International Politics

	Vol. 227 No. 3
MAYRA RODRÍGUEZ VALLADARES, CONTRIBUTING EDITOR, SOUTH AMERICA

Leftist wake-up call to Washington. How much the left-leaning policies of Venezuela and Bolivia will influence South American energy politics should be a main focus of officials in Washington observing Latin America, and certainly for international oil companies active in the region. Thus far, indications are that the leaders of Venezuela and Bolivia will be far more left-leaning than those of other South American countries, such as Argentina and Brazil.

Verbal sniping on a daily basis. The year has barely started, and the Venezuelan and US administrations have already been very active, hurling criticisms and expelling each other’s diplomats. Even Christian missionaries, who have been in Venezuela for decades, have been accused of being US spies.

Most recently, the conflict intensified when Venezuelan newspapers published excerpts of the Pentagon’s 2005 Quadrennial Defense Review (QDR), which mentioned Venezuela as a potential problem country, given its economic disparity and the “resurgence of populist authoritarian political movements.” Even Cuba, the only Latin American nation that the US embargoes, was not singled out in the QDR. This is not the first time that Washington has voiced concern about Venezuela. Last year, and again this year, several officials, including National Intelligence Director John Negroponte, have said that Venezuela poses a serious threat to US interests, since it is trying to have closer relationships with Iran and North Korea.

Venezuelan officials, in turn, argue that their country is not a threat to US security, but that they want alternatives to a Bush agenda for Latin America. Also fueling Venezuelan anger were comments by US Secretary of Defense Donald Rumsfeld, who compared the “democratic” elections of Chávez and Nazi Germany’s Adolf Hitler.

Energy professionals can expect the vitriolic tussle between Venezuelan President Hugo Chávez and the Bush administration to escalate, as Venezuela’s December election nears. It is very likely that Chávez will increase his anti-US tirades, since this helps divert attention from his programs failure to alleviate the dire poverty of the very society segment that got him elected.

Given the very real possibility that Middle Eastern oil flows could decrease, due to potential terrorist attacks, or if the UN imposes sanctions on Iran, the US cannot afford to lose the roughly 1.5 million bopd that it imports from Venezuela. This level is about 12% of total US imports. Intermittent disruptions from Nigeria, and potential disruptions from the Middle East may be in the offing. Hopefully, this reality will influence cooler heads in Washington, such as that of senior State Department official for Latin America, Thomas A. Shannon Jr., to lessen the negative rhetoric from the anti-Chávez camps of Rumsfeld and Negroponte.

Despite his anti-US stance, Chávez would not welcome losing the $80 million that Venezuela nets daily from oil sales to the US, which are about 60% of all purchases of Venezuelan oil. Despite Chinese officials’ visits to Venezuela, it is unlikely that given the enormous distance, China could supplant the US as the most significant oil buyer.

A number of high-ranking Latin American analysts at think tanks in Washington, and at American universities, are concerned that US officials might over-react to Chávez and help fuel more populist support in his favor. Moreover, no Western Hemisphere country can even approach the voracious US appetite for oil. So, despite a very tense marriage of convenience, no divorce is anywhere in sight.

Venezuela may not cut crude exports to the US, but operators should watch for what happens with existing contracts or deals being bid. In January, PDVSA’s conflict with ExxonMobil hit a peak. The US firm had planned to team with Pequiven, PDVSA’s petrochemicals division, on a $3 billion project to produce 1 million metric tons of ethylene and derivatives annually. With little explanation, Pequiven told ExxonMobil that it would not be able to complete the feasibility study.

Rumors abound that this is a move instigated by Venezuelan officials to pay back ExxonMobil for its refusal to comply with increased tax hikes. Since 2004, the company has resisted tax hikes and contract changes amid a so-called “re-nationalization” of Venezuela’s oil industry. Contract changes being required by Venezuela mean that 32 privately run oil fields are now dominated by PdVSA, irrespective of which foreign firm was the previous operator.

In protest, ExxonMobil sold its stake in one field to avoid the new, unfavorable terms. ConocoPhillips, Total, Chevron and Statoil agreed to the terms, but ExxonMobil has threatened international arbitration. It is also the only foreign firm to protest a royalty hike on extra-heavy oil output in the Orinoco River basin.

Another sign that Venezuela wants to lead South American energy politics – and be less dependant on the US – is a joint announcement in January with Brazil and Argentina of in-depth studies for a 6,200-mi gas pipeline from Venezuela to Argentina. These countries hope that this project – which has to cut through the Amazon jungle at a $20 billion cost – will help meet growing gas demand and make South America less dependent on outside sources.

Brazilian environmentalists have already criticized the proposal, which they believe could harm the Amazon jungle, and which they believe will cost a lot more than forecast. For his part, Chávez has said that he wants South American state-owned companies to own and oversee all contracts related to the gas pipeline’s development. This would lessen dependence on non-South American firms. A meeting was planned this month to analyze the in-depth studies and development plans further.

A new Bolivian attitude. The election of Bolivia’s first indigenous president, Evo Morales, has been hailed as a long overdue accomplishment in South America, where, overwhelmingly, many leaders continue to be of Spanish or other European backgrounds. The Bush administration, however, considers Morales’s election as a further tilt to the left for all of South America. So far, Morales’ rhetoric is much more in the vein of Castro and Chávez, than in the style of other left-leaning leaders.

Morales, a former coca leaf farmer, has said that he does not want to reduce Bolivia’s coca leaf farming, due to its multiple uses and the fact that it brings in badly needed income to numerous people. He says that the US should focus on pursuing those who turn coca into cocaine. Many in the US have been angered by his comments. They worry that some of the success attained after years of combating drug trafficking in Colombia could be eliminated by a rise in Bolivia’s coca leaf production.

Morales’ election also causes concern among energy investors as to how he will treat existing JV contracts, and whether he might nationalize energy companies. In an altercation early this year, Spanish newspaper El Mundo quoted the president of Bolivian state company YPFB, Jorge Alvarado, as accusing Repsol of shipping 126,000 bbls of oil from Bolivia into Argentina, and another 34,000 bbls of oil into Chile without correct documentation from its 50:50 Andina/ Bolivian JV. Alvarado is also questioning how much money from the sales is due to Bolivia. Repsol denies allegations of smuggling the oil.

Under other circumstances, the Andina dispute might be seen as an ordinary, international business situation. Yet, given Morales’ statements at his inauguration in January, energy companies are seriously concerned about their existing business transactions and future plans in Bolivia. Just last month, Morales told a La Paz news conference, “We will nationalize (Bolivia’s) natural resources.....Many of these contracts signed by various governments are illegal and unconstitutional. It is not possible that our natural resources continue to be looted (and) exploited illegally. And, as the lawyers say, these contracts are legally void and must be adjusted.”

Even before Morales was elected, Bolivia had passed a hydrocarbon law in May 2005 that raised production royalties to 50%. Yet, the law was never put into practice. Nationalization of natural resources was a significant Morales’ campaign theme and is now the cornerstone of his oil politics. However, he has not specified when, and how, nationalization might take place.