Sunday, May 25, 2008

Update: Venezuela vs. Exxon-Mobil


On March 13, 2008, US Representative Connie Mack (R-FL) submitted H.R. 1049 to the US Congress calling for the Bolivarian Republic of Venezuela to be designated a state sponsor of terrorism.(1) This act was basically in response to what is now known as the 2008 Andean diplomatic crisis, where Colombia troops crossed the Ecuadoran border in pursuit of a group of Revolutionary Armed Forces of Columbia (FARC) taking refuge there. The incursion led to the death of Raul Reyes, a senior leader of FARC, as well as the capture of computers which contained evidence of strong ties between Hugo Chavez and the rebel group.(2)

The incident brought into focus the geopolitical battlelines in the struggle that Chavez imagines himself in with the United States.

The President of Ecuador--Rafael Correa--is seen by many to be an ideological fellow-traveller of Chavez's, and just after his election in 2006 began moves to nationalize the petroleum industry in that country.(3) Although the industry there is nowhere near the size of Venezuela's, it is the third largest oil producer in South America, producing around 512 kb/d in 2007 band holding proven reserves of around 4.5 billion barrels.(4) As with Venezuela, the oil sector in Ecuador has ties to the Chinese petroleum industry after CNPC bought the assets of Encana--a Canadian oil producer--there in 2005.(5)

The Colombian raid over the border was quickly condemned by Ecuador, which immediately expelled the Colombian Ambassador from Quito, recalled their own from Bogota, and moved troops to the border. Hugo Chavez also closed its Embassy in Colombia, expelled the Colombian Ambassador to Venezuela, closed the border between the two countries, moved 10 battalions to the border, and threatened to nationalize Colombian assets in Venezuea. Nicaragua, which you'll recall is the beneficiary of Venezuela's special program to sell oil at below-market rates with special financing deals and which has an old border dispute with Colombia, also broke diplomatic relations with Colombia.(6) The current President of Nicaragua, Daniel Ortega, was the head of the Communist Sandanista government of Nicaragua which was brought down, in great part, due to US funding of the Contra movement there in the 1980s.

The diplomatic meltdown seems to have been put a stop to after an emergency meeting of the Rio Group on March 7th, where the presidents of Venezuela, Ecuador, Nicaragua, and Colombia publicly shook hands in a show of peace.(7)

However, allegedly the computer files captured in the raid point to strong Venezuelan support for the Colombian rebel group, FARC, with reference to a $250 million loan made to the organization by Chavez.(8) FARC has long been considered an enemy to American interests because of its connection to the cocaine trade, which it has taxed to finance its political enterprise in Colombia.(9) In the first week of May, President Bush gave a speech which pointedly made reference to FARC's connection to Venezuela and Venezuela's connection to Cuba.(10) This followed a report by the Senate Committee on Foreign Relations which argued that sanctions against Venezuela would be likely to backfire unless the region as a whole were convinced to impose them as well, something the report argued was unlikely.(11)

The Cuba connection is important to understanding the genesis of HR 1049, as Connie Mack and several of the co-sponsors, including Ileana Ros-Lehtinen and Lincoln Diaz-Balart, are luminaries of the Cuba sanctions effort dating back to the Helms-Burton Act of 1996. (The Helms-Burton Act gave Congress the right to override a decision by the Executive to void sanctions on Cuba, strengthened sanctions on that country, and prohibited recognition of any transitional goverment there headed by either Fidel or Raul Castro--currently Cuba's head of state.)(12)

Venezuelan ties to FARC are just the icing on the cake as far as this particular coterie in the Congress goes. Anything which serves their goal to isolate Cuba from the international community--or at least from any reconsideration within the United States--is welcome. Beyond that, their efforts presumably confirm Chavez's suspicion that the United States is committed to his overthrow, by military force if necessary. It is an interesting gambit, for example, to put 10 battalions on the border with Colombia, a country which possesses an army twice the size of those of Venezuela and Ecuador combined.(13) Given that Colombian troops have battle experience fighting its various rebel movements and it's outright backing by the Uniteed States, it is little wonder that Colombia did not decide to do anything as a countermeasure whatsoever. That type of conflict is not one that Chavez would be likely to come out ahead in.

On the other hand, in 2006 Chavez put together a reservist program which counts upwards of 2 million men as its members. These groups are deliberately trained in asymetrical warfare, with lessons gleaned from the Viet Cong(14)--similar to the military doctrine current in Cuba--as protection from an American attack or perhaps that of its perceived proxies, such as Colombia. Indeed, it appears that one of the troubles faced by FARC in its battle with the government of Colombia is that Colombia, aided by the US, has no ability to counteract government air superiority. Russian-made surface-to-air missiles are mentioned,(15) which brings to mind our efforts in Afghanistan twenty years ago. Whether it is just posturing for political gain or not, it does appear that Venezuela is preparing the ground regionally and inside Venezuela for a military confrontation with the United States.

