prices. Geopolitical factors were cited in a U.S. Energy Department report Tuesday that forecast high oil prices through the end of the year. "With the market as tight as it is, any negative news puts upward pressure on prices," said Michael Lynch of Strategic Energy & Economic Research Inc. Venezuela exports an average of 1.5 million barrels a day to the U.S., the third-largest supplier after Canada and Saudi Arabia.

[Other sources say this: Venezuela shipped 47.7 million barrels of crude oil and refined petroleum products to the U.S. in January, just over 11% of total U.S. imports that month, making it the nation's third biggest source of foreign oil after Canada and Mexico.]

[W]orries that Venezuelan President Hugo Chavez might seize key fields containing large deposits of heavy oil in the Orinoco Belt also are spooking the market. The Orinoco projects account for about 25% of Venezuela's 2.4 million barrels of daily oil production. The output has become important for Venezuela because production of lighter crude has declined.

Venezuela's relationships with foreign companies have grown increasingly unfriendly during the leftist populist's tenure in office. Since he took power in 1999, Chavez has pledged to "recover the sovereignty" of Venezuela's oil industry, which his predecessors opened up to foreign investment in the 1990s. Last month, Chavez grabbed majority control of the 32 operating agreements signed by state oil company Petroleos de Venezuela, or PDVSA, that gave foreign companies rights to take over aging oil fields. Chavez set a March 31 deadline for 60% of each of the projects to be turned over to PDVSA.

All but two companies, Total of France and Eni of Italy, complied. Delegations led by Energy Minister Rafael Ramirez personally seized the Total and ENI operations on April 1.

Such a move might spur the departure of at least some companies adept at managing heavy oil, which in turn would threaten production volume. Exxon Mobil Corp. sold to partner Repsol of Spain rather than agree to relinquish control, saying Chavez was bound by the contracts signed by his predecessors. It might be more difficult for Chavez to assert control over the four Orinoco projects, in which companies have invested $12 billion, because Venezuela's National Assembly approved the deals.

Beginning in the early 1990s, the partners in the four projects sank billions into developing technology to extract oil as thick as tar that was previously thought unusable. The companies built a set of "pre-refineries" in a new oil city called Jose on eastern Venezuela's Caribbean shore where the sludge was treated to make it more easily transportable by tanker. Insiders say Chavez's efforts to control the projects will cause operators to leave, depressing Venezuela's output. "Not that many companies can [operate those fields], only a few in the world," said an oil analyst in the capital, Caracas, who asked not to be identified. By 2004, the firms had raised the aggregate production of the fields to 550,000 barrels of crude a day from 100,000 in 1997.

The four Orinoco ventures are Petrozuata, controlled by ConocoPhillips; Sincor, by Total and Norway's Statoil; Ameriven, by ConocoPhillips and Chevron Corp.; and Cerro Negro, by Exxon Mobil and Britain's BP. PDVSA owns a minority interest in each. The Orinoco projects also are important for the companies. They are the principal reasons ConocoPhillips and Chevron now derive about 10% and 9%, respectively, of their global oil production from Venezuela.

Chavez has significantly raised royalties and taxes on foreign companies operating in the Orinoco. The royalty rate has climbed to 16.6% from 1% and the tax rate to 50% from 34%. After the last tax hike, Chavez promised five years of tax stability.

But Venezuelan Deputy Oil Minister Bernard Mommer, in an interview published Monday in the Financial Times, said that more tax hikes may be coming. "The only guarantee you have is political," the newspaper quoted Mommer as saying during a visit to London. "The government can promise you whatever they want. It's not binding."

Sounds like they have been taking lessons from King George's recent comments concering his regal prerogatives.

But I digress.

The stakes are very high in Venezuela due to this technology to extract heavy oil. There is so much of it there, Venezuela just might be the world's largest petroleum reserve:

Venezuela is the world's fifth largest oil exporter and one of the United States main suppliers. The country’s reserves are estimated to rank eighth globally with Saudi Arabia top of the list. However, US Department of Energy (DoE) analysts indicate that at an average 50 US dollars a barrel, Venezuela - and not Saudi Arabia - will have the biggest oil reserves among OPEC members.

Actually a DoE report shows that at today's prices
Venezuela's oil reserves are bigger than those of the entire Middle East
- including Saudi Arabia, the Gulf States, Iran and Iraq.

Venezuela has vast deposits of extra-heavy oil and tar sands in the Orinoco basin which traditionally are not inventoried because they were too expensive to exploit, but at 50 US dollars melting them into liquid petroleum becomes extremely profitable. The DoE estimates that the Venezuelan government controls 1.3 trillion barrels of oil - more than the entire declared oil reserves of the rest of the planet.

