U.S. taxes sub­si­diz­ing Chavez via oil pact

Venezuela rakes in hun­dreds of mil­lions

The Washington Times Weekly - - Front Page - By Kelly Hearn

BUENOS AIRES — Venezue­lan Pres­i­dent Hugo Chavez, one of the hemi­sphere’s harsh­est crit­ics of the United States, is re­ceiv­ing hun­dreds of mil­lions of dol­lars in sub­si­dies from Wash­ing­ton, thanks to an ob­scure 20year-old oil pric­ing for­mula.

The for­mula is part of a sup­ply con­tract be­tween Venezuela’s state-owned Petroleos de Venezuela (PDVSA) and its wholly owned U.S. sub­sidiary, Citgo Pe­tro­leum Corp., which forces Citgo to buy PDVSA’s crude for at least $5 a bar­rel over mar­ket prices.

The net ef­fect is to re­duce Citgo’s tax­able earn­ings in the United States and to boost Venezuela’s share of oil prof­its by as much as $1 mil­lion a day.

“At the mo­ment, we have the strange sit­u­a­tion where the USA is sub­si­diz­ing Venezuela to the ex­tent of the tax re­lief on the ex­cess above-mar­ket prices” says Oliver Camp­bell, a for­mer fi­nance co­or­di­na­tor of PDVSA.

James Wil­liams, an Arkansas­based oil an­a­lyst with WTRG Eco­nomics, es­ti­mates that Citgo has been pay­ing $5 to $8 a bar­rel over mar­ket prices for the past

two years, amount­ing to a de facto U.S. sub­sidy.

Mr. Wil­liams es­ti­mates that Venezuela­could­beearningas­much as an ex­tra $1 mil­lion a day that would oth­er­wise be­long to the U.S. Trea­sury.

The ironies are ubiq­ui­tous ontwo fronts:de­mand­stoend­taxbreaks­for Big Oil in the United States as gaso­line prices sky­rocket and Mr. Chavez’s re­peated threats to cut off oil ship­ments.

“The gov­ern­ment of the United States should know that if they go over the line, they are not go­ing to have Venezue­lan oil,” Mr. Chavez said as re­cently as Fe­bru­ary.

“I have al­ready taken mea­sures re­gard­ing this. I’m not go­ing to say what be­cause [U.S. of­fi­cials] think that I can’t take th­ese mea­sures be­cause we would not have any place to send the oil,” Mr. Chavez said.

To­day’s record oil prices — about four­timeshigh­erthanin1989,when the IRS for­mula was ne­go­ti­ated — have pro­vided Venezuela’s ver­bose lead­er­with­plen­ty­of­cash­forhisan­tiU.S. cam­paign.

Mr. Chavez cites the hy­po­thet­i­cal threato­faU.S.-led­mil­i­taryas­saultto jus­tify pur­chas­esof­bil­lion­sof­dol­lars of ad­vanced weapons from Rus­sia.

He also pro­vides gen­er­ous sub­si­dies to Latin na­tions with left­ist gov­ern­ments, rang­ing from an­tiU.S. Cuba to long­time U.S. friends such as Ar­gentina, which re­cently ben­e­fited fro­maVenezue­lan­buy­out of debt owed to the In­ter­na­tional Mone­tary Fund.

The U.S. Congress’ Gov­ern­ment Ac­count­abil­ity Of­fice (GAO) says that the United States is ill-pre­pared for a dis­rup­tion in Venezue­lan oil, which could cost the U.S. econ­omy $23 bil­lion in losses to its gross do­mes­tic prod­uct.

The GAO re­port also says that Venezuela’s econ­omy would suf­fer. About 70 per­cent of the na­tion’s oil ex­ports go to the United States.

But an­a­lysts saythe po­ten­tial im­pact on Venezuela would shrink as Mr. Chavez finds new mar­kets and re­fin­ing po­ten­tial out­side the United States.

Dur­ing the first four months of 2006, Venezue­lan oil ex­ports to the United States fell about6 per­cent, to 178 mil­lion bar­rels of crude and pe­tro­leum prod­ucts, from 190 mil­lion bar­rels dur­ing the same pe­riod a year ear­lier, ac­cord­ing to the U.S. En­ergy De­part­ment.

An an­a­lyst with the de­part­ment says it is too soon to say if this rep­re­sents a trend, be­cause im­ports rou­tinely fluc­tu­ate, mak­ing it dif­fi­cult to de­ter­mine whether pro­duc­tion lags at PVDSA or sales in new mar­kets caused the de­cline.

Nev­er­the­less,Venezuela’s oil ship­ments to China clearly are ris­ing.

In2004,Cara­cassen­taav­er­a­geof 14,000 bar­rels a day to China, an amount­that­spiked to 80,000bar­rels adayin2005,PDVSA’sWeb site says.

