www.oaoa.com Monday, March 17, 2003 By Julie Breaux Odessa American

John Bell said the Clinton administration and then-Texas Gov. George W. Bush nixed the idea of a differential tariff. Four years ago, he said the chairmen of Exxon Mobil and BP Amoco told him that crude oil would be priced at $12 to $14 through 2007, "and that I needed to sit down and shut up and go away. It was crazy."

At some point, everyone reaches his or her limit. John Bell reached his in 1998-99.

That’s when Venezuela flooded the market with crude oil, forcing some small, independent producers to shut in production. For Bell, a second-generation oil man from Kermit, the price of crude had fallen so low that any further production was unprofitable.

But, instead of grousing about the sad state of domestic oil and gas industry and accepting the status quo, Bell did something about it. And since that time, the soft-spoken Bell has been a consistent voice for regulatory and legislative change.

In January 1999, he organized an independent producers’ movement that climaxed when more than 300 producers demonstrated at the state Capitol to bring attention to the plight of Permian Basin oil producers then facing historically oil low prices.

He’s written scores of letters to top-level oil executives and to last few energy secretaries, sharing with them his concerns for the industry. He has also testified on the industry’s woes on Capitol Hill.

In early 2001, he applied for a position with the Department of Energy, hoping to influence debate on a national energy policy. At the time, though, Democrats controlled the Senate and his nomination never got out of committee.

Now, Bell wants to leverage his years of activism to obtain a seat in Congress.

Late last week, Bell said he was considering running for the open 19th Congressional District seat and would announce his decision sometime this week.

If he decides to run, Bell would have to hit the ground running. Since Rep. Larry Combest in January announced he would retire in May, about a dozen people from Odessa, Midland and Lubbock have announced their candidacies.

"I’m going to have to run like crazy."

Of the many issues he could focus on, the woeful status of the oil and gas industry would be his for the taking.

Bell has made it his mission to promote ways to stabilize energy prices, which, he says, would benefit producer and consumer alike.

"We’ve got to get off this (price) roller coaster," Bell said. "We need a long-term strategy to help us encourage stability instead of ‘Let’s spike it today and bust it tomorrow.’"

Out-of-control crude oil and natural gas prices typically spell trouble, too, he said, citing a 1997 Department of Energy study that found energy price spikes playing a significant role in nine of the 10 recessions since World War II.

"They (recessions) hurt the whole economy, and not just the United States but the world economy, because they send too many market shivers," Bell said. "All I used to think about were higher prices, but that’s not correct. I want a price that’s reasonable, that the public can afford and a price I can afford to produce it."

Energy-related recessions could be avoided and price stability achieved through a federal price floor, which would be tied to supply and demand, Bell said. A price floor would encourage domestic drilling, which in turn, would reduce the United States’ dependency on foreign imports.

Bell and petroleum engineer Kirk Edwards are kicking around the idea of promoting a nickel tax on diesel and jet fuel. The tax would, in essence, pay for a price minimum, he said.

"I don’t know that it’s acceptable in government or economic circles, but I think it would be beneficial to the country, and there’s lot of people in the industry who want that," Bell said.

If a price floor won’t fly, Bell believes a "floating" tariff on imported oil would help break the vicious circle of unrealistically high or low prices routinely leading to supply gluts or shortages. The tax would kick in when a barrel of crude dipped below a certain price, say $20, and increase the lower the price fell.

"There would be zero tariff at $20, and at $18 it would be $2 a barrel. At $10 a barrel, the tax would be $10," Bell said.

The government could reap billions of dollars from the import tax, Bell said, but few have indicated much support for the plan.

"Everybody from the (Department of Energy) on down said we couldn’t do that. It was just impossible."

In addition to floor prices and import tariffs, Bell believes a restructuring of the use of the Strategic Petroleum Reserve would be a "natural way" to moderate wide swings in crude oil prices.

The Strategic Petroleum Reserve is a U.S. government complex of four sites created in deep underground salt caverns along the Texas and Louisiana Gulf Coast that hold emergency supplies of crude oil.

"I think the SPR needs to be expanded and full so we have the reserve supply to help soften the economic impact to the country," Bell said.