Venezuela's deposits alone could extend the oil age for another 100 years.

[Other sources report: Venezuela, a founding member of the Organization of Petroleum Exporting Countries, was the world's fifth-largest oil exporter in 2004. It sits atop 77.2 billion barrels of crude, the largest proven reserves in the Western Hemisphere, according to the U.S. Energy Information Administration.]

Special note to our friends in the Great White North: Your turn for a beating in the oil barrel by Bu$hCo will come:

The US agency also identifies Canada as another future oil superpower.

While George is busy sending the US Navy to the Caribbean, analysts don't seem too worried about the economic 'damage' Chavez' moves - the inspiration for American military might being exerted to benefit Big Oil - will cause:

Big Oil seen trimming Venezuela risks

In recent days, Venezuela has taken control of oil fields operated by companies opposed to President Hugo Chavez's efforts to wrest more money from the industry and assert more national control over its activities. The government has also sharply raised the production royalties foreign companies must pay and income taxes on their leftover profits.

But big foreign companies rejecting the new rules are unlikely to see their bottom lines or reserves suffer much simply because they've spread their risk among a diversified basket of projects worldwide, said Pavel Molchanov an analyst at Raymond James.

"If [the companies' oil] reserves have been expropriated they will have to write that down
unless they find a way to negotiate their way back to Chavez's good graces ...
but its immaterial as these are gigantic companies," he said.

Exxon Mobil Corp. last year sold its stake in a small Venezuelan oil field rather than submit to the new fiscal terms. Regarding the royalty issues, Exxon officials said in an e-mail, "Exxon Mobil wishes to explore an amicable resolution...and continues to have a long-term perspective of its activities in Venezuela." The company said it still holds a 42% stake in the 122,000-acre La Ceiba block on the southeastern shore of Lake Maracaibo and a 42% interest in the Cerro Negro field.

[Also, Norway's Statoil sold PDVSA its stake in one field rather than agree to a joint venture. Four other companies, including Spanish-Argentine Repsol YPF and Japan's Teikoku Oil Co., chose to voluntarily return five fields to PDVSA, though they retained stakes in other more profitable fields.]

Other majors, such as Royal Dutch Shell and Chevron Corp. have opted to comply with the oil-rich state's demands rather than walk away from their investments. Though Chevron did not list its total reserves by country, it reported that 26% of its 2005 net oil-equivalent output came from Venezuela, Indonesia, Nigeria and the neutral zone between Kuwait and Saudi Arabia.

Chevron, the No. 2 U.S. oil company after Exxon Mobil, said in its 2005 annual report that
the possible financial implications of the new structures are uncertain,
but that they are not expected to have a material effect on the company's consolidated position or liquidity.

It was mentioned by Raymond James analyst Pavel Molchanov whom I quoted above that the affected oil companies could 'negotiate their way back to Chavez's good graces'. Chevron and Total have done so:

Chevron-Texaco and France's Total have accepted to pay the Venezuelan government some 113.5 million US dollars in back taxes, dating from the 2001/2004 period. At today's oil prices [New York futures closing 4/11/6 at $68.98 a barrel, up 24 cents], and with oil company profits at record high levels, I'm sure this 'donation' to the Venezuelan government is still far less that they pay to Bu$hCo - even after tax 'relief' is taken into account. Their profits are so huge nothing corporate can match them.

Just as Big Oil is lowering its threat exposure, so is Chavez. He's looking to sell off Citgo's stake in a Texas refinery [Venezuela's state oil company PDVSA owns Citgo through a subsidiary] to keep The King of Crawford from doing to him what he's done to Exxon Mobil and Chevron. In turn, what funds are raised through the sale of the Houston refinery will be used thusly:

State oil company Petroleos de Venezuela SA plans to build three new domestic refineries to increase processing capacity by 50 percent over the next six years to 1.85 million barrels a day. Venezuela is also seeking to buy a stake in a small Argentine refinery, has signed a deal to double capacity at a refinery in Uruguay, and laid the cornerstone for a US$2.5 billion (euro2 billion) refinery in Brazil last December. PDVSA has also signed deals to expand existing facilities in Jamaica and Cuba.

George has to still be pissed over Chavez showing him up by aiding poor folks in the cold regions of the United States with sidsubized heating fuel supplies.

It wouldn't do to take bread out of the mouths of Topper$ by doing so! This calls for WAR!

And off goes the American War Machine to do the bidding of its corporate masters.

Aren't we getting tired of this fable? We've been hearing about it since Two-time Medal of Honor winner Gen. Smedley Butler, USMC, spilled the beans back in 1935!!!

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There is so very much more to this story that I will be posting other parts to this sordid tale, segmented into topical categories, over the next few days.

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