In­May,PDVSAan­nounceda$1.3 bil­lion plan to buy 18 oil tankers from Chi­nese ship­yards to boost its ship­ments to Asia.

“Bytheend­ofthisyear,weshould be send­ing 300,000 bar­rels a day of oil to China,” Mr. Chavez said.

Mr. Chavez is also ex­pand­ing his en­ergy re­la­tion­ships to Rus­sia and Iran. Both are oil ex­porters, but have the tech­nol­ogy for new re­finer­ies that are needed to process Venezuela’s heavy crude.

Dur­ing a state visit to Moscow last month,he clinched a large arms deal and oil agree­ments with Pres­i­dent Vladimir Putin.

“In­Vol­gograd,wea­greed­with­the pres­i­dentofLukoilthat­bytheendof 2006,thisRus­sian­com­pa­ny­will­start topro­duce oil in­Venezuela,int­wore­gions,” Mr. Chavez said.

The trip in­cluded a visit to Tehran, where Iran’s state-owned Petropars oil and gas com­pany said it would in­vest $4 bil­lion in two Venezue­lan oil fields.

Venezuela also has deals to sup­ply coun­tries such as Cuba and Bo­livia with cheap oil, as well as new sup­ply agree­ments with In­dia, Ja­maica, Haiti and Paraguay.

Ar­gentina and Uruguay last month agreed to work jointly on oil projects in Venezuela’s Orinoco re­gion, and Mr. Chavez con­tin­ues push­ing a num­ber of oil ini­tia­tives in the Caribbean.

Venezuela is al­ready the world’s fifth-largest oil pro­ducer. But it has yet to be­gin de­vel­op­ing an oil find in its Orinoco River belt, which would give it oil re­serves­greaterthanSaudi Ara­bia’s,ac­cord­ing­toes­ti­mates­from bothU.S.and­in­ter­na­tion­ala­gen­cies.

“What hap­pens when the weight of global oil shifts from the Mid­dle East to Venezuela?” Jose Cordeiro, aVenezue­lan oil spe­cial­ist, asked re­cently at an oil fo­rum in Buenos Aires.

U.S. of­fi­cials are con­cerned that Mr. Chavez will con­tinue to use his na­tion’s oil wealth to re­ward regimes tothe de­greetheyshare his anti-Amer­i­can agenda.

“So what is it, this [U.S.] gov­ern­ment is try­ing to do? Desta­bi­lize its se­cure [oil] sup­plier?” Mr. Chavez asked rhetor­i­cally dur­ing his weekly “Hello, Pres­i­dent” television and ra­dio show.

He an­swered his own ques­tion, say­ing that Venezuela “has enough al­lies on this con­ti­nent tostart a 100year war.”

Barely a day goes by with­out Mr. Chavezhurlinganover-the-top­in­sult or threat at the United States.

Still, Mr.Chavezhas plenty of oilthirsty neigh­bors. The main ob­sta­cle is tech­ni­cal.

Venezue­lan oil is sul­fur-heavy, mak­ing it dif­fi­cult to re­fine into prod­ucts such as gaso­line.

Few re­finer­ies in the­worl­dareup to the task, the bulk be­ing nine U.S. re­finer­ies that are ei­ther partly or fully owned by PDVSA through Citgo.

“WhiletheUnit­edS­tates is unique in its ca­pac­i­ty­tore­finelargevol­umes ofthe­heavy­crude oil that­con­sti­tutes ama­jor­i­ty­ofVenezuela’s oil ex­ports, China and other coun­tries, such as Brazil, have plans to build re­finer­ies that can process heavy crude oil, which, if built, may cre­ate other at­trac­tive mar­kets for Venezuela’s oil,” the GAOre­port says.

One key to Mr. Chavez’s strat­egy in­volves de­vel­op­ing re­finer­ies out­side the United States that can process Venezue­lan crude. Brazil and Venezuela are jointly build­ing a $2.5 bil­lion re­fin­ery in the north­east­ern Brazil­ian state of Per­nam­buco,which is ex­pect­ed­to­pro­ces­sup to 200,000 bar­rels of heavy oil daily.

“The crude cur­rently go­ing to Citgo could just as eas­ily go there,” said Carter Beasley, an oil in­dus­try pro­fes­sional who works in Latin Amer­ica.

“Brazil is a big im­porter, and if Venezuela builds the re­fin­ery, you would as­sume there is a clause in there some­where about sup­ply­ing the crude,” Mr. Beasley said.

PDVSA also has an agree­ment to up­grade a Uruguayan re­fin­ery and re­port­edly plans to in­vest in a Paraguayan fa­cil­ity.

Sen. Richard G. Lu­gar, In­di­ana Repub­li­can and chair­man of the For­eign Re­la­tions Com­mit­tee, is urg­ing the United States to plan for the day when Venezue­lan oil is no longer avail­able.

