Venezuela: Halt in Oil to Cuba May Ease Pressure on Chavez

Under a five-year bilateral deal signed in October 2000 by Venezuelan President Hugo Chavez and Cuban leader Fidel Castro, state-owned oil company Petroleos de Venezuela (PDVSA) is expected to deliver 53,000 barrels of oil per day to Cuba. But the company has not shipped any crude oil to the country since Chavez was briefly toppled from power in mid-April.

The Venezuelan government has not given an explanation for the stoppage, but STRATFOR sources in Caracas say the decision was made by new PDVSA President Ali Rodriguez and was pressed on Chavez by senior energy and military officials still loyal to his regime. If so, this suggests that PDVSA's financial troubles may be more serious than the company's senior management has admitted to date.

It also suggests that Chavez has lost some political power within his government to senior civilian and military officials who are trying to defuse some of the economic and political pressures that are weakening his regime.

Cuba owes PDVSA nearly $128 million at a time when cash flow is getting very tight at the firm due to a combination of lower international oil prices, failure by the Chavez government to pay its energy-related debts to the company and increasing doubts about the availability of more than $4 billion in PDVSA cash that is supposed to be on deposit at the macroeconomic stabilization fund (FIEM).

PDVSA deposited the cash in the FIEM, which was created before Chavez was elected in December 1998, for the purpose of keeping surplus cash out of the economy so as not to trigger higher interest rates and inflation. Rodriguez said May 27 that the funds would be used for oil and gas investments, not to underwrite the government's current spending needs.

However, with the Chavez regime facing a cash flow shortfall estimated at nearly $11 billion -- due to its rapidly pending liabilities to state governments, workers and foreign and domestic creditors -- it's likely that PDVSA's funds are no longer in the FIEM. In fact, in order for PDVSA to withdraw the $4 billion, Venezuela's Central Bank likely would have to draw down its international reserves by an identical amount.

Following a first quarter 2002 GDP contraction of 4.2 percent and a $3.7 billion balance of payments deficit, the Central Bank can't transfer $4 billion of its declining foreign exchange reserves to PDVSA without accelerating the currency's devaluation and raising interest rates even higher.

With the economy sinking deeper into recession and PDVSA in worsening financial health, continuing oil shipments to Cuba is a politically untenable proposition. The current oil supply agreement is highly unpopular within PDVSA and sectors of the armed forces opposed to closer ties with the Castro regime. Chavez likely will have more clashes in coming weeks with his political opponents, including moderates within his own camp.

While the oil supply agreement has not been rescinded officially, the de facto suspension of more oil shipments to Cuba may help to defuse at least some of the tensions within potential flashpoint groups like the military and PDVSA.

Thanks for the ping and the post! Chavez's actions have stifled the Venezuelan economy.

March 2002 - Oil and communism don't mix: Venezuela faces energy standoff at petroleum company***This discord reflects a growing list of grievances within the oil industry:

· The government's cash demands, paying for much of the federal budget, forced PDVSA to borrow $500 million last year.

· Chavez has insisted that oil sales continue to Cuba, despite an unpaid $97 million bill for past sales.

· PDVSA has continued to produce far more oil than it needs at a time when exports are down because of the OPEC agreement to reduce supplies. The higher production allows the government to collect higher royalties.

Foreign oil executives, who have about $20 billion invested in Venezuela, are staying out of the fray for now. But analysts say that the new direction bodes ill for future investment, especially as Parra was party to a lawsuit that contested the 1996 return of private oil companies to Venezuela.

"This all runs contrary to PDVSA's six-year business plan, which calls for investing $7.4 billion a year, $4 billion of which is to come from the private sector," says Luis Giusti, former president of PDVSA and a board member of Royal Dutch/Shell Group. "The question is what private sector? Who's going to go into Venezuela now?"

The continuing changes in management are resulting in the departure of many managers who led the company when its goal was to operate like an efficient, privately owned oil company.

After appointing Parra, Chavez ousted career PDVSA executives from the board of directors, and this week he named a new expanded board filled with outsiders and middle-management employees aligned with his leftist "peaceful revolution."

The appointments, say protesters, run counter to the company's tradition of "meritocracy," or performance-based promotions. The system was designed to prevent the political cronyism and nepotism that is rampant in Venezuela's state institutions.

Chavez's management of PDVSA has sparked quiet dissent in the three years since he took office with a vow to rein in the company's "gold card culture."

PDVSA, the jewel in the crown of the Venezuelan state, supplies 60 percent of government revenue and 80 percent of the country's export earnings.

Chavez charged that the company's traditional autonomy made it a "state within a state," and neo-liberal managers were leading it to privatization.

"This company cannot be managed as a private company," he said Tuesday. "It is a state company; it does not belong to bureaucrats or technocrats. We respect meritocracy, but there are other considerations." Lameda and many employees fear that Chavez's philosophies run the risk of bleeding the company of the cash it needs to develop this country's rich reserves.

Lameda locked horns with the Energy Ministry on numerous issues, including the new hydrocarbons law that raises royalties and mandates that PDVSA be the controlling partner in any joint venture. Critics said these rules would stifle international investment.

Other bones of contention were the central government's demand that the company hand over $4.4 billion in dividends last year, forcing PDVSA to borrow $500 million to pay the bill; and the oil sales to Cuba, whose leader, Fidel Castro, is Chavez's longtime mentor.

One of the major disagreements centered on the Ministry's insistence on adhering to OPEC production cuts, but forcing PDVSA to continue producing surplus oil that has now filled every available storage facility. Although PDVSA cannot sell the oil, the catch is that it still must pay royalties for producing it to the central government, Lameda revealed after his departure. "I started warehousing" when prices were $26 per barrel, he told El Universal newspaper. "They're now $16. The barrels are worth less every day. I told the minister that I have to go out and ask for $500 million in loans while I have $300 million in the warehouse."***

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