www.sfgate.com Verne Kopytoff, Chronicle Staff Writer Sunday, January 12, 2003

Chevron knows how to pump oil under pressure. Over the years, the petroleum giant has kept the barrels flowing even in nations besieged by rocket attacks, kidnappings for ransom and corruption.

But the company's usual immunity to local inconvenience has been put to the test in Venezuela, where a riotous general strike has shut down most of the country's economy.

Because of a lack of workers, supplies and ships, ChevronTexaco, headquartered in San Ramon, has significantly curtailed its pumping of oil from three fields in Venezuela, according to analysts. The strike seems to be so protracted, they said, that the company's business there may be blocked for months to come.

But due to the complexities of the global oil market, ChevronTexaco may be financially untouched by the chaos, though it is Venezuela's largest private foreign oil producer. The strike has caused world oil prices to rise, allowing the company to charge more for what it pumps in other places, such as California, Nigeria and Angola.

"While what's going on in Venezuela is reasonably significant for ChevronTexaco, it's not a disaster," said Charles Lucas-Clements, a president in London for IHS Energy, an oil industry consulting firm. "Because of pricing dynamics, ChevronTexaco may in fact be slightly better off."

A spokeswoman for ChevronTexaco declined to comment.

GROUND TO A HALT

The most substantial effect on ChevronTexaco's Venezuelan business has been the closure of the Hamaca field, an expansive project on the nation's eastern plains that normally produces 104,800 barrels a day. The company owns 30 percent of the operation alongside its partners, Phillips Petroleum and the Venezuelan state oil monopoly, Petroleos de Venezuela S.A.

Pumping ground to a halt in Hamaca primarily because of a supply problem, according to a source familiar with ChevronTexaco's affairs. The strike has made it impossible to get deliveries of liquid diluent, which is needed to coax the heavy oil there up to ground level.

2 OTHER FIELDS HOBBLED

ChevronTexaco is having slightly better luck with the two other Venezuelan fields it oversees. They are operational, according to the source familiar with the company's business, though analysts suspect the output is a dribble compared with what it was before the strike.

One of the fields is LL-652, of which ChevronTexaco is a 27 percent owner. It normally produces 4,900 barrels a day from the depths of Lake Maracaibo, on the nation's western coast.

The other field is Boscan, on a dry, western savannah, which ChevronTexaco manages as a contractor on behalf of Venezuela's oil monopoly. The field's usual output is 35,000 barrels a day.

ChevronTexaco does not disclose its revenue from Venezuela.

"This kind of wholesale shutdown is very unusual for oil companies," said Lucas-Clements. "You get them occasionally, like in Alaska after an earthquake or because of environmental activism."

WIDESPREAD DISRUPTION

Venezuela normally produces 3.1 million barrels of oil a day and is the world's fifth-largest oil exporter. The government says the total output has fallen since the strike to around 800,000 barrels, though analysts say that figure is inflated and that the real output is between 200,000 and 600,000 barrels.

Virtually all oil companies operating in Venezuela have been affected by the country's unrest. They include ExxonMobil, Shell and British Petroleum.

The current problems began Dec. 2, when Venezuelan workers from an array of industries left their jobs in protest against the foundering economy and the leftist policies of President Hugo Chavez. Among the strikers were many of the state oil monopoly's 35,000 employees.

ECONOMY IN CHAOS

Currently, the two camps are at an impasse marked by huge protests and street clashes. The nation's economy is in shambles from the loss of oil money,

which accounts for nearly 80 percent of the nation's export revenue.

"It's an unfortunate situation," said Fadel Gheit, an analyst for the investment bank Fahnestock & Co., who has no financial ties to ChevronTexaco. "It's obviously hurting Venezuela, but it's hurting the world, too."

American oil companies are the principal buyers of Venezuelan crude. But with the nation's troubles, they have had to look elsewhere for petroleum, pushing the price for a barrel up several dollars to above $30. Just a year ago, a barrel cost half as much.

DOUBLE WHAMMY

The spike is troublesome to U.S. drivers and industry because it comes on top of a so-called war premium already levied on oil. Analysts estimate that concerns about war in Iraq have driven the price for a barrel up an extra $5.

Compared with its global oil output, ChevronTexaco's production in Venezuela is relatively small. Around 150,000 barrels a day are typically pumped from fields where the company operates. But the actual amount the firm owns is much less because it is merely a part-owner in two of the projects and is a contractor in a third.