Bell was critical of the way Bush has been filling the 700-million-barrel reserve with crude averaging slightly more than $27 a barrel.

"Supply and demand influence prices," Bell said. "So, if you have dropping (private) inventories, it’s telling you that supply is not keeping up with demand. Then quit buying it. When you see excess supplies available, you buy."

Bell said he felt vindicated by the release of a report by Senate Democrats two weeks ago that maintained Bush’s decision to divert 40 million barrels of crude from the market into the SPR helped drive up gasoline and other energy prices.

During 2002, when oil was diverted steadily into the reserve, oil prices climbed from the low $20s early in the year to over $30 a barrel by September. After easing a bit, prices soared again toward the end of the year, remaining above $30 a barrel from Dec. 23 through last Thursday, or 50 days straight.

Abraham has rejected the notion, but Bell doesn’t.

"We don’t need to buy $35 oil and put it in storage," Bell said. "It’s just plain, simple Economics 101. It isn’t rocket science. This is just smart, intelligent buying that will help soften what we’re doing even without some of these other ideas. Adding to the SPR in times of shortage is adding fuel to the fire. And somebody somewhere at pretty high levels is not picking that up."

www.forbes.com Reuters, 03.17.03, 1:09 PM ET

NEW YORK (Reuters) - NYMEX crude oil futures were sharply lower at midday on Monday as traders speculated that a looming war with Iraq would be short. Traders also believed U.S. could offset any supply shortage from the Gulf region by releasing oil from its strategic reserves, which helped pull down prices. At 12:55 p.m. EST (1755 GMT), NYMEX April April crude was down 93 cents at $34.45. Nearby May was down $1.01 at $32.30 and June down $1.06 at $30.90. NYMEX April crude oil surged as much as $1.02 higher to $36.40 in volatile trading and then quickly nose-dived as low as $1.38 to $34.00. "It appears very likely that the attack on Iraq will begin late in the week or shortly after...the advice for U.N. inspectors to get out was a serious signal that the time is nigh," said an energy market analyst from Houston. In London, Brent crude's new prompt month May was down 88 cents at $29.25. The United States, Britain and Spain ended Monday morning diplomatic efforts to win U.N. approval for an ultimatum to Iraq to disarm or face war. That, analysts said, now clears the way for the three countries to launch a war without a vote in the Security Council. U.N. Secretary General Kofi Annan told the U.N. Security Council that he is now pulling U.N. staff out of Iraq and that all U.N. work in the country, including the oil-for-food program, would be suspended. U.N. arms inspectors were packing their bags and were expected to leave Baghdad early Tuesday, a diplomat in Baghdad told Reuters. The impetus to remove inspectors followed an ultimatum from Bush on Sunday that the U.N. Security Council had just one more day to give its blessing to a resolution sanctioning the use of force to rid Iraq of suspected weapons of mass destruction. The U.S. has vowed to lead a coalition to disarm Saddam, who it accuses of violating U.N. disarmament resolutions, with or without U.N. support. More than 250,000 American and British troops are already poised to attack if the signal is given. Bush will deliver a television message at 8:00 p.m. EST, in which he is expected to make a final ultimatum to Iraqi President Saddam Hussein to leave or face invasion. The U.S. has yet to decide whether it would tap its 600-million-barrel Strategic Petroleum Reserve to stabilize domestic supply once Iraqi oil exports stop flowing, the U.S. Department of Energy said. U.S. Rep. Bill Tauzin from Louisiana, the Republican chairman of the House Energy and Commerce Committee, said earlier that the reserves had been switched to "flow mode" and was prepared to be put in the market if ordered by Bush. Iraq currently exports about 1.7 million barrels per day (bpd) of crude under U.N. supervision as part of sanctions when it invaded Kuwait in 1990. Last January, Iraq sold about 600,000 bpd to the United States. On Monday, the U.N.-supervised Iraqi oil exports were at a standstill and will likely stay that way until after a U.S.-led assault, which is now expected imminently, trade and U.N. sources said. Iraq's oil exports will be halted indefinitely once U.N. oil export inspectors are evacuated, which is expected to coincide with the pullout of U.N. arms inspectors by Tuesday. Saddam said early Monday that while Iraq had weapons of mass destruction in the past, it no longer had them. The day's prices have erased about $5.50, or nearly 14 percent, since NYMEX crude hit a 12-year high of $39.99 on Feb. 27. From mid-November to that high point, NYMEX crude prices had built up more than $15, or 60 percent, about half of which was seen as a war premium amid fears of supply disruptions that a war with Iraq would entail. Crude prices also rose as U.S. supplies thinned due to a crippling two-month strike in Venezuela backed by its oil workers that began Dec. 2. Venezuela's production is gradually being restored. Crude futures jumped to an all time high of $41.15 in October 1990 after Iraq invaded Kuwait in August of that year. Meanwhile, NYMEX refined product futures tumbled sharply, moving with crude. April gasoline futures were off 1.74 cents at $1.023 a gallon while April heating oil futures were down 1.67 cents at 92.40 cents.

