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Despite Production Challenges, Venezuela Pursues Regional Oil Strategy

President Hugo Chávez is pursuing new energy partnerships in Latin America. (AP Photo)

August 07, 2012

Venezuela may be facing operational challenges affecting the availability of oil in its domestic market, but the government has continued an ambitious petroleum export strategy in Latin America. With plans for expanded gas rationing in Venezuela, some analysts believe the petroleum-rich country could be experiencing production problems—a potential issue prior to October’s presidential election. Still, as Venezuela becomes a full member of the Southern Common Market (Mercosur) trade bloc on July 31, the country is expanding plans for regional energy partnerships while continuing to offer preferential energy agreements across the region.

Currently, the Venezuelan government subsidizes gasoline at the lowest prices in the world, but has also implemented rationing. Previously, the government imposed gasoline rations for motorists in three border towns in Zulia and Tachira states, on the border with Colombia. In July, the Venezuelan government announced oil rationing would begin throughout Zulia state but, due to a backlash, the plan was postponed until 2013.

The need for rationing could be linked to smuggling, since a large black market exists with neighboring Colombia, where oil prices are much higher. But some believe rationing may have less to do with smuggling and could actually stem from production and operational problems in the Venezuelan oil industry. Analysts point to operational inefficiencies and lack of maintenance in refineries, as well as a failure to upgrade technology. One of the main production challenges originates from limited refining capacity, forcing the country to import gasoline from the United States. State-run oil company Petróleos de Venezuela, S.A. (PDVSA) increased U.S. oil imports by 65 percent from January to May of 2012 over the same period last year.

At the same time, Venezuela is working on new oil partnerships in Latin America while continuing preferential petroleum deals. Such agreements allow countries to acquire oil in exchange for issuing credit or trade in goods and services. These accords expanded to the point that PDVSA received direct payment for only half of the crude oil pumped in 2011, reports Reuters. During campaigning in early August, presidential contender Henrique Capriles vowed to discontinue these programs, saying: “Not a single drop of free oil will leave this country.”

But such agreements are an important part of Chávez’s regional strategy and low interest, preferential oil agreements to Latin America began during his presidency. Created in 2005, Petrocaribe consists of a group of 16 countries with shared borders in the Caribbean Sea that have such accords with Venezuela. Venezuela has a similar agreement with the Bolivarian Alliance (ALBA) bloc consisting of Bolivia, Ecuador, and five Caribbean and Central American countries. While these programs have geopolitical dimensions to expand Venezuelan influence abroad, the economic feasibility of preferential oil accords sometimes raises questions at home. Venezuelan economist José Toro Hardy estimates that PDVSA has spent between $5 and $8 billion on Petrocaribe and other subsidized oil deals. “It’s best not to try to make too much sense of Chávez’s oil policy, which is governed more by political than economic considerations,” writes Benedict Mander for Beyondbrics blog. Some, however, believe these agreements are important for diplomacy and “break barriers of isolation,” as energy expert David Paravisini told El Mundo.

Chávez is also pursuing new energy partnerships in the region. Following Venezuela’s entrance to Mercosur, the president announced oil deals with Argentina and Brazil. As part of a “strategic alliance” signed July 31 between PDVSA and Argentina’s oil company YPF, Venezuela will continue hydrocarbons operations in Argentina, and will gain access to the country’s shale oil deposits. Venezuela will also aid offshore oil exploration in Argentina close to the Falkland Islands. In addition, Argentina will participate in oil exploration in Venezuela’s Orinoco region.

Similarly, Chávez hopes to expand hydrocarbons trade with Brazil. In late July, the Venezuelan president proposed sending crude oil to Brazil, and also vowed for PDVSA to carry through with its investment in Brazil’s Abreu e Lima refinery, originally conceived in 2005.

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