Globally, ChevronTexaco produced an average of 1.959 million barrels a day in 2001, according to regulatory filings.

ChevronTexaco's biggest source of oil is actually the United States. It pumped an average of 614,000 barrels a day here, or 31.3 percent of its worldwide total, mostly in California, Louisiana and Texas. Next on the list was Indonesia, with 304,000 barrels a day, or 15.5 percent.

PART OF THE PIE

Oil companies are expected to withstand the troubles in Venezuela with varying degrees of success, depending on whether they produce oil, refine it or sell gasoline. ChevronTexaco engages in all processes, but the company is nonetheless expected to reap a financial windfall, analysts said.

Its production unit, the company's biggest business, will be able to charge more for the oil it drills around the world. The smaller refinery operation may take a hit, however, because it will have to pay more for the oil it buys.

Service station profits will probably be a wash. Gasoline prices may increase 10 cents a gallon in the next three months, according to the Energy Department, but ChevronTexaco will see no extra profits because of increased oil costs, analysts said.

COUNTER-PRODUCTIVE

In the final calculation, analysts agreed that the company will probably come out ahead. But, they added, it is not as if ChevronTexaco executives pray for revolution to erupt somewhere in the world to improve profits.

"The oil companies are enjoying higher prices," Gheit said. "They're not going to say no.

"But too much of a good thing turns out to be bad," he added. "Higher oil prices will hurt economic growth and, at the end of the day, you kill the goose that laid the golden egg." In past crises, consumers have lowered consumption and sought out alternative energy sources.

ChevronTexaco's history in Venezuela has been a love-hate affair, even before the current developments. The company began exploration there in the early 1920s and discovered a big oil field in 1946.

But the company was subsequently kicked out, when Venezuela nationalized its oil industry in the mid-1970s. The company returned in 1996 after the nation's laws were liberalized somewhat.

Now, ChevronTexaco is eager to expand in Venezuela if allowed to do so, analysts said. There is virtually no chance the company will pull out, they said, considering that it has held steadfast in some fairly unstable places over the years.

For example, ChevronTexaco operated in Angola during its long and bloody civil war. It also kept pumping in the Democratic Republic of Congo during its spate of coups, ethnic fighting and political assassination.

"They've been around the block in working in dicey places," said Terry Hallmark, who gives advice about political risk and policy assessment for IHS Energy. "Typically, oil companies are a very hardy breed. Unless something drastic or cataclysmic happens, they are willing to ride it out."

One exception came during the Gulf War. Prior to its merger with Chevron in 2001, Texaco temporarily pulled out of an oil field along the border between Kuwait and Saudi Arabia.

Hallmark said oil companies usually try to balance their risks by operating in relatively secure fields. For example, ChevronTexaco has big operations not only in the United States, but in the United Kingdom, Australia and Canada.

After the strike in Venezuela ends, ChevronTexaco will still have its work cut out for it. Simply getting the fields the company already operates back to full strength could take two months. Analysts said the process would be more complicated than simply flipping a switch back on.

Heavy oil, of the kind found in one field where ChevronTexaco operates, tends to gum up if left idle for too long. Other wells may have to be repressurized.

In any case, the Organization of Petroleum Exporting Countries will meet today to discuss boosting oil output elsewhere in the world. Members hope to scotch fears of an oil shortage created by the loss of production in Venezuela and a potential war in Iraq.

Oil prices have already modestly retreated from their two-year peak of just above $33 in the past couple weeks, to $31.68 on Friday.

If current world problems end, oil prices are expected to decline much further. Venezuela's oil spigot would be open again, while Iraq -- under a new leader -- could potentially expand its fields within a couple of years.

In that scenario, ChevronTexaco's fortunes would probably take a turn for the worse, analysts said. Profits would probably drop and there would be little that executives could do about it.

"When you see a tremendous rise in earnings, it's not because the oil companies got smart," said Gheit, the analyst. "It's because prices were high. But longer term, oil companies know that higher oil prices are unsustainable."

E-mail Verne Kopytoff at vkopytoff@sfchronicle.com.

www.toledoblade.com By FRIDA GHITIS SPECIAL TO THE BLADE

WASHINGTON - The Bush administration is straining to find the right tone in its approach to the growing crisis in Venezuela. One day spokesman Ari Fleischer says the United States would like to see new presidential elections. The next day, after someone notes a new election might be unconstitutional, he says it’s really a referendum the White House supports.