money.cnn.com March 17, 2003: 12:05 PM EST

LONDON (Reuters) - Oil prices slumped Monday despite the imminent threat of war on the world's seventh largest exporter Iraq, as dealers bet on a short conflict.

The possibility of the United States releasing oil from its huge emergency stockpiles also dampened prices, which began the day sharply higher with war fever.

Brent crude oil for May delivery fell 83 cents to $29.30 per barrel on London's International Petroleum Exchange, which was forced to close for two hours when anti-war protesters raided the London market waving banners saying "Oil fuels war." U.S. crude futures fell 68 cents to $34.70 per barrel, some $6 short of their peak during the 1990-1991 Gulf crisis.

"The market believes the war will be short and quick, so there should be a relatively soft landing for crude prices," said Charlie Luke at Aberdeen Asset Management.

Crude oil futures have risen 40 percent in four months as President Bush has stepped up his rhetoric against Baghdad. Bush was scheduled to make an address at 8 p.m. ET (0100 GMT Tuesday) in which he's expected to give Iraqi President Saddam Hussein a limited to leave his country in order to avoid war.

A cold winter and prolonged supply hitch from Venezuela have simultaneously drained commercial stockpiles to historical lows.

But markets have fallen 10 percent in the last week as traders prepared for a quick war that could see Iraq resuming exports within weeks.

"The market is betting on a short, straightforward campaign that would be over fairly quickly," said Steve Turner of Commerzbank in London.

"But there is definitely upside if the war is long and difficult and there are repercussions across the Middle East."

Iraq's U.N.-supervised oil exports, which recently averaged almost two million barrels daily, will slow to a trickle this week as dealers have already stopped buying for fear of an imminent attack.

Iraq's two authorized export terminals in Turkey and the Gulf were both idle Monday morning.

"Apparently, the banks do not believe there is sufficient time for a ship to load at Mina al-Bakr (in the Gulf) and get out before the bombs start dropping," said an industry source.

Iraq and its Gulf neighbors together pump about 40 percent of global crude exports. Forecast stretches to $46

Mike Rothman of Merrill Lynch said oil prices could exceed their Gulf War high of $41, pegging the upper end of his short-term forecast at $46 per barrel for U.S. crude, after reports that Baghdad has placed explosives at oilfields.

"The prospect for crude prices to spike up sharply even from current levels and, more importantly, how long prices stay elevated above the $25 figure we see as oil's 'center of gravity' rests largely on actual events impacting oil flows from the Persian Gulf," Rothman said.

The United States and its allies ended diplomatic efforts to win U.N. approval for an ultimatum to Iraq, clearing the way for them to launch war without Security Council authority.

The State Department has ordered non-essential diplomats and all embassy dependents out of Kuwait, Israel and Syria because of the threat of war, a notice mirroring precautions before the 1991 Gulf War.

Iraq denies possessing weapons of mass destruction and President Saddam Hussein vowed that Iraq would fight back "anywhere in the world" if invaded.

