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### Viewing cable 04CARACAS731, HOW REAL IS CHAVEZ'S OIL THREAT?

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
04CARACAS731 | 2004-03-04 22:57 | 2011-06-26 00:00 | CONFIDENTIAL | Embassy Caracas
Appears in these articles: http://www.mcclatchydc.com/2011/05/16/114269/wikileaks-cables-show-oil-a-major.html

`

    This record is a partial extract of the original cable. The full text of the original cable is not available.

    042257Z Mar 04

` `

    C O N F I D E N T I A L  CARACAS 000731

    SIPDIS

    NSC FOR TSHANNON AND CBARTON
    ENERGY FOR DPUMPHREY AND ALOCKWOOD

    E.O. 12958: DECL: 03/02/2014
    TAGS: EPET PGOV VE
    SUBJECT: HOW REAL IS CHAVEZ'S OIL THREAT?

    Classified By: AMB. CHARLES SHAPIRO; REASONS 1.4 (B) AND (D)

    -------
    SUMMARY
    -------

    ¶1. (C) On February 29, President Chavez threatened to cut off
    Venezuelan oil supplies to the U.S. or to nationalize U.S.
    company assets if the U.S. were to seek to "blockade" or
    impose sanctions against Venezuela.  The U.S. majors in
    Venezuela dismiss his words as bluster but do not totally
    discount some action on his part.  Chavez has sought, largely
    unsuccessfully, to diversify Venezuela's oil sales away from
    the U.S. in the past.  Weighing against a sudden cut-off is
    the fact that it would be enormously costly and time
    consuming for Venezuela to seek out new markets to replace
    its sales to the U.S. where specialty refineries are tooled
    to handle Venezuelan heavy crudes.  However, Chavez's brutal
    restructuring of PDVSA after the general strike of December
    2002-February 2003, and his draconian exchange control system
    show that on economic matters a purely political logic often
    prevails for him.  On a much smaller scale, he has used oil
    as a political tool with his action against the Dominican
    Republic in 2003.  While we believe such a high risk action
    is not imminent, Chavez's character, revolutionary ideology,
    and ignorance of how international markets function mean it
    cannot be ruled out completely.  Chavez may believe that his
    threat, against the backdrop of U.S. domestic politics, may
    cause the USG to back off.  And, of course, it serves to fire
    up his supporters and to burnish his revolutionary
    credentials.  End Summary.

    --------------
    STINGING WORDS
    --------------

    ¶2. (C) On February 29, President Chavez threatened that "not
    a drop of oil would arrive from Venezuela" if the U.S. were
    to seize CITGO or otherwise "blockade Venezuela."  He went on
    to add that the U.S. should remember that it has "plenty of
    installations here" (that could be seized in retaliation).
    Venezuelan Ambassador to the U.S. Bernardo Alvarez minimized
    the remarks in a press conference the next day saying that
    "that message was intended for the Venezuelan people and not
    the North American Government."  Inquiring about our reaction
    to President Chavez's remarks, Juan Fernandez, President of
    "Gente de Petroleo" (Petroleum People), an opposition civil
    society group consisting of former PDVSA staff, commented to
    PolCouns March 4 that Chavez's comments should not be
    dismissed off-hand.  As a PDVSA executive, he recalled, he
    had had discussions with PDVSA President Ali Rodriguez about
    contracts being canceled capriciously.  Rodriguez told him,
    Fernandez said, that he had to understand that the decisions
    were matters of state, not business.

    --------------------------------------------- ----
    U.S. COMPANY REACTIONS TO NATIONALIZATION THREAT
    --------------------------------------------- ---

    ¶3. (C) We canvassed the U.S. majors (ChevronTexaco,
    ConocoPhillips and ExxonMobil) operating in Venezuela for
    their reactions to Chavez's threat of nationalization.  They
    were united in dismissing his words as bluster.  However,
    ChevronTexaco de Venezuela President Ali Moshiri commented to
    econoff on March 2 that he believes the GOV is watching the
    U.S. companies closely.  He added that he has a "gut feeling"
    there could be some action taken if a company were to "step
    outside the boundaries."  Mark Ward of ExxonMobil, which
    besides operating in Venezuela, has a long-term purchase
    contract for Venezuelan crude, remarked that PDVSA would be
    hit by a blizzard of law suits.  All three local company
    presidents pledged to let the Embassy know immediately of any
    operational changes.