Whatever it is, Mr. Fleischer emphasizes that it ought to happen democratically, within "the confines of the constitution of Venezuela."

The reality, however, is that at a time when Washington can least afford to see oil production disrupted, few people in Latin America believe the U.S. government’s claim to stand for democratic rule. Washington’s influence in Venezuela’s crisis has been deeply eroded by its own actions.

During normal times, the United States imports 14 percent of its oil from the South American country. But these are not normal times. The Venezuelan oil industry is practically paralyzed by a nationwide strike by opponents of President Hugo Chavez. At the same time, the United States is poised for a possible war in Iraq, which could disrupt oil supplies in the Persian Gulf. From Washington’s perspective, the timing of the troubles in Caracas could hardly be any worse.

If the timing is poor today, the prospects for the coming weeks look even grimmer. Venezuelans are passionately divided. Millions of Mr. Chavez’s opponents want him out of office, and millions of his supporters - many of them armed - say they will do what it takes to keep him in power. The ingredients for a disastrous civil war are all in place.

The United States would like to diffuse the situation, but it is reaping what it sowed last April, when it spectacularly mishandled the Venezuelan crisis. It proclaimed support for the overthrow of the highly controversial, but nonetheless democratically elected Mr. Chavez.

Like many in Washington, Latin American leaders would like to see the Chavez era end. But the region has struggled over the last two decades to create and strengthen democracy. That is why when a bungled coup removed the former colonel from power for 48 hours, Latin American governments quickly spoke out against what was a flagrant violation of democratic principles. Washington, however, rushed to celebrate, blaming Mr. Chavez for his own fate and accepting at face value the coup plotters’ false assertion that the president had resigned.

Many accused Washington of involvement with the coup. Administration officials offered conflicting accounts of meetings with the leaders of the anti-Chavez movement. Some said U.S. authorities had offered tacit support for the forceful removal of the president; others maintained that the United States had urged the opposition to work through constitutional means.

The United States would be overjoyed if Mr. Chavez left office. The former paratrooper has been a burr under Washington’s saddle since he took office four years ago. The nation that was once a reliable and friendly supplier of oil has become a source of constant worry since he took office. His inflammatory leftist rhetoric has been consistently anti-American. When the United States attacked Afghanistan, he accused America of committing a crime as great as that of Sept. 11.

He has successfully pushed for OPEC to control production and thus push oil prices higher. When he took office oil was selling for less than $10 a barrel, less than one-third today’s price.

To rally OPEC unity he has undertaken diplomatic tours that to Washington eyes look like the work of the travel agent from Hell. He has visited Muammar Kaddafi in Libya, Saddam Hussein in Baghdad, the Ayatollah Ali Khameini in Tehran, and Fidel Castro, his close friend, in Havana.

It is not only Washington that dislikes Mr. Chavez. His sympathy for Colombia’s leftist guerrillas has caused friction with the neighboring country, and his friendship with Castro has worried many in the hemisphere. But nowhere is the displeasure more intense than among Mr. Chavez’s own people.

Mr. Chavez, who once tried to take power through a coup, has enraged his countrymen with inflammatory and divisive populist rhetoric and with political moves that concentrate power in his own hands. During his tenure the poverty that already affected a majority of Venezuelans has become even more pervasive. But many of the poor see him as one of them and still revere him, blaming the rich and powerful for the country’s problems, as Mr. Chavez does.

Ironically, events in Venezuela may have more power to influence Washington’s actions than vice-versa. If the anti-Chavez strike that has crippled Venezuela’s oil production does not end, Washington is going to find it more challenging to launch a war in Iraq.

While Washington was focusing all its energy and attention on the Middle East, its top oil supplier in its own hemisphere was spinning out of control. But the United States cannot present itself as an honest broker to help resolve the crisis. Its words are now seen with absolute mistrust by Mr. Chavez and his supporters.

Frida Ghitis is the author of The End of Revolution: a Changing World in the age of Live Television. She writes about world affairs.

www.alertnet.org 12 Jan 2003 10:14

VIENNA, Jan 12 (Reuters) - Venezuelan oil officials said on Sunday that sabotage at oilfields, refineries and computer systems was causing pollution and preventing a swift recovery in the industry, crippled by a six-week-old strike.

Arriving at an emergency OPEC meeting in Vienna called to deal with the extended Venezuelan stoppage, state oil company chief Ali Rodriguez said the South American country was aiming to supply its minimum supply obligations by the end of January.

