Bush:U.S. oil reserves locked up tight Chavez: claims role of "oil commander"

WASHINGTON -- The Venezuelan crisis has prompted calls for the United States to tap into the nation's strategic oil reserves, but analysts say the White House is saving that option for another emergency: war with Iraq.

Gasoline prices in Houston are up 40 percent from a year ago. Supplies of heating oil already are low in the Northeast. Some Gulf Coast refineries may have to cut back operations because of a lack of Venezuelan crude.

"The next few weeks are likely to be very interesting," the U.S. Energy Information Administration warned in a report issued last week about shrinking reserves.

With the crisis escalating, refiners such as Citgo Petroleum Corp., which is heavily dependent on Venezuelan crude, have asked the Bush administration repeatedly to open the spigot on the 599-million-barrel Strategic Petroleum Reserve.

House Energy and Commerce Committee Chairman Billy Tauzin, R-La., as well as former Deputy Energy Secretary Bill White, have added their voices to the request.

So far, the administration has decided the current situation does not warrant such a step.

Energy Department spokeswoman Jeanne Lopatto said the department's position on the reserve is that it is for a severe supply disruption.

"We are closely monitoring the situation in Venezuela and the impact it has on the energy markets. We will continue to do so," Lopatto said. "We know what the issues are."

Many in the oil industry are getting impatient with the administration's reluctance to use the reserve.

"If a reserve release could not be justified when inventories head towards minimum requirements due to a politically driven supply interruption, then it is hard to imagine when it could be justified," Paul Horsnell, an analyst with J.P. Morgan in London, noted in a recent report.

A number of the nation's refineries have been designed specifically to use Venezuelan crude. Switching over to other grades would take time.

If those refineries have to cut back, Jan Stuart, an analyst with ABN Amro in New York, says, the country could experience even more severe price spikes as the country enters the busy summer driving season.

Last month, the administration did allow five companies with oil interests -- Vitol, Morgan Stanley, Marathon-Ashland, Koch and Houston-based Equiva -- to delay their December and January deliveries to the reserve. That oil, representing about 7 million barrels, will stay on the market.

Late last week, the Energy Department again agreed to allow an undisclosed list of companies to postpone shipping 3 million barrels in February.

President Bush's reluctance to tap the reserve would almost certainly evaporate if the United States were to launch a strike against Iraq, particularly if Venezuela is still in chaos at the time.

The administration would likely accompany any order to strike with a public statement assuring the world of the government's willingness to release as much oil as necessary to calm the markets, noted Robert Ebel, director of the Washington-based Center for Strategic and International Studies' energy program.

Such a move would almost surely be coordinated with releases from industrialized nations' stockpiles, Ebel said.

The approach would be similar to strategy adopted by Bush's father. After Iraqi President Saddam Hussein launched an invasion of Kuwait, then-President Bush released 4 million barrels of crude from the reserve as a "test."

Then, after the U.S-led allies launched Operation Desert Storm, the elder Bush sold off 17 million barrels.

While the current administration has adopted a similarly cautious approach, the Clinton White House was more willing to use the reserve.

In September 2000, at the height of the tight presidential race between then-presidential candidate Bush and former Vice President Al Gore, Democratic Energy Secretary Bill Richardson ordered the release of 30 million barrels from the reserve, citing concerns about home heating oil supplies in the Northeast.

Some of the crude that companies were supposed to deliver to the reserve in December and January was actually repayment of barrels withdrawn under the Clinton order.

At the time, then-Republican candidate Bush accused the Clinton administration of using the reserve for "short-term political gain." He insisted the stockpile "needs to be used in case of war, in case of major supply disruption."

Over the years, the government has used the reserve to avoid short-term supply disruptions in particular areas. And during the mid-1990s, Congress ordered sales from the reserve to help balance the federal budget.

Bill White, who served in the Energy Department during the Clinton years and now heads the Houston-based energy and real estate firm Wedge Group, contends the strategy adopted by the elder Bush during the Persian Gulf War supplied the crude oil too late.

By the time oil began flowing out of the reserve, crude prices had dropped and the reserve's barrels were no longer needed. Indeed, the 21 million barrels actually sold off during the Persian Gulf War was far less than the 39 million barrels the first Bush administration authorized.