“Venezuela’s lever­a­geover global oil prices and its di­rect sup­ply lines and re­fin­ing ca­pac­i­tyintheU.S.give Venezuela un­due abil­ity to im­pact U.S. se­cu­rity and our econ­omy,” Mr. Lu­gar­wroteinare­cent let­ter to Sec­re­tary of State Con­doleezza Rice.

“How­ever un­re­al­is­tic Venezue­lan Pres­i­dent Hugo Chavez’s re­peated threats todis­rupt the oil sup­ply may be, we have a re­spon­si­bil­ity to plan ap­pro­pri­ate con­tin­gen­cies that pro­tect the Amer­i­can peo­ple,” the let­ter says.

It also warns of “a real risk of hav­ing Venezuela act in con­cert with other coun­tries to dis­rupt the price of oil.”

En­ergy-hun­gry China and In­dia fig­ure promi­nently in Mr. Chavez’s plans.

But get­ting oil from Venezuela to China is ex­pen­sive. Ac­cord­ing to one es­ti­mate, Cara­cas loses $3 dol­lars per bar­rel in ship­ping costs.

Buta$4.7 bil­lion pipeline­planned by Venezuela and Colom­bia could some­day­move Venezue­lan crude to the Pa­cific, where it could be loaded on­toanew­gen­er­a­tionof­su­per­size oil tankers that are too big to squeeze through the Panama Canal.

ThoughMr.Chavezhas big plans for mar­ket­ing Venezuela’s crude to cus­tomers other than the United States, it takes time to build pipe­lines and re­finer­ies, mak­ing a sud­den cut­off un­likely.

Nev­er­the­less, it is clear that Venezuela is mov­ing to dis­in­vest its oil-re­latedas­setsintheUnit­edS­tates.

On Aug. 15, Venezue­lan Oil Min­is­ter Rafael Ramirez an­nounced the sale of Citgo’s 41 per­cent stake in the Lyon­dell-Citgo re­fin­ery in Hous­ton to Lyon­dell Chem­i­cal Co. for about $1.3 bil­lion.

Here lies an­other irony in Mr. Chavez’s oil strat­egy. Two years ago, when Venezuela be­gan ne­go­ti­at­ing the sale of its mi­nor­ity share of Lyon­dell-Citgo, he could sayAmer­i­can re­finer­ies were a bad deal for his coun­try.

That ap­pears to have changed be­cause of the ob­scure pric­ing mech­a­nism that was ne­go­ti­ated with the IRS to fa­cil­i­tate PDVSA’s pur­chase of Citgo in 1989.

Fewde­tail­sa­reavail­ableabout­the com­pli­cated ac­count­ing for­mula.

A rare and su­per­fi­cial de­scrip­tion of­fered in a 2005 Citgo re­port to the U.S. Se­cu­ri­ties and Ex­change Com­mis­sion (SEC) says it takes into ac­count a variety of fac­tors, in­clud­ing the mar­ket value of re­fined pe­tro­leum prod­ucts, trans­porta­tion costs, re­fin­ing­mar­gin­sand in­fla­tion.

Be­cause Citgo is no longer a pub­licly traded stock, it no longer files re­ports with the SEC.

Sources say the for­mula was de­signed to help ob­tain loan fi­nanc­ing for the pur­chase of Citgo, with third­party cred­i­tors seek­ing to en­sure the U.S. re­fin­ery would not be over­charged in sup­ply con­tracts.

Be­fore oil prices spiked in re­cent years, the for­mula fa­vored Citgo — and, by ex­ten­sion, the U.S. Trea­sury — as PDVSA was forced to sell at be­low-mar­ket prices.

But the for­mula was struc­tured in such a way that when prices rise above a cer­tain thresh­old, the bal­ance shifts in fa­vor of the par­ent com­pany, cre­at­ing the sit­u­a­tion that ex­ists to­day with the United States sub­si­diz­ing PDVSA.

De­spite pay­ing more for crude, high oil prices have also kept Citgo flush with cash.

In a May in­ter­view with the Venezue­lan news­pa­per El Uni­ver­sal, Citgo’s Chief Ex­ec­u­tive Of­fi­cer Felix Ro­driguez said the U.S. com­pany repa­tri­ated to Venezuela $785 mil­lion in 2005.

Agence France-Presse / Getty Images

Venezue­lan Pres­i­dent Hugo Chavez waved to sup­port­ers Aug. 12 as he cel­e­brated his reg­is­tra­tion as a can­di­date for re-elec­tion in the Dec. 3 vot­ing at Venezuela’s Na­tional elec­toral Coun­cil in Cara­cas. The leader uses oil rev­enue to re­ward anti-Amer­i­can regimes.

Agence France-Presse / Getty Images

Oil tow­ers de­fine the sky­line in Mara­caibo, Venezuela. About 70 per­cent of the na­tion’s oil ex­ports go to the United States.

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