This record is a partial extract of the original cable. The full text of the original cable is not available.

042257Z Mar 04

C O N F I D E N T I A L  CARACAS 000731 
 
SIPDIS 
 
 
NSC FOR TSHANNON AND CBARTON 
ENERGY FOR DPUMPHREY AND ALOCKWOOD 
 
E.O. 12958: DECL: 03/02/2014 
TAGS: EPET PGOV VE
SUBJECT: HOW REAL IS CHAVEZ'S OIL THREAT? 
 
 
Classified By: AMB. CHARLES SHAPIRO; REASONS 1.4 (B) AND (D) 
 
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SUMMARY 
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¶1. (C) On February 29, President Chavez threatened to cut off 
Venezuelan oil supplies to the U.S. or to nationalize U.S. 
company assets if the U.S. were to seek to "blockade" or 
impose sanctions against Venezuela.  The U.S. majors in 
Venezuela dismiss his words as bluster but do not totally 
discount some action on his part.  Chavez has sought, largely 
unsuccessfully, to diversify Venezuela's oil sales away from 
the U.S. in the past.  Weighing against a sudden cut-off is 
the fact that it would be enormously costly and time 
consuming for Venezuela to seek out new markets to replace 
its sales to the U.S. where specialty refineries are tooled 
to handle Venezuelan heavy crudes.  However, Chavez's brutal 
restructuring of PDVSA after the general strike of December 
2002-February 2003, and his draconian exchange control system 
show that on economic matters a purely political logic often 
prevails for him.  On a much smaller scale, he has used oil 
as a political tool with his action against the Dominican 
Republic in 2003.  While we believe such a high risk action 
is not imminent, Chavez's character, revolutionary ideology, 
and ignorance of how international markets function mean it 
cannot be ruled out completely.  Chavez may believe that his 
threat, against the backdrop of U.S. domestic politics, may 
cause the USG to back off.  And, of course, it serves to fire 
up his supporters and to burnish his revolutionary 
credentials.  End Summary. 
 
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STINGING WORDS 
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¶2. (C) On February 29, President Chavez threatened that "not 
a drop of oil would arrive from Venezuela" if the U.S. were 
to seize CITGO or otherwise "blockade Venezuela."  He went on 
to add that the U.S. should remember that it has "plenty of 
installations here" (that could be seized in retaliation). 
Venezuelan Ambassador to the U.S. Bernardo Alvarez minimized 
the remarks in a press conference the next day saying that 
"that message was intended for the Venezuelan people and not 
the North American Government."  Inquiring about our reaction 
to President Chavez's remarks, Juan Fernandez, President of 
"Gente de Petroleo" (Petroleum People), an opposition civil 
society group consisting of former PDVSA staff, commented to 
PolCouns March 4 that Chavez's comments should not be 
dismissed off-hand.  As a PDVSA executive, he recalled, he 
had had discussions with PDVSA President Ali Rodriguez about 
contracts being canceled capriciously.  Rodriguez told him, 
Fernandez said, that he had to understand that the decisions 
were matters of state, not business. 
 
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U.S. COMPANY REACTIONS TO NATIONALIZATION THREAT 
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¶3. (C) We canvassed the U.S. majors (ChevronTexaco, 
ConocoPhillips and ExxonMobil) operating in Venezuela for 
their reactions to Chavez's threat of nationalization.  They 
were united in dismissing his words as bluster.  However, 
ChevronTexaco de Venezuela President Ali Moshiri commented to 
econoff on March 2 that he believes the GOV is watching the 
U.S. companies closely.  He added that he has a "gut feeling" 
there could be some action taken if a company were to "step 
outside the boundaries."  Mark Ward of ExxonMobil, which 
besides operating in Venezuela, has a long-term purchase 
contract for Venezuelan crude, remarked that PDVSA would be 
hit by a blizzard of law suits.  All three local company 
presidents pledged to let the Embassy know immediately of any 
operational changes. 
 