The Organization of the Petroleum Exporting Countries has pledged that it will fill any shortfall in supplies if war disrupts oil flows.

www.upi.com From the International Desk Published 3/17/2003 11:50 AM View printer-friendly version

-0- So Osama bin Laden has been in the Western Hemisphere. He met the Arab community in Brazil's town of Foz do Iguacu during a brief visit in 1995, according to Brazil's news Veja, which cites intelligence sources but that a video film of bin Laden's visit exists. Bin Laden also attended a series of meeting at a local mosque, having entered Brazil from Argentina. And al-Qaida's operations chief Khalid Sheikh Mohammed, arrested two weeks ago in Pakistan, also visited the region the same year. The semi-lawless tri-state region where Brazil, Paraguay and Argentina meet, a haven for money laundering, has been attracting counter-terrorist officials for months. Gen. James Hill, in charge of U.S. Southern Command (whose remit includes Latin America), claims that Islamic groups such as Hezbollah, Hamas and Egypt's Al-Gamaa al-Islamiyah get up to $500 million a year from criminal networks spread across Latin America, particularly the tri-border region and Margarita Island off Venezuela. The U.S. State Department describes the region as a "focal point for Islamic extremism in Latin America."

-0- Chaos at the United Nations, because the usual small consultation room off the formal Security Council chamber is closed this week for renovation. So they scheduled closed-door consultations for Conference Room 7 in the first basement. But it couldn't handle the mass of media so they decided to move consultations to the formal chamber. U.N. staffs hate this because it forces them to close broadcast booths overlooking the chamber -- for fear of lip-reading reporters.

-0- It looks like business as usual between the United States and the European Union, despite American anger at the French and Germans. With U.S. backing, NATO and the EU signed Friday a security pact that provides for the exchange of classified and secret information between the alliance and the EU's new military staff. This precedes the expected handover on April 1 of responsibility from NATO to the EU for Operation Allied Harmony in Macedonia. It will be the EU's first military mission, symbolically important despite the delays in organizing the vaunted Rapid Reaction Force of 60,000 EU troops. The Macedonian mission is more manageable, requiring only 300.

-0- Refitting useful military equipment past its prime is a valuable and cost-effective exercise for many militaries, as evidenced by America's continuing to field U-2s and B-52s decades after their introduction into service. In a surreal development unthinkable a decade ago, America's closest Middle East ally Israel is angling for a lucrative contract to upgrade thousands of Russian army T-72 tanks and armored personnel carriers with Israeli combat and electronics systems. Israel Military Industries chairman, retired Gen. Arie Mizrachi has had talks with Ilya Klebanov, the Russian Federation minister of Industry, Science and Technology, in charge of Russia's military-industrial complex. Mizrachi observed that Russian weapons systems lack advanced Western technology, and said, "We think that a country like Russia, which has 10 percent growth a year, needs to operate a high-tech army. We've been looking for new markets, and in addition to upgrading tanks and armored vehicles, we're offering to provide Russia with our advanced artillery and rocket technologies." IMI is thinking big, and not ruling out providing sophisticated Israeli-Russian systems to other clients in the future. IMI is already working on a $670 million project to upgrade Turkish Army M-60 tanks. The project is the world's largest tank improvement project, and may be expanded to several billion dollars.

-0- The Raelian cult, now operating in Israel, claims to have received 55 applications from Palestinian and Israeli parents, asking that their children -- killed during the intifada -- be cloned. The Raelians' star scientist, Dr. Brigitte Boisselier, flew into Tel Aviv to visit Eve, the first cloned human baby, whose parents apparently live there -- but they ducked the Raelian news conference, fearing the Israeli law that bans human cloning. The Raelians, who believe humans were cloned by extraterrestrial visitors and that the Hebrew word for the God of Geneisis -- Elohim -- means "those who came from the sky" say that want to build a temple in Jerusalem. And now the experiments are over, says Boisselier, no more freebies: "This is a very expensive process, so from now on, we will need to demand payment. We will publicize the exact fee shortly."

-0- The Chinese effort to enter space is not so socialist that it isn't above hustling a bit of extra funding for its 18th recoverable launch vehicle in April. Advertisements have been set out to solicit business to carry experiments into space. Twenty percent of the fee (negotiable) is to be paid upfront.

www.latintrade.com March, 2003

How much pressure can state oil giant Petróleos de Venezuela (Pdvsa) take before it—and Venezuela—cracks?

