How Chávez Aims to Weaken U.S.

Venezuela's leader Hugo Chávez may have more than just nationalism in mind Tuesday when he takes control of four large oil projects run by private firms, many of them U.S.-based, and hands them over to the state.

The ceremonies are also part of a larger effort by the self-proclaimed Maoist to help reshape the global oil business by sidelining the U.S. and making China his country's chief strategic energy partner, both as a source of investment and an important client for exports.

Since becoming president in 1999, Mr. Chávez has tried to use oil as a political weapon against the U.S. In recent years, he has doled out cut-rate supplies to dozens of Latin American countries to buy support. Increasingly, he is using oil to support the U.S.'s economic rivals like China and political rivals like Iran.

• The Goal: Hugo Chávez wants to replace the U.S. as Venezuela's main partner and client in the oil business. The big winner could be China.
 
• What's at Stake: Venezuela has the biggest oil reserves outside the Middle East, and global energy demand is growing.
 
• The Bottom Line: If Mr. Chávez succeeds, the U.S. will become even more reliant on oil from the volatile Middle East.
 
 

In late March, Mr. Chávez unveiled a raft of proposed oil-related deals with China valued at about $13 billion. Under terms of the prospective deals, China National Petroleum Corp. would develop, together with state oil company Petroleos de Venezuela SA, the biggest chunk yet of Venezuela's Orinoco River region -- the same area where Mr. Chávez is nationalizing the Western companies' projects. Oil produced there would then be ferried to China in a new, joint "super fleet" of tankers, and processed there at three new refineries built to handle Orinoco heavy crude.

The Venezuelan leader's goal is to supply China with one million barrels a day by 2012, up from 150,000 barrels a day. While many analysts doubt Mr. Chávez's ability to deliver on his promises, Venezuela's exports to China have grown quickly, from 12,000 barrels a day in 2003. Meanwhile, with oil production falling and China's share rising, exports to the U.S. fell 8.2% in 2006 from 2005, and Nigeria has replaced Venezuela as the U.S.'s fourth biggest source of crude oil after Canada, Mexico and Saudi Arabia.

"The United States as a power is on the way down, but China is on the way up. China is the market of the future," the ex-army officer said recently.

At a time of fast growing global demand for stable energy supplies, the stakes in this new great game are high for all parties. Venezuela sits on the largest reserves outside the Middle East, and if government estimates of Orinoco reserves prove right, it may rival Saudi Arabia in its holdings. Getting preferential access to that oil would be a strategic coup for China.

The U.S., for its part, is likely to remain Venezuela's biggest client for oil in the coming years, especially since the Andean country owns the U.S.-based oil refiner Citgo Petroleum Corp. But Mr. Chávez said this weekend that he aims to sell Citgo's refineries in order to build refineries elsewhere and sell oil to places other than the U.S. If Mr. Chávez succeeds with his plans, the best the U.S. can hope for, it seems, is to keep oil imports from Venezuela stable. That means any incremental imports to meet rising demand will likely have to come from the volatile Middle East.

The stakes are high for the oil industry, too. Venezuela represents a critical source of new business in future years, especially since the industry is blocked from Saudi Arabia and many other big oil producing nations.

Yet as long as Mr. Chávez is in charge, his government seems bent on favoring state-run companies from governments he considers friendly. Consider the list of winners of contracts handed out to companies to certify oil holdings in the Orinoco region in the last two years: Vietnam, Iran, Brazil, and China. Last month, PDVSA signed a deal with Belarus to work in the Orinoco. Meanwhile, today's nationalization ceremony pushes out U.S. companies Exxon Mobil Corp., ConocoPhillips and Chevron Corp., along with Britain's BP PLC, France's Total SA and Norway's Statoil ASA.

However, Mr. Chávez's own policies may stand in the way of him carrying out his plans. The leader's focus on social spending has turned PDVSA into a poverty-alleviation ministry more than an oil company, and left the company with little focus. Venezuela's output has fallen to 2.4 million barrels a day from 3.1 million barrels a day since Mr. Chávez took office in 1999. Mr. Chávez recently paid off the last portion of debt owed the World Bank using Venezuela's oil income and paid off all debts with the International Monetary Fund shortly after taking office. He said Monday he will pull the country out of the lending bodies, blaming them for continued poverty throughout Latin America.

Mr. Chávez has announced numerous investments such as domestic and foreign refineries that have never gotten off the ground. "He is good at giving oil away, but he's not good at producing oil. Something like this China deal involves meticulous planning, and he's shown that's not his strong suit," says Luis Giusti, who was CEO of PDVSA during the 1990s.

On the other side of the equation, China may also decide that the mercurial leader is too risky a partner, preferring instead to rely on liquefying domestic coal as a cheaper alternative than shipping in heavy Venezuelan crude, says Amy Myers Jaffe, an energy expert at Rice University.

Venezuela was historically one of the U.S.'s most reliable energy allies. During World War II and again in the 1991 Persian Gulf War, Venezuela pumped as much as it could to ensure steady supplies. And during the 1973 Arab oil embargo, Venezuela broke ranks with other members of the OPEC cartel and continued to ship oil to the U.S.

That began to change after Mr. Chávez took power in 1999 and relations between both countries declined. Mr. Chávez accuses the U.S. of taking part in an abortive coup against him five years ago and of trying to assassinate him ever since, charges the U.S. denies.

Mixing oil and politics may not help Mr. Chávez in the long run. Many analysts say he will need private companies' expertise to develop the heavy crude in the Orinoco region. But as long as oil prices stay high, Mr. Chávez can probably afford to give state firms such as CNPC an opportunity to learn.