Striking executives at Petroleos de Venezuela, many of whom have now been sacked by Rodriguez, say incompetence by replacement workers is to blame for the accidents.

"There has been electronic sabotage and sabotage on valves, because the (strike) campaign has been aimed at causing accidents, and we have to take anti-sabotage measures to start up safely," he told reporters on arrival in the Austrian capital.

Rodriguez, a former secretary-general of OPEC, said the country still aimed to meet its minimum contractual supply obligations by the end of January, but declined to provide any figures on output in the world's fifth largest exporter. Venezuela previously supplied 13 percent of U.S. oil imports.

A full recovery in ouput by the end of February, a previous target, would not be achieved because of the extensive sabotage, he said.

Striking oil company executives, demanding the government's resignation, said crude flows dropped below half a million barrels per day last week, from more than three million in November.

The country's main oil refineries have ground to a virtual halt, export terminals have closed or drastically reduced loadings and long lines have formed at gasoline stations, while Venezuela resorts to importing fuel.

"Internal market distribution is being normalised, we have managed to free up port operations and we have drawn down stocks whose build-up had blocked production," Rodriguez said.

"This has helped a sustained rise in output, so this month we should achieve our objectives," he said without providing details.

"Our objective is to reestablish basic production this month and restart the refineries to satisfy the internal market because we are importing gasoline at prices far above what we sell it at, which is creating losses for the company," Rodriguez said.

In Lake Maracaibo, where Venezuela pumps about half its crude oil, Rodriguez blamed a recent oil spill on sabotage. In the country's largest refinery, Amuay-Cardon, he said striking workers had shut the plant incorrectly, leaving deposits of asphalt and sulphur in some units.

In the smaller El Palito refinery, Rodriguez said a fire last week was caused by a faulty seal which has now been corrected and output there was restarting.

Asked whether oil production would be fully restored by the end of February, Rodriguez said, "Not totally because damage has been very great and we don't know if there has been sabotage in some wells, so we have to be very careful."

abcnews.go.com — By Peg Mackey and Michael Georgy

VIENNA (Reuters) - Leading OPEC producer Saudi Arabia said on Sunday that the cartel is already responding to a Venezuelan strike and sees no real shortage now on world oil markets.

Saudi Oil Minister Ali al-Naimi said the group was acting to fill what he estimated as a two million barrels per day gap on the international market caused by the six-week-old strike. "There is no shortage. We never allowed the shortage to take place," Naimi told reporters before Sunday's emergency OPEC meeting.

Asked if OPEC was supplying the market right now with all the oil it needed, he said: "Yes, we want to make sure there is no shortage."

Riyadh is trying to prevent the Venezuelan strike, combined with the threat of war against Iraq, causing an oil price spike that would hurt the world economy and hit crude demand. U.S. oil prices recently rose above $33 a barrel for the first time in two years.

Naimi said Saudi, which was estimated in December to be pumping about eight million bpd, could reach 10 million bpd within two weeks.

"We can get to 10.5 right away but to maintain that level we need 90 days to formalize contracts for extra rigs with drilling companies," he added.

Fellow cartel members the UAE, Kuwait, Nigeria and Algeria also held spare capacity, the minister said.

Naimi ruled out any increase at Sunday's meeting of formal limits of 23 million barrels per day for the 10 OPEC members with quotas, simply because Venezuela is out of the market.

"An increase in the ceiling would really flood the market," he said. "At the last December meeting we evaluated the market needing 23 million barrels per day. OPEC made a worldwide commitment. The ceiling is still 23 million barrels a day and we will maintain 23 million barrels a day," he told reporters.

That means that the remaining nine members of the group with quotas, excluding Venezuela and Iraq, are likely to agree a temporary increase, making clear they will reverse the addition once Venezuela returns. Iraq has had no quota since the 1990-1991 Gulf War.

Delegates said ministers might decide simply to announce their intention to make up for the Venezuelan loss without announcing any exact additional volume increase or higher individual allocations.

Ministers so far have said they were discussing a 1.0-1.5 million bpd increase. Naimi would not comment directly on that volume. But he said that with a Venezuelan outage of two million bpd, an increase of 1.5 million bpd would not be enough.

www.boston.com Government, foes defy courts By Mike Ceaser, Globe Correspondent, 1/12/2003

CARACAS - The government says a disguised coup is taking place. The opposition accuses the government of imposing dictatorship. But the real victim, observers say, is the rule of law.