Depends on whom you ask, but the consensus is that while the company itself is in no real danger, millions of ordinary Venezuelans who depend on the oil business are hanging by a thread. Venezuelan President Hugo Chávez must get the oil flowing again soon or his country’s economy, already on the mat, could be knocked out cold.

Control of roughly US$45-billion-revenue Pdvsa means control of Venezuela, and both Chávez and the strikers flooding the country’s streets know it. The oil sector employs just 1% of Venezuelans, but Pdvsa is the economic motor responsible for some 70% of Venezuela’s foreign exchange income and 43% of government income.

Shaking the Pdvsa tree for the benefit of Venezuela’s poor is Chávez’s plainly stated goal. “We want to favor the people who’ve never seen a drop of petroleum,” says Luis Vierma, the Energy Ministry’s hydrocarbons director.

Laudable, but estimates of the strike’s impact on the national economy during the first 50 days hit $14 billion in lost revenues, or 15% of gross domestic product (GDP). Economists predict that national output could plummet 10% in 2003—40% in the first quarter alone.

“The oil business contributes 50% of the economy of Venezuela, so a 40% decline in GDP is a realistic number,” says Fadel Gheit, senior energy analyst at Fahnestock and Co. in New York. “Absolutely, the economy is going to be a basket case.”

Can Pdvsa itself prosper after these hits? If it can get the oil pumping again soon, probably so, analysts predict. Under normal conditions, the company needs anywhere from $2 billion to $4 billion to operate. In addition, the company must make $1.6 billion in debt payments in 2003, more than $800 million of which is due by the end of March. Pdvsa must continue servicing $3 billion in long-term unsecured debt despite the strike that through the end of January had erased an estimated $600 million in revenues tied to pending oil sales, analysts report.

The government told analysts in January that it will meet obligations using Pdvsa’s $900 million in cash and the company’s $2.4 billion macro stabilization fund.

The fund was established to provide a cushion against macroeconomic instability by setting aside a percentage of Pdvsa revenues. Chávez has gone to great lengths to use it to extract money from Pdvsa since 2001. He recalculated Pdvsa’s macro fund contribution, nearly doubling its payment to 30% from just under 17%. Now, though, it looks like he’ll have to spend a good part of that macro fund fixing Pdvsa—if the money isn’t gone. Chávez admitted taking at least $1 billion from the fund in December 2001 to pay government salaries and bonuses.

“We don’t know if the money is there,” says Edgard Leal, a former Pdvsa executive and director, now a senior associate at the Caracas office of U.S. consultant Cambridge Energy Research Associates. “We don’t know if the government has used it. Pdvsa is no longer managed by a board but by an individual [Pdvsa CEO Alí Rodríguez] who has close links to the government.”

Pdvsa says it could restart operations and be back to nearly normal levels in less than two months, but it is not clear how much damage might have been done to equipment by departing strikers.

Venezuelan heavy crude oil, if not pumped, hardens in the pipes, experts say. (“It just turns to rock,” says one analyst.) Nor is it clear how the government might run a huge state oil company after firing thousands of seasoned professionals. Critics say four months is a more likely time-frame for resumption of full operations.

Apertura. Former Pdvsa CEO Luis Giusti, a Chávez critic, figures the company needs to spend $4 billion a year or lose ground at a rate of 25% of production each year. Under Giusti, who headed Pdvsa for five years until 1999, the petroleum sector opened to foreign investment and dozens of multinational oil companies rushed in. Exports grew as capacity increased.

“By widening the constituent base of the oil sector you expand the economic activity in the country,” says Giusti, now a consultant with the Center for Strategic and International Studies in Washington, D.C. “You generate steady growth.”

Yet four vital heavy-crude projects partly owned by foreigners being built in the country’s vast Orinoco oil belt—Petrozuata, Cerro Negro, Hamaca and Sincor—shut down during the strike; the projects can meet immediate debt payments, analysts predict, but after a couple of months it is unclear how operations can continue. The top 10 foreign oil companies working in Venezuela were losing an estimated $6.7 million in revenue a day, reports energy research firm Wood McKenzie.

Foreigners in the country produce 400,000 barrels per day—15% of Venezuela’s normal output—and were expected to double that figure.