White proposes the government begin releasing oil from the reserve if, over the next two weeks, Venezuelan exports have not reached 80 percent of their precrisis levels, and oil prices are above $30 a barrel. Under his plan, the government would sell even more oil if Venezuelan exports were less and prices shot even higher.

On Monday, crude oil for delivery in February fell 98 cents to close at $32.10 on the New York Mercantile Exchange, after key exporters Saudi Arabia and Russia promised to help meet market demand.

At Houston-area gas stations, regular unleaded gasoline averaged nearly $1.42 Monday, up from $1.34 a month ago and a far cry from the $1.01 seen at this time last year, the American Automobile Administration reported.

Created in 1975 after the Arab oil embargo, the Strategic Petroleum Reserve was designed to help cushion the economic blow caused by a disruption in oil supplies. Policy-makers believe the reserve has been a powerful tool to discourage oil producing countries from playing the crude card.

The petroleum reserve is capable of supplying more than 4.1 million barrels a day, or about one fifth the nation's total oil needs.

Maybe the nay-sayers have it all wrong. Food for thought. Gorbechev didn't bring the Soviets out of communism. Ronald Reagan (with help from Poland and the Pope) did. The Soviet economy ran on oil and when Reagan pushed "Star Wars" they struggled to compete with the U.S. They knew from Apollo Americans could and would do what they said. But because of the low price of oil, they spent themselves into bankruptsy.

We need to follow Reagan's example and cut off terrorists' life blood - oil revenue. One thing this report painstakingly avoids to report is Citgo is owned by Venezuela.

Worldwide OperationsCITGO Petroleum Corporation is a manufacturer, marketer and transporter of gasoline, jet turbine fuel, diesel fuel, heating oils, lubricants, refined waxes, petrochemicals, asphalt, and other petroleum based industrial products. Headquartered in Tulsa, Oklahoma, the Company is owned by PDV America, Inc., an indirect, wholly-owned subsidiary of Petróleos de Venezuela S.A., (PDVSA).

Thousands protest against Venezuelan President Hugo Chavez in Caracas, January 6, 2003. Thousands of foes of Chavez took to the streets again after the leftist leader threatened to punish striking opponents who have crippled the vital oil industry and who vow to resist a government crackdown. Photo by Kimberly White/Reuters

Hugo Chavez - Venezuela

Venezuela plans to cut oil company into 2 parts - [Full Text] CARACAS, Venezuela -- Energy Minister Rafael Ramirez said Monday the government planned to take the state-owned oil company, the world's fifth-largest, and break it in two, hoping also to snap the back of a devastating six-week strike aimed at driving President Hugo Chavez from power.

Ramirez, who offered preliminary details of the plan in an interview, said the government intended a sweeping restructuring of Petroleos de Venezuela, or PDVSA. The company controls the largest oil fields outside the Middle East and is an important supplier to the United States.

He said the government would "decentralize" the company by dividing it into PDVSA East and PDVSA West, hollowing out the Caracas-based management and making the two entities "financially autonomous."

Such a move would effectively gut the company of middle- and upper-level executives who have joined a coalition of business and labor leaders in opposing Chavez, whose left-leaning policies they say are destroying the country.

Government opponents said that floating such a plan amounted to government bluster aimed at breaking the morale of what they estimated were 30,000 oil workers who have joined the strike.

Ramirez said the goal was to restore the company's production capacity of about 3.1 million barrels of crude oil a day while reducing "exorbitant bureaucratic costs," which he estimated at $1 billion.

He said the company produced about 14 million barrels last month and was currently turning out 800,000 barrels a day, a quarter of what output was before the strike.

Outside analysts expressed doubts that the company was even producing that much oil, and they were immediately skeptical that the plan could revive production to pre-strike levels.

Ramon Espinasa, an ex-PDVSA economist who now works as a consultant to the Inter-American Development Bank, said such a plan could have a devastating impact on what was once considered a model among state-run oil companies, and the breakup could have an equally devastating impact on Venezuela's oil-dependent economy.

It could also reverberate through world markets and in the United States, which imports about 14 percent of its oil from Venezuela.