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A STABLE SUPPLIER LOOKS TO DIVERSIFY MARKETS 
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¶4. (C) In the past, senior Chavez administration officials 
have repeatedly reminded U.S. policymakers that Venezuela has 
never suspended oil shipments to the U.S and assured them 
that Venezuela would continue to be a stable supplier of oil. 
 Nonetheless, announcements of PDVSA's attempts to develop 
other markets have been a hallmark of the Chavez years. 
While it is normal for any business to seek to expand its 
markets, we have long felt that Chavez's ideology was such 
that he would prefer other customers rather than the U.S.  In 
reality, however, the process of building new markets in the 
oil business can be a slow, costly one.  In 2001, PDVSA was 
ordered by the Ministry of Energy and Mines to cultivate a 
market in India and signed a contract with Indian firm 
Reliance Petroleum.  We understand that contract proved 
unprofitable and was allowed to lapse in 2002. 
 
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A CUT-OFF WOULD BE COSTLY... 
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¶5. (C) Moving out of the U.S. market would be very painful 
for Venezuela.  Venezuela exports 1.4-1.6 million b/d to the 
U.S.  The majority of these exports are heavy, sour (i.e., 
high sulfur) crudes bound for so-called deep conversion 
refineries that have been tooled to handle them.  PDVSA's 
U.S. affiliate CITGO operates several of these refineries and 
others are operated by ventures that have long-term purchase 
agreements with PDVSA.  Admittedly, there would be an impact, 
possibly serious, on the U.S. in terms of refinery economics, 
etc., if Chavez were to stop these exports.  But the U.S. 
would have the whole world to turn to for alternative 
supplies, either crude or refined, and, as a Washington-based 
oil analyst told the Ambassador, the option of drawing upon 
the Strategic Petroleum Reserve would be available to calm 
markets.  We very much doubt whether Chavez is weighing these 
factors at all in making his threats.  Nor does he appear to 
be considering the fact that in the event of such a cut-off 
PDVSA and thus Venezuela could be grievously harmed.  India 
and Brazil have been mentioned to econoff as possible markets 
for these Venezuelan crudes.  The local stringer for industry 
publication "Petroleum Argus," however, has informed us that 
Brazil has little of the hydrotreating and coking capacity 
needed to handle the crudes while India's Reliance Petroleum 
could only handle 150-200,000 b/d of heavy crude based on its 
current desulfurization capacity. 
 
¶6. (C) He adds that most European and Asian refiners could 
not run these Venezuelan crudes straight through their 
facilities, but would instead have to blend them with a 
light, sweet crude to meet refinery specifications.  While 
this is possible, Venezuela would have to offer a significant 
price cut ("next to nothing a barrel," according to our 
expert) in order to induce refineries to accept the crudes. 
Venezuela would also have to undercut other sellers into 
these markets such as Russian oil sales to Europe.  In sum, 
given the realities of refinery operations, it would be more 
likely that Venezuela would have to make small scale deals 
with small countries to start with and suffer through a long 
process of market development. 
 
¶7. (C) A bigger risk to the U.S. might lie in a decision by 
Venezuela to divert to other markets the approximately 
400,000 b/d of light crude controlled by PDVSA.  But here 
again Venezuela would take a price hit and the shipping 
market would also be another barrier.  Venezuela would be 
forced to hire tankers that normally operate in other areas, 
for instance the West Africa to Asia routes.  Many of these 
long range tankers could not enter Venezuelan ports -- only 
Jose can accommodate a tanker holding more 500,000 barrels. 
These transport costs would place further pressure on the 
price of Venezuelan crudes. 
 
¶8. (C) In the area of products, we understand there are now a 
few long distance product runs between Venezuela and Europe, 
primarily in jet fuel.  Venezuela might be able to expand 
this market.  Venezuela could export more fuel oil and gas 
oil to Asia which could affect power and heating oil prices 
in the U.S.  But here again, Venezuela would probably have to 
offer deep discounts to attract non-traditional buyers and 
the shipping costs might be prohibitive.  The U.S. gasoline 
market has already been affected by problems in Venezuela's 
refineries resulting from the 2002-2003 oil strike.  It 
appears that the market is already likely to be more severely 
affected in 2004.  Several sources reported to econoff on 
 
March 4 that Venezuela itself is now importing over 100,000 
b/d of unleaded gasoline to the Amuay refinery to compensate 
for problems at the neighboring Cardon refinery. 
 
