Chavez gives boost to oil sands

Friday, December 8, 2006


CALGARY -- The re-election of Hugo Chavez as President of Venezuela for a second term this week means the world should get ready for another six years of sabre-rattling aimed at keeping oil prices high.

Mr. Chavez's landslide victory has bought him time to achieve his ultimate objective -- the certification of the 235 billion barrels of heavy oil reserves found in the country's Orinoco basin. Added to existing reserves of 80 billion barrels, the country would leapfrog ahead of Saudi Arabia and put Venezuela in the role of swing producer, giving it greater ability to affect world oil prices.

If Mr. Chavez succeeds, the reserve numbers look like this: Venezuela's 316 billion barrels to Saudi Arabia's 264 billion and Canada's 179 billion. And there's another consequence in that Venezuela becomes a magnet for capital flows because of the need for further development of upgrading and refining technology to process the heavy crude.

Because Venezuela has lagged in investing in research and development for heavy oil, as well as the fact that it is apparently no longer interested in having private sector firms operate in the country, it has looked to the state-owned oil companies for intellectual and financial capital to aid in this quest.

To that end, companies such as Russia's Lukoil, ONGC from India and CNPC from China have signed on to help Mr. Chavez reach his objective. The state oil companies look for strategic opportunities to invest in energy and are not constrained when it comes to factors such as corporate social responsibility, returns on investment and share price.

If this isn't eye-popping enough, consider that Mr. Chavez has recently become good friends with the Iranian President, Mahmoud Ahmadinejad. The two leaders exchanged visits and signed trade agreements earlier this year; Iran committed to investing $4-billion (U.S.) in two energy projects. It's safe to assume that this alliance, which has been forged between two countries who are members of the Organization of Petroleum Exporting Countries and openly hostile to the United States, isn't good for oil price stability. Iran is OPEC's second-largest producer, with Venezuela following in third spot.

Moreover, Iran and Venezuela have similar needs. Both depend on high oil prices to keep domestic peace in their respective countries, and the very real possibility exists that the two countries could polarize, or even destabilize, OPEC. This is especially likely if Mr. Chavez does get the heavy oil estimates recognized and added to the total reserves. Either way, a Venezuela-Iran alliance within OPEC means increased uncertainty for oil prices, which pushes them higher.

Of course, it would be better for Venezuela if it weren't so dependent on oil revenue, which makes up 20 per cent of gross domestic product and half of the government's revenue; when the price falls as quickly as it did this summer -- from the $75 level to below $60 -- the country's economic vulnerability and subsequent need for some measure of price influence is evident.

Mr. Chavez might be full of bluster and rhetoric toward the United States, but behind all of this is a very shrewd plan to shift a measure of economic power to Latin America -- where income distribution amongst the population is abysmal. According to the World Bank, 10 per cent of the richest people on the continent earn almost 50 per cent of total income.

"Mr. Chavez is showing countries in Latin America that they can shape their own economies by gaining control of their natural resources," says Paul Michael Wihbey of GWEST in Washington. "By doing this, the region can become a dominant force from an economic perspective."

Mr. Chavez is also intent on diversifying his customer base when it comes to oil exports.

To that end, notes Mr. Wihbey, Venezuela has agreed to start shipping 300,000 barrels a day of crude to China. Those are barrels that were once intended for the U.S. markets. He's already sending thousands of barrels to the Caribbean and Cuba.

"He's playing treaty chess, whereas Cuba's Fidel Castro played checkers," Mr. Wihbey says.

All of this is bound to have a profound impact on crude oil markets. The U.S. will have to source crude from elsewhere; given that Mexico can't step up to the plate, it's likely to turn to Canada and more specifically, the oil sands.

Mr. Chavez's re-election might have taken place thousands of kilometres away, but as his game of oil chess proceeds, the impact will also be felt on the oil sands of northern Alberta.