A 2001 Chávez law restricted foreign ownership of new projects, dampening investor enthusiasm. Nevertheless, concessions will have to be a large part of Pdvsa’s future, says Alejandro Bertuol, senior director of the Latin America Energy Group at Fitch Ratings. “[There] is cushion enough, but not for long-term operations and investment,” says Bertuol. “The fastest way for Venezuela to recover is through [foreign] investments.”

Even though oil output has declined in recent years, Pdvsa CEO Rodríguez has said the company will spend $40 billion by 2007 to increase its potential output to 5 million barrels per day from 3 million barrels. Of the investment target, more than $18 billion is expected from foreign partners. Increasing capacity, however, doesn’t mean Pdvsa will produce more oil. Recently head of the Organization of the Petroleum Exporting Countries (OPEC), Rodríguez understands the cartel’s cagey quota game as well as anybody. OPEC-enomics is pretty hard to fathom at times, but here’s the bottom line: Everyone wants to add production capacity, but no one can afford to overproduce.

That’s because OPEC calculates each country’s export quota based on its potential output. It figures out a target price, and then sets production levels accordingly. Since the cartel says each country can export 70% of its potential—not actual—output, it behooves each to have as much capacity as possible, even if the extra capacity remains unused.

Venezuela tried to double output a decade ago, only to find that busting the cartel meant lower overall prices. Since assuming power in 1999, Chávez has transformed the company from an OPEC quota cheater to a strict quota adherent. Production, which once reached 3.6 million barrels per day, dropped to 2.7 million barrels.

Cutting production has boosted international oil prices, but it left thousands of oil workers idle. Pdvsa managers on strike say that pouring more money into government and less into the pockets of oil workers is no way to run a modern economy. “It’s a short-term vision,” says Juan Fernández, leader of Gente de Petróleo, an organization of dissident Pdvsa executives. “(Pdvsa) is sacrificing market.”

Oil industry suppliers are fed up over the sector’s slow decline during the Chávez years, says Fernando Cival, owner of oil and gas processing machinery maker Industrias Vander-Rohe. “Businessmen prefer to close their doors now rather than continue under these conditions in which companies go out of business little by little,” Cival says.

The clearest loser in the battle for Pdvsa is Venezuela’s already-battered economy. Using the stabilization fund to pay short-term Pdvsa debts leaves the country itself with no cushion should the price of oil fall. Anxious to curtail the beleaguered bolivar’s slide, Venezuela’s Central Bank stopped selling dollars in late January. The government, meanwhile, will cut $2.4 billion from spending to offset lost oil revenues. It also announced price and foreign exchange controls.

Fallout. Francisco Toro, an editor at the VenEconomy newsletter, predicts that the strike’s losses in export revenues and taxes will push Venezuela’s public deficit to $15.2 billion, equal to the government’s entire year 2002 budget. “What are they going to do?” Toro asks.

Policy analyst Mark Weisbrot, co-director of the Center for Economic and Policy Research in Washington, D.C., figures Pdvsa is missing a pile of money on bad deals with foreign oil companies struck by previous administrations. Venezuelan oil drilled by foreign licensees in 2000, he points out, represented 11% of output but 45% of Pdvsa’s costs—four times the company’s internal cost of drilling. “That’s just not explainable,” Weisbrot says. “There’s only so much bullshitting you can do.”

Weisbrot believes Pdvsa management made money hard to find to avoid giving it to Chávez. “They want a big company, because that increases their salaries and their power,” he says. “And there’s probably some corruption in there.”

What’s so bad, then, about running Pdvsa the way Chávez proposes, as an institution to benefit all Venezuelans? “Pemex,” says ex-Pdvsa director Leal, referring to Mexico’s corruption-ridden state oil giant.

Striking oil company employees face house payments, children’s school fees and utility bills, yet they say the sacrifices are worthwhile. Teresa Centeno, 44, a marketing manager in Pdvsa’s natural gas subsidiary, has spent nearly half her life at Pdvsa.

Centeno has two children and now no income, but defending Pdvsa is more important, she says. “This is way beyond my personal situation.”

Author: Mike Ceaser • Caracas Greg Brown • Miami