    --------------------------------------------
    A STABLE SUPPLIER LOOKS TO DIVERSIFY MARKETS
    --------------------------------------------

    ¶4. (C) In the past, senior Chavez administration officials
    have repeatedly reminded U.S. policymakers that Venezuela has
    never suspended oil shipments to the U.S and assured them
    that Venezuela would continue to be a stable supplier of oil.
     Nonetheless, announcements of PDVSA's attempts to develop
    other markets have been a hallmark of the Chavez years.
    While it is normal for any business to seek to expand its
    markets, we have long felt that Chavez's ideology was such
    that he would prefer other customers rather than the U.S.  In
    reality, however, the process of building new markets in the
    oil business can be a slow, costly one.  In 2001, PDVSA was
    ordered by the Ministry of Energy and Mines to cultivate a
    market in India and signed a contract with Indian firm
    Reliance Petroleum.  We understand that contract proved
    unprofitable and was allowed to lapse in 2002.

    ----------------------------
    A CUT-OFF WOULD BE COSTLY...
    ----------------------------

    ¶5. (C) Moving out of the U.S. market would be very painful
    for Venezuela.  Venezuela exports 1.4-1.6 million b/d to the
    U.S.  The majority of these exports are heavy, sour (i.e.,
    high sulfur) crudes bound for so-called deep conversion
    refineries that have been tooled to handle them.  PDVSA's
    U.S. affiliate CITGO operates several of these refineries and
    others are operated by ventures that have long-term purchase
    agreements with PDVSA.  Admittedly, there would be an impact,
    possibly serious, on the U.S. in terms of refinery economics,
    etc., if Chavez were to stop these exports.  But the U.S.
    would have the whole world to turn to for alternative
    supplies, either crude or refined, and, as a Washington-based
    oil analyst told the Ambassador, the option of drawing upon
    the Strategic Petroleum Reserve would be available to calm
    markets.  We very much doubt whether Chavez is weighing these
    factors at all in making his threats.  Nor does he appear to
    be considering the fact that in the event of such a cut-off
    PDVSA and thus Venezuela could be grievously harmed.  India
    and Brazil have been mentioned to econoff as possible markets
    for these Venezuelan crudes.  The local stringer for industry
    publication "Petroleum Argus," however, has informed us that
    Brazil has little of the hydrotreating and coking capacity
    needed to handle the crudes while India's Reliance Petroleum
    could only handle 150-200,000 b/d of heavy crude based on its
    current desulfurization capacity.

    ¶6. (C) He adds that most European and Asian refiners could
    not run these Venezuelan crudes straight through their
    facilities, but would instead have to blend them with a
    light, sweet crude to meet refinery specifications.  While
    this is possible, Venezuela would have to offer a significant
    price cut ("next to nothing a barrel," according to our
    expert) in order to induce refineries to accept the crudes.
    Venezuela would also have to undercut other sellers into
    these markets such as Russian oil sales to Europe.  In sum,
    given the realities of refinery operations, it would be more
    likely that Venezuela would have to make small scale deals
    with small countries to start with and suffer through a long
    process of market development.

    ¶7. (C) A bigger risk to the U.S. might lie in a decision by
    Venezuela to divert to other markets the approximately
    400,000 b/d of light crude controlled by PDVSA.  But here
    again Venezuela would take a price hit and the shipping
    market would also be another barrier.  Venezuela would be
    forced to hire tankers that normally operate in other areas,
    for instance the West Africa to Asia routes.  Many of these
    long range tankers could not enter Venezuelan ports -- only
    Jose can accommodate a tanker holding more 500,000 barrels.
    These transport costs would place further pressure on the
    price of Venezuelan crudes.

    ¶8. (C) In the area of products, we understand there are now a
    few long distance product runs between Venezuela and Europe,
    primarily in jet fuel.  Venezuela might be able to expand
    this market.  Venezuela could export more fuel oil and gas
    oil to Asia which could affect power and heating oil prices
    in the U.S.  But here again, Venezuela would probably have to
    offer deep discounts to attract non-traditional buyers and
    the shipping costs might be prohibitive.  The U.S. gasoline
    market has already been affected by problems in Venezuela's
    refineries resulting from the 2002-2003 oil strike.  It
    appears that the market is already likely to be more severely
    affected in 2004.  Several sources reported to econoff on

    March 4 that Venezuela itself is now importing over 100,000
    b/d of unleaded gasoline to the Amuay refinery to compensate
    for problems at the neighboring Cardon refinery.

