Hugo Chavez aims for $100 a barrel

G2Americas | Intelligence Brief

100206 – No. 03/06 – Venezuelan President Hugo Chavez is seeking to raise world oil prices to $100 a barrel this year. Chavez needs a high and rising stream of oil revenues in 2006-2007 because Venezuela’s oil production capacity is collapsing, and his Bolivarian revolution can only be sustained by evergreater public spending. Chavez, who is seeking re-election to a second six-year term in December 2006, plans to spend up to $65 billion this year on social programs and infrastructure projects. He needs significantly more fiscal revenues, and oil is Venezuela’s only cash cow.

To advance his goal of $100 per barrel oil, Chavez is aligning Venezuela’s government with Iran and Syria, which are challenging the West over Tehran’s nuclear plans and the U.S. military presence in Iraq. Chavez this year also will embrace the Harakat al-Muqawamah al-Islamiyya (Islamic Resistance Movement), Hamas, which on Jan. 25 won 76 of 132 seats in the Palestinian parliamentary elections, giving the group the right to form the next Cabinet. The U.S. government considers Hamas a terrorist organization. Hamas leaders already vowed they will never recognize Israel and refused to renounce violence to achieve their political aims.

Hamas already has singled out Cuba, Venezuela, Brazil and Bolivia officially as the most important countries in Latin America for the Palestinian group’s geopolitical needs. Mohammed Nazzal, a member of the radical Palestinian militant group’s political bureau, revealed its foreign policy agenda on Feb. 9 in Damascus. “First we’re visiting the countries of the Middle East, and then we will go to Latin America,” he said. “We are very interested in Bolivia, Brazil, Cuba and Venezuela. Up to now we have not made contacts (with the governments of those countries), but we are going to visit them.”

Iran and Venezuela have enjoyed close relations for over 20 years, based largely on oil and shared interests in OPEC. Last year, they signed bilateral investment and cooperation agreements worth over $7 billion. The Chavez government also has quietly established good relations with the Syrian government. Tehran and Damascus consider Chavez a friend and strategic ally because of his virulent opposition to the U.S. military presence in Iraq and his strong support for Iran’s nuclear development program. Chavez also endorses an independent Palestinian state, and soon he will embrace Hamas publicly as the legitimate democratic ruled of the Palestinian people.

These strategic alignments have thrust the Chavez government squarely into Iran’s nuclear confrontation with the West, and the Israeli-Palestinian conflict. However, Chavez is not alone. Cuba is also backing Tehran strongly in its nuclear stand-off against the West. Cuba, Venezuela and Syria voted against the resolution of the International Atomic Energy Agency to refer Iran to the U.N. Security Council over its nuclear program. Iran's President Mahmoud Ahmedinejad and parliamentary chief Ghulam Ali Haddad Adel accepted an invitation from Fidel Castro to visit Havana next September to attend the Non-Aligned Summit, and to thank Cuba for supporting Iran in the International Atomic Energy Agency (IAEA) vote. Fidel Castro also has warm relations with Damascus, and Havana likely will strengthen its existing links with Hamas this year.

The Caracas/Havana alignment with Iran, Syria and Hamas likely will trigger a significant increase in tensions this year between the Chavez government and the U.S., Israel and the European Union. This alignment also likely will lead to an increased presence in Venezuela of Iranian, Syrian and Palestinian nationals engaged in oil and non-oil businesses, and also in security-related activities. Venezuela’s army is already receiving strategic and tactical military advice from Cuba. It’s likely that Chavez also will quietly seek, and receive, military advice from Iranian, Syrian and Hamas experts in urban asymmetric warfare, which is the foundation of the Chavez government’s new national security and defense doctrine adopted in mid-2005.

Moscow also will engage the Chavez government with more enthusiasm in 2006, since Venezuela could become Russia’s third largest arms buyer in 2006, after China and India. In early 2005 Chavez announced that he would buy up to 50 MiG-27 Fulcrum fighters equipped with stealth technology for a whopping $5 billion. Instead, Venezuela spent close to $2.5 billion last year to buy transport aircraft, light attack turboprop fighters, eight missile-capable corvettes and coastal patrol boats, 22 Russian attack and transport helicopters, and 100,000 AK-103 and AK- 104 assault rifles. Venezuelan air force officials visited Moscow, for up-close looks at MiGs and Sukhoi Flankers, but no formal negotiations started.

However, the U.S. government in January denied Spain and Brazil authorization to sell Venezuela military transport aircraft and light attack fighters equipped with U.S. technology, and Chavez announced that he would buy his fighters and transport aircraft instead from Russia, China and Iran. On Feb. 9, Mikhail Dmitriyev of the Federal Service for Military and Technical Cooperation said that “If Venezuela wants to obtain MiGs, we are prepared to cooperate.” Now Dmitriyev has signaled Moscow’s willingness to sign a major deal with Chavez as soon as contract negotiations (which haven’t started yet) are wrapped up.