¶9. (C) Finally, the experience of the 2002-2003 strike 
demonstrated that Venezuela has limited storage capacity. 
The strike demonstrated that if the export stream of a 
million or more barrels a day is stopped, production will 
have to be shut in in as little as 48 hours in some fields. 
We see no evidence that PDVSA had taken any steps to increase 
storage.  Also, the capabilities of PDVSA's current marketing 
personnel would probably not be up to the task of placing 
over a million barrels of oil a day onto the spot market. 
 
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...BUT PRAGMATISM NOT NECESSARILY THE REVOLUTIONARY WAY 
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¶10. (C) While PDVSA management know the damage that a cut-off 
of oil to the U.S. could do to the company, the new PDVSA is 
staffed by fervent supporters of the "revolution" or by 
opportunists who would be unwilling to lose their access to 
the spoils of corruption.  The recent decision to stop the 
development of the market for orimulsion, the oil-water blend 
designed to replace coal in electricity plants, could be 
illustrative.  Canada's New Brunswick Power has recently sued 
Bitor, PDVSA's orimulsion affiliate, alleging breach of an 
agreement to supply orimulsion.  New Brunswick went ahead to 
install additional generation capacity based on signature of 
a Letter of Intent with PDVSA only to have PDVSA announce its 
decision to supply existing contracts only.  Chavez himself 
is reported to have blocked signature of the agreement with 
the Canadians.  It appears the decision was made to forego 
the development of a relatively small but growing market for 
a product developed from Venezuela's ample supplies of extra 
heavy crude to produce a higher yield blend.  Thus, market 
development was sacrificed to short-term financial gains, at 
a time when the GOV needs lots of ready cash for spending to 
maintain its political standing with its low-income voter 
base. 
 
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OIL AND POLITICS 
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¶11. (C) Chavez also showed his willingness to use oil as a 
political weapon in September 2003 when he suspended oil 
shipments to the Dominican Republic in protest against 
supposed coup-mongering by former Venezuelan President Carlos 
Andres Perez.  Although Chavez has since publicly announced 
that shipments under the San Jose Accord would be resumed, a 
shipping industry contact tells us that what Venezuelan oil 
is going to the DR is moving through traders and not 
directly.  Chavez's restructuring of PDVSA, laying off 20,000 
employees following their participation in the general strike 
aimed at his ouster, is another indication of his willingness 
to put political considerations above economic ones in 
dealing with oil-related issues. 
 
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COMMENT 
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¶12. (C) Chavez's priority is regime survival.  Stopping oil 
sales to the U.S., and taking what could be an enormous 
revenue loss does not on its face appear to be a recipe for 
ensuring the economic stability he presumably needs. 
However, Chavez may believe that, in a crisis, the short-term 
pain inflicted on the U.S. would be enough to cause the USG 
to back off from some action against him or that by raising 
it now he makes such action less likely.  Chavez's 
combination of an oil embargo threat with insulting remarks 
about President Bush also send a message to supporters that, 
not to worry, he can deal with USG pressure on the 
referendum.  With at best limited understanding of how 
international oil markets function, Chavez may also be 
over-estimating Venezuela's power in such a confrontation. 
He probably does understand that a sudden cut-off of sales to 
the U.S. would be a momentous decision.  Such a decision is 
by no means imminent; for now it is useful to fire up his 
supporters and to divert attention from the referendum 
process.  But for the first time, he has laid on the table 
the use of Venezuela's "oil weapon," such as it is, which 
must be considered a new and somewhat ominous development. 
Ironically, such a threat completely cuts against Venezuela's 
effort to attract new international hydrocarbons investment, 
such as the Deltana Platform natural gas project for which 
ChevronTexaco has been awarded a concession or a giant 
petrochemical plant which Exxonmobil is considering, but 
clearly Chavez's main concerns lie elsewhere. 
SHAPIRO