    ¶9. (C) Finally, the experience of the 2002-2003 strike
    demonstrated that Venezuela has limited storage capacity.
    The strike demonstrated that if the export stream of a
    million or more barrels a day is stopped, production will
    have to be shut in in as little as 48 hours in some fields.
    We see no evidence that PDVSA had taken any steps to increase
    storage.  Also, the capabilities of PDVSA's current marketing
    personnel would probably not be up to the task of placing
    over a million barrels of oil a day onto the spot market.

    --------------------------------------------- ----------
    ...BUT PRAGMATISM NOT NECESSARILY THE REVOLUTIONARY WAY
    --------------------------------------------- ----------

    ¶10. (C) While PDVSA management know the damage that a cut-off
    of oil to the U.S. could do to the company, the new PDVSA is
    staffed by fervent supporters of the "revolution" or by
    opportunists who would be unwilling to lose their access to
    the spoils of corruption.  The recent decision to stop the
    development of the market for orimulsion, the oil-water blend
    designed to replace coal in electricity plants, could be
    illustrative.  Canada's New Brunswick Power has recently sued
    Bitor, PDVSA's orimulsion affiliate, alleging breach of an
    agreement to supply orimulsion.  New Brunswick went ahead to
    install additional generation capacity based on signature of
    a Letter of Intent with PDVSA only to have PDVSA announce its
    decision to supply existing contracts only.  Chavez himself
    is reported to have blocked signature of the agreement with
    the Canadians.  It appears the decision was made to forego
    the development of a relatively small but growing market for
    a product developed from Venezuela's ample supplies of extra
    heavy crude to produce a higher yield blend.  Thus, market
    development was sacrificed to short-term financial gains, at
    a time when the GOV needs lots of ready cash for spending to
    maintain its political standing with its low-income voter
    base.

    ----------------
    OIL AND POLITICS
    ----------------

    ¶11. (C) Chavez also showed his willingness to use oil as a
    political weapon in September 2003 when he suspended oil
    shipments to the Dominican Republic in protest against
    supposed coup-mongering by former Venezuelan President Carlos
    Andres Perez.  Although Chavez has since publicly announced
    that shipments under the San Jose Accord would be resumed, a
    shipping industry contact tells us that what Venezuelan oil
    is going to the DR is moving through traders and not
    directly.  Chavez's restructuring of PDVSA, laying off 20,000
    employees following their participation in the general strike
    aimed at his ouster, is another indication of his willingness
    to put political considerations above economic ones in
    dealing with oil-related issues.

    -------
    COMMENT
    -------

    ¶12. (C) Chavez's priority is regime survival.  Stopping oil
    sales to the U.S., and taking what could be an enormous
    revenue loss does not on its face appear to be a recipe for
    ensuring the economic stability he presumably needs.
    However, Chavez may believe that, in a crisis, the short-term
    pain inflicted on the U.S. would be enough to cause the USG
    to back off from some action against him or that by raising
    it now he makes such action less likely.  Chavez's
    combination of an oil embargo threat with insulting remarks
    about President Bush also send a message to supporters that,
    not to worry, he can deal with USG pressure on the
    referendum.  With at best limited understanding of how
    international oil markets function, Chavez may also be
    over-estimating Venezuela's power in such a confrontation.
    He probably does understand that a sudden cut-off of sales to
    the U.S. would be a momentous decision.  Such a decision is
    by no means imminent; for now it is useful to fire up his
    supporters and to divert attention from the referendum
    process.  But for the first time, he has laid on the table
    the use of Venezuela's "oil weapon," such as it is, which
    must be considered a new and somewhat ominous development.
    Ironically, such a threat completely cuts against Venezuela's
    effort to attract new international hydrocarbons investment,
    such as the Deltana Platform natural gas project for which
    ChevronTexaco has been awarded a concession or a giant
    petrochemical plant which Exxonmobil is considering, but
    clearly Chavez's main concerns lie elsewhere.
    SHAPIRO

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