The detention of a high-ranking national guard officer in defiance of a judge's order, and the opposition's call not to pay taxes, are the latest examples of how both sides in the struggle over President Hugo Chavez's rule have flouted Venezuela's never-strong legal structure during the six-week strike. Some observers warn that the disdain for the law could push this nation of 24 million over the edge and prompt widespread violence or even civil war.

''There are large sectors of society which don't accept the arbiters we have,'' said Carlos Correa of the Caracas human-rights organization Provea. ''This could advance into a situation in which there is no authority which anybody respects.''

On Dec. 30, a dissident National Guard general, Carlos Alfonzo Martinez, was arrested without a court order and has been held without charges or access to attorneys, even though a judge ordered him released. His freedom was a key demand behind an opposition march Jan. 3, in which demonstrators clashed with government supporters, leaving two people dead and dozens injured.

For its part, the opposition is calling on its supporters not to pay taxes as an additional pressure tactic to force Chavez to resign or agree to early elections.

Carlos Ortega, leader of the opposition Venezuelan Workers Confederation, told supporters early this month that the tax money ''could be used in a way contrary to the nation's values.''

Both sides also have interpreted the law according to their own convenience. On Dec. 15, the opposition protested furiously after Chavez declared that military officers need not obey judicial orders. Nevertheless, when the Supreme Tribunal of Justice ordered striking petroleum workers back to work a few days later, the opposition ignored the ruling. Chavez justified his instruction to the generals by saying that the president's authority superseded that of the courts.

The disregard of courts and laws occurs against a backdrop of calls for the military to step in and oust Chavez, as a group of officers did during a short-lived April coup. Many of Chavez's opponents justify rebellion based on Article 350 of the nation's Constitution, which says Venezuelans do not have to recognize any government that contradicts democratic values or infringes on human rights. The officers cited Article 350 during their April coup, and during the past weeks Chavez's opponents have said it justifies the petroleum and tax strikes.

Janet Kelly, an American political scientist based in Caracas, said invoking the article sets a dangerous precedent.

''The opposition says, `This government is so unjust we won't obey anything,''' she said. ''You're questioning the legitimacy of the government to rule.''

Indeed, the discourse of many Chavez opponents has become increasingly incendiary in recent weeks.

''We're fighting to install the rule of law,'' says constitutional attorney Luis Betancourt, who compares Venezuela under Chavez to Panama under Manuel Noriega and even Germany under the Nazis. ''In a battle, you can't respect the same rules as in a democracy.''

Neither Chavez nor his opposition can boast clean democratic credentials. During the two days in April while the opposition held power, its businessman-president dissolved Parliament, annulled the Constitution, and conducted arbitrary searches and arrests of Chavez supporters.

Chavez himself led a bloody but unsuccessful 1992 coup attempt. His government also supports ''Bolivarian circles,'' activist organizations accused of employing violence and intimidation.

The opposition accuses Chavez of using the popularity that carried him to landslide election victories in 1998 and 2000 to place his allies in all branches of government, eliminating checks and balances.

As evidence, they point to two dozen court cases that have been filed against Chavez, accusing him of everything from corruption to crimes against humanity for some of the 19 street marchers fatally shot before the April coup attempt. Nearly all those cases are in judicial limbo, neither accepted nor rejected by the Supreme Tribunal of Justice.

Mohamad Merhi, leader of a group of victims of the April violence and their relatives, said their case was recently rejected by the tribunal and sent to the attorney general's office, even though the attorney general is accused of complicity in the killings.

''We have no confidence in any investigation by the attorney general,'' said Merhi, whose son, Jesus, was killed April 11.

The opposition accuses Chavez of using a similar tactic on a nonbinding referendum on the president's rule. Although the National Electoral Court set a referendum for Feb. 2, Chavez has said that the action is illegal and that the government will not finance it. The issue is now before the Supreme Tribunal.

But in a polarized society, almost no judge is above suspicion these days. The weakening of the legal system, compounded by an ongoing battle between Chavez and the mayor of Caracas for control of the capital's police force, translates into a climate of increasing criminal impunity, said Provea's Correa.

''With the [legal] institutions deteriorated, the politicization of the police force only makes things worse,'' Correa said. ''When you have judges who act not as judges but as politicians, you experience a decomposition of society.''

This story ran on page A12 of the Boston Globe on 1/12/2003.