"We could talk about the need to diversify the economy, but those are long-term goals," Espinasa said. "But right now, Venezuela's economy needs oil. If not, the country could collapse."

The plan, analysts said, appeared to be far less an economic strategy than a political one, aimed at purging the company once and for all of Chavez opponents and wresting more political control over the industry in Venezuela, even if it means enduring sharp declines in production.

Moises Naim, a former Venezuelan minister of trade and industry, drew comparisons between what is happening in Venezuela and what happened in Iran after the Islamic Revolution in 1979.

Iran's oil production, which rivaled Saudi Arabia's, plummeted from 6 million barrels a day to less than 2 million. In the decades since, Iran's oil output has been about half the pre-revolution levels -- about 3 million barrels a day. But, Naim said, the Iranian government has tighter political control of the industry.

"He may may be willing to live with a smaller oil industry, and a less competitive oil industry, as long as he has more control over it," Naim said, referring to Chavez. "What we know is that Chavez intends to stay in power at any cost."

In a televised speech Sunday night, Chavez said he had assumed the rank of "oil commander" and promised to rebuild the state company into "a new PDVSA, a patriotic PDVSA." [End]

Oil power to the people is priority for Rodríguez*** A long-time friend of Cuba's Fidel Castro, Mr Rodríguez likens the tightening economic noose that is the oil strike with the long-time US-imposed trade embargo on the Caribbean island.***

Venezuelan leader says oil industry on rebound***Chavez on Sunday branded the PDVSA strikers as "traitors" and said they should be tried for jeopardizing the nation's security. Oil accounts for almost half of government revenue.

Chavez vowed to use the strike to tighten government control over PDVSA and make it a trimmer, more profitable corporation. He has appointed loyal board members at the semiautonomous company and fired almost 300 executives.

Chavez said exports have reached 1.5 million barrels a day, compared to 2.5 million before the strike. Analysts said the figure was unlikely.

Government sympathizers demanded that Attorney General Isaias Rodriguez prosecute strike leaders, including the heads of Venezuela's largest business and labor confederations. The strike has cost the economy billions of dollars and caused food shortages.

"Justice! Justice!" several hundred protesters, including ruling party legislators, chanted outside Rodriguez's office. "Work or quit. Our patience is running out!" one sign read.

Protesters also demanded swift justice in the slayings of two Chavez supporters during a melee at an opposition rally on Friday.

Oscar Gomez Aponte, 24, and Jairo Gregorio Moran, 23, were killed during the fracas involving

Chavez supporters, Chavez opponents, military police, National Guardsmen and Caracas city police. At least 78 people were injured.

Opposition leaders (say) Chavistas started the violence by attacking their march with rocks, bottles and, later, guns.

Chavez's government accused city police, who report to Caracas' opposition mayor, for the deaths. Police Chief Henry Vivas said his officers don't have .40-caliber handguns used to kill the two men.

Opposition leaders seethed Monday, saying Chavez didn't pay so much attention when three people were killed and 28 were wounded at an opposition rally Dec. 6. A lone gunman was arrested but hasn't been charged.

The anger also underscored bitterness over the slayings of 19 people during an opposition march on the presidential palace April 11. Both sides blame each other for the bloodshed, which helped trigger a short-lived coup against Chavez. Investigations have produced little progress. ***

REPORT ON VENEZUELA

***OIL

Crude oil production is down to 190.000 barrels a day (6% of total output) from a normal average production of 3.2 mm, (Occidental area 145.000, Oriental area 25.000 and South area 20.000). It is noteworthy that the Oriental area is where most of the foreign oil companies operate holding joint exploitation contracts, including synthetic oil and Orimulsión. Local consumption (Domestic market) represents 270K barrels/day.

Gas production is down by 80%, current levels being used basically to generate electricity and for household consumption (note that gas pressure in the domestic pipes was down by 15%). Some rural areas are already using wood and coal to prepare food, while waiting lines in metropolitan areas average 2km.

Fuel: Gasoline stored in the Paraguana complex (Cardon and Amuay refineries, the world's largest) might grant 20 days supply of national consumption (around 40 Mm barrels), at the same time, this inventory does not allow the refineries to operate for lack of additional storage capacity. One tanker was partially loaded by the end of the week with some difficulty due to shortage of qualified manpower. It is a well-known fact that the complexity of these refineries makes them not available for production in the short term.