Although some of the current diplomatic sympathy for Chavez in the region likely comes from stronger-than-usual antipathy to the Administration in Washington, DC, it also seems to me that he is making progress towards tying the region closer to Caracas. Ecuador, for example, has seen a drop in production of oil since Occidental was kicked out in 2006, and the sector accounts for fully one-third of the government's tax revenues and nearly half of its export earnings.(16) Ecuador is being forced to import petroleum products to meet local demand--and reportedly is racking up $billion/year in bills to do so.(17) As part of an effort to end this problem Ecuador signed an agreement with Venezuela to build a 300 kb/d refinery for $5.5 billion in February.(18) In 2007 it rejoined OPEC--the brainchild, basically, of Venezuela at its foundation. Moreover, Ecuador is in the process of considering changes to its constitution in a move reminiscent of Chavez's, shortly after coming to power, and several times since.

Nicaragua's Daniel Ortega, of course, has a long history with the United States and may well, therefore, feel strongly sympathetic to Chavez's efforts. (Iran's recent efforts to build strong ties to both Venezuela and Nicaragua--including an MOA to help finance a hydroelectric dam in the latter country(19)--are the most interesting historical irony in this story.)

If, as Franklin Foer's piece in the Atlantic Monthly suggested some time ago(20), Chavez is working to recreate the Gran Colombia that Bolivar liberated from Spain two hundred years ago, it does seem that he has made a good start.

Gran Colombia

The suggested American response of putting Venezuela on the state sponsor of terrorism list does not make much sense to me, however. Any effort at this stage to make life for the Venezuelan energy industry more difficult does not seem to be in American interests, given the current high price environment for oil and the supply concerns which are at least part of the reason for this.


It has been reported that Venezuela has had no trouble placing the oil that it traditionally sent to the Chalmette Refinery, having found a buyer for it all in China.(21) However, I find this claim extremely suspicious, because, as I pointed out in my previous blog, there simply aren't enough complicated refineries in China to take this crude. I have heard from a private source that in fact Venezuela did offer the oil to China, which in turn offered to pay a price of WTI minus $35-40 for the crude, given the transportation costs, etc. According to my source, the Venezuelans refused the offer, and sold the oil to traders, who in turn sold the oil to ... Exxon-Mobil, at about the price they were paying the Venezuelans.

(1) House Resolution 1049
(2) "Chavez Aided Colombia Rebels, Captured Computer Files Show," Wall Street Journal, May 9, 2008, by Jose de Cordoba and Jay Solomon
(3) "Ecuador moves to take over Occidental oil operations," International Herald Tribune, May 16, 2006
(4) US Department of Energy's Energy Information Agency Country Analysis Brief on Ecuador
(5) "China oil firm buys EnCana assets in Ecuador," Reuters, September 15, 2005
(6) Wikipedia: 2008 Andean Diplomatic Crisis
(7) Wikipedia: 2008 Andean Diplomatic Crisis
(8) "Chavez Aided Colombia Rebels, Captured Computer Files Show," Wall Street Journal, May 9, 2008, by Jose de Cordoba and Jay Solomon
(9) Testimony Before the Senate Committee on the Judiciary Subcommittee on Technology, Terrorism and Government Information by Rand Beers, Assistant Secretary for International Narcotics and Law Enforcement Affairs and Francis X. Taylor, Ambassador-At-Large For Counterterrorism, March 13, 2002
(10) "Chavez Aided Colombia Rebels, Captured Computer Files Show," Wall Street Journal, May 9, 2008, by Jose de Cordoba and Jay Solomon
(11) "Senate report warns against Venezuela sanctions," by Pablo Bachelet, McClatchy Newspapers, April 28, 2008
(12) Wikipedia: Helms-Burton Act
(13) Wikipedia: 2008 Andean Diplomatic Crisis
(14) "Invasion or civil war for Venezuela?," by Sam Logan, ISN Security Watch, March 24, 2006
(15) "Chavez Aided Colombia Rebels, Captured Computer Files Show," Wall Street Journal, May 9, 2008, by Jose de Cordoba and Jay Solomon
(16) US Department of Energy's Energy Information Agency Country Analysis Brief on Ecuador
(17) "Oil Nationalization Threatens Output, Investment," Reuters, February 15, 2007
(18) "Ecuador and Venezuela will construct oil refinery for 5,5 billion dollars," Business and Financial News, February 3, 2008
(19) "Iran pledges hydro, houses, port for Nicaragua," Reuters, August 4, 2007
(20) The Atlantic Monthly, "The Talented Mr. Chavez" by Franklin Foer, