Venezuela, Mexico Are Gaining More Clout

The role of Venezuela and Mexico in driving Monday’s surge in oil prices demonstrates the shifting power balance on the world petroleum scene as producers outside the Middle East, especially Venezuela, gain greater clout, analyst said.

Venezuela, which has surpassed Saudi Arabia to become the largest exporter of oil to the United States and is a notorious flouter of Organization of Petroleum Exporting Countries production quotas, has told the world that it intends to nearly double its production over the next nine years--regardless of the outlook for softer prices.

So when Venezuela finally bowed Sunday to market and domestic fiscal pressure by agreeing to cut oil production by 6%, its lead--and that of Mexico’s and Saudi Arabia’s--was followed by several other nations, promptly producing the desired effect: a price spike that dramatically demonstrated Venezuela’s ability to help sway the market.

Venezuela had little choice, analysts said Monday, with oil prices having declined to the point of jeopardizing the country’s full slate of domestic reforms, economic growth and the 20 deals it has signed recently with foreign oil companies to help it ramp up production. Falling prices have already undercut economic growth and forced the government to cut 6% of its budget.

Nevertheless, Venezuela’s agreement to cut only 200,000 barrels a day from its current daily production of 3.4 million barrels amounted to a victory in itself, analysts said, because it, in effect, legitimizes Venezuela’s ongoing quota violations.

Its nominal OPEC quota is 2.5 million barrels per day. Until Sunday, Saudi Arabia, the world’s leading producer and OPEC’s 800-pound gorilla, was adamant that Venezuela scale back toward that level.

Although all OPEC countries fudge the quotas, Venezuela has been a particularly egregious violator of late. But Sunday’s deal is a tacit admission on the Saudis’ part that Venezuela is a bigger player in the global energy scene than before, said Ed Morse, publisher of New York-based Petroleum Intelligence Weekly.

Under the agreement, the Saudis agreed to cut 300,000 barrels per day of production, and Mexico agreed to produce 100,000 barrels less per day.

Mexico, which helped broker Sunday’s deal, also finds itself on unfamiliar ground. It was the first time Mexico agreed to scale back production in concert with other nations, so its intervention surprised analysts. Mexico is not an OPEC member, and past efforts at cooperation between OPEC and non-OPEC members have mostly failed.

Asked Monday whether Mexico’s leading role in the negotiations meant an increase in the role of non-OPEC members, Deputy Mexican Energy Minister Leopoldo Gomez said: “The decision that Mexico took was motivated by national interests. There is no intent of ‘cartelization.’ ”

Mexico has been steadily ratcheting up its oil exports in recent years, although oil revenue is not nearly as important a factor in its budgetary finances as Venezuela’s.

But the decline in government revenue due to falling oil prices forced Mexico to announce a 1.7% budget cut in mid-January, a serious blow to an economy only now recovering from the 1994-95 peso crisis and the recession that followed. Mexico has also lowered its 1998 economic growth projections from 5.2% to 4.8%. Mexico was reportedly considering a second budget cut when the oil production agreement was struck.

“There is confidence that we have stopped the fall, and there could be a recovery in prices in coming days, but in no way is there an exaggerated optimism that we will return to the levels of a year ago,” said Mexican Energy Minister Luis Tellez.

Finance Minister Jose Angel Gurria said in January that oil sales of $10 billion in 1997 represented just 8% of Mexico’s exports, thanks to surging manufacturing exports. But Gurria also noted that Pemex generates nearly 40% of Mexico’s total tax revenue.

With desperately needed growth in the balance, Mexico apparently chose to shift gears and take a more activist role in helping shape world production levels.

Venezuela, meanwhile, is flexing its oil muscles on numerous fronts. Its increasing oil production is a direct result of new investment policies that have opened the doors to foreign investors, a policy geared toward roughly doubling daily production to 6.2 million barrels a day by 2007.

Underpinning its ambitions is a steadily growing assessment of Venezuela’s long-term potential, as improved oil-patch technology makes more and more of the nation’s heavy oil recoverable and arguably puts it in the same league as Middle Eastern producers.

In the last two years, Venezuela’s national oil company, Petroleos de Venezuela (PDVSA), has signed 20 joint production deals with foreign oil companies, including Exxon, Mobil, Shell and Atlantic Richfield.

Most of the deals are designed to help Venezuela develop its vast reserves of heavy crude oil--said to total four times the 75-billion-barrel reserves of light crude--located in the eastern or Orinoco River region of the country. Heavy crude has high sulfur content and is worth 40% less per barrel than light, higher quality crude.

Arco’s $3.5-billion project would eliminate much of the sulfur content and prepare the crude for conventional refining by 2001.

The heavy crude projects, plus an aggressive program of public-private joint ventures to accelerate development of its existing light crude reserves, have helped Venezuela expand both production and reserves in recent years.

“The center of gravity of world oil has shifted from the Middle East to Venezuela and Canada,” said Joseph Tovey, an oil consultant and investor with New York-based Tovey & Co. “Technology has now made . . . the enormous [heavy oil] reserves of Venezuela economic to produce.”

Venezuela has also expanded its sales and marketing presence in the United States to ensure an expanding market for its higher oil production. PDVSA owns the 15,000-outlet Citgo service station chain, one of the nation’s largest, and six refineries in the United States, a PDVSA spokeswoman said.

The Venezuelans are following the lead of the Saudis, who are partners with Texaco in gasoline retailing east of the Mississippi, said Fahnestock & Co. oil analyst Fadel Gheit.

“What’s different is that Venezuela is a lot more aggressive about getting oil out of the ground. They are opening up to outside capital and technology will accelerate their production, and this all just adds to a glut of crude,” said John Vautrain, vice president of Purvin & Gertz, oil industry consultants in Long Beach.

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* GOING UP: Oil prices soared 13% and gasoline prices are poised to follow. A1

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Well-Oiled

Venezuela passed Saudi Arabia in 1996 to become the largest exporter of oil to the United States. Last year, Mexico also edged past Saudi Arabia to become No. 2. The five largest foreign suppliers of oil to the U.S., in thousands of barrels per day:

‘97 Rankings

in thousands of barrels/day

1. Venezuela: 1,347

2. Mexico: 1,341

3. Saudi Arabia: 1,332

4. Canada: 1,120

in thousands of barrels/day

5. Nigeria: 710

U.S. Imports

in thousands of barrels/day

Total U.S. imports in 1988: 5,100

Total U.S. imports in 1997: 8,050

Headline: Well-Oiled

Source: Oil & Gas Journal