The El Palito refinery was positioned as a symbolic figure and the Government is focusing all efforts and manpower into its start up, however there are several difficulties to overcome in order to succeed.

PDVSA refineries located abroad: Isla in Curaçao, closed operations December 29th, and will require at least 15 days to get restarted. St. Croix refinery is in full operation.

Gasoline distribution seems to worsen the problem on a daily basis. There are difficulties in the Andean region, gasoline is being smuggled from Colombia and sold at 14 times its current price in Venezuela. Caracas is being served from the Guatire reservoir, yet this terminal and its pipelines were contaminated when at the peak of the crisis, the Government pumped more than 200.000 barrels of Catalytic Nafta in order to pump out the gasoline inside the pipes. There is an existing black market in major metropolitan areas selling gas at $1 per liter (v. standard market price of $0.06 per liter) and the danger of accidental death due improper gasoline storage in jerry-cans has already occured.

This last weekend clean gasoline was pumped in again without purging the pipelines. The resulting mixture of gasoline and nafta will be distributed with the high risk of engine damage. (Explosion grade of gasoline is lower than nafta - nafta is a primary derivative of crude refining, needing additional refining plus the addition of derivatives to obtain gasoline. Additionally, the usual quality control of gasoline is not being conducted, and damage to vehicles is expected to happen). The Central region, Maracaibo, Oriente and Guayana areas are being hit the hardest by the fuel shortage.

It is noteworthy that only around 40% of available tank trucks are operating, most of them in an illegal manner, since they were confiscated "de facto" by government supporters. The available fuel, in no manner, covers distribution needs.

Crude Exports: For reference, please note that regularly, around 240 to 260 vessels are used to move oil exports from Venezuela. During the current strike, only 6 have been dispatched (carrying around 4.5 mm barrels). There are 27 vessels in the bay, an additional 17 have refused to enter Venezuelan ports and 4 are either loading or unloading (Vessels positioned in non operating terminals: Puerto La Cruz B/7 O/2, Jose B/1, Criogenico B/1, Puerto Cabello B/2, Cardon B/3, Amuay B/6, Tacoa O/1 Catia la Mar B/1, Carenero O/1, Bitor and Petrozuata none, Bajo Grande B/1, El Palito B/1 - B: moored in bay, O: in operation, None no vessel in port). It is noteworthy that PDVSA's own ships carried 90% of the operation and these are being operated under armed military supervision, which adds danger to the critical operation.

Operations - production and refining facilities are closed in all the Oriente Areas and also in Tia Juana, Paraguana and El Palito. Petrochemical plans are also closed. All facilities, nationwide are under military control.

Brazil' s elected President Lula ordered Petrobras to supply Venezuela 450.000 barrels of unleaded gasoline - one day national consumption, in what may be interpreted as a rescue operation. However, considering Venezuela's economic rating, including the fact that PDVSA' s rating was downgraded, Petrobras, not willing to assume political risk, requested payment in advance, prior to unloading. This support has resulted in demonstrations at the doors of the Brazilian Embassy, and society is calling for a boycott to all Brazilian made products.

It is worth to notice that the equivalent to 10 tankers is required just to fill in empty gas stations' tanks and after that, one tanker daily to support demand.

PDVSA is hardly hit by the actual situation. December sales of over $1.2 Bn to foreign markets are not made, the revenue of local sale of gasoline did not enter PDVSA' s bank accounts because gas was sold on cash basis to pumps without invoices, (the Army personnel, truck drivers and pump operators negotiated the operation to their personal interest and benefit), an additional loss will be incurred by the sale of the imported gasoline at below cost prices, which may not even be collected. (There are no administrative control over sales)

The problem is compounded by the fact that PDVSA's receivables, including December invoicing which was a zero, were sold for cash in order to sustain the liquidity of the Government.

In order to reach November 30th production level PDVSA needs at least 4 months (the expiry of substitution contracts signed by their customers to other vendors, work over of wells, which by the suspension of production will clog requiring repair and maintenance, etc.)

It is expected that PDVSA will not meet payroll payment due at the end of December, which will add to the workers unrest.***

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