Chavez declared on Feb. 4 that he will arm one million reservists to oppose a U.S. military invasion of Venezuela. “One hundred thousand assault rifles are not sufficient,” Chavez thundered in a speech during the official 14th anniversary celebration of his failed coup attempt in 1992. Chavez also revealed in that speech that he plans to buy “good and modern” air defense missile systems (SAMs), but gave no details.

The Venezuelan leader’s plans to buy MiGs, air defense missile systems, more helicopters and perhaps hundreds of thousands of assault rifles add up to billions of dollars in potential weapons contracts for Russia’s military industries. It also opens the door more widely in the near future for a significant Russian presence in Venezuela’s crude oil and natural gas industries.

Chavez will clash frequently with the U.S. government this year because the confrontation contributes to pushing up oil prices. More accusations of espionage in Venezuela by the U.S. military or the CIA are likely. Chavez’s recent threat that U.S. military personnel and civilians could be arrested and jailed on espionage changes should not be dismissed as rhetorical bombast. Chavez means what he says, even though to date he hasn’t carried out his frequent threats to curtail or even suspend oil exports to the United States.

Chavez also will support Iran strongly in its confrontation with the West because that helps to keep oil prices high. Tehran and Caracas will work together to persuade OPEC to reduce production in March. Outside OPEC’s confines, however, both governments will cooperate in pushing oil prices even higher by challenging the U.S. in the Middle East (Iraq, Israel) and Latin America (Colombia, Bolivia, Ecuador, Peru, Argentina, Mexico, Central America). The Bolivian revolution will leave its footprints across the region, and may reach into Israel for the first time if Chavez decides to give Hamas some financial support.

The strategic alliances between Caracas/Havana and radical governments in Tehran, Damascus and the Palestinian territories also imply that Venezuela’s geopolitical importance for radical Islamic militant groups will increase this year. Fund-raising arms of Hezbollah, Hamas and other Islamic militant groups have been active in Latin America for years. Their presence has been detected at different times in Paraguay, Uruguay, Brazil, Ecuador, Colombia, the Venezuelan island of Margarita, and El Salvador. However, the Chavez government’s strengthening relations with Iran, Syria and the new Hamas government imply that Islamic militant groups will enjoy in Venezuela the same official tolerance that Colombian militant groups have enjoyed since Chavez became president seven years ago.

Meanwhile, it all comes back to oil. Venezuela’s ambassador in Washington, D.C. said on Feb. 9 that the Chavez government is a trustworthy oil supplier and wants good relations with the U.S. government. In Caracas, however, Chavez was more focused on increasing his political confrontation with the U.S. government by unleashing his wrath against British Prime Minister Tony Blair, now officially dubbed “a pawn of the empire,” because it contributes to keeping oil prices at high levels. If oil prices weaken, the Bolivarian revolution’s cash flow would be disrupted and the political situation in Venezuela would deteriorate very quickly.

However, high oil prices also are masking a huge structural capacity problem at PDVSA, the national oil company. The Chavez government claims officially that Venezuela’s oil production totals over 3.3 million b/d. OPEC and other independent entities estimate that Venezuela’s real production is much lower, averaging about 2.5 million b/d, give or take up to 100,000 b/d. The difference between the official production figure and independent estimates is about 800,000 b/d. Moreover, the gap between the official production figure and the independent estimates is growing.

Venezuela’s oil production capacity has a yearly natural depletion rate of between 20 percent and 24 percent, according to former PDVSA employees who were purged by Chavez, and who may be overestimating depletion rates as a result. Natural depletion refers to production capacity that is lost because reservoir pressure levels fall as oil is extracted. The older the oil field, the higher the rate of natural depletion. Venezuela’s oil industry is over 90 years old. Some PDVSA reservoirs (in the Lake Maracaibo basin, for example) have been in production almost that long.

If we assume for this analysis that Venezuela’s oil production capacity was 3 million b/d at the end of 2002, and output capacity has been dropping by 20% annually in the past three years during which there has been grossly insufficient investment in well repair and maintenance, PDVSA may have lost up to 900,000 b/d of production capacity in that period. This would imply that Venezuela’s maximum production capacity today is about 2.1 million b/d, about 500,000 b/d less than OPEC currently estimates from what it calls “secondary sources.” However, we think OPEC’s estimate is closer to the truth in terms of measuring real production levels.

If our assumption is correct, it implies that PDVSA is managing to offset some of the effects of natural depletion. The production numbers confirm that PDVSA isn’t able to expand its output capacity, but the country’s production capacity likely isn’t collapsing as quickly as the Chavez government’s critics are claiming. This doesn’t mean that PDVSA’s production capacity is not declining. There is no doubt at all that it’s falling, and we think this will start to become more visible in 2006 despite higher oil prices. However, PDVSA’s output capacity implosion won’t significantly weaken Chavez’s oil revenues or hinder his geopolitical moves against the U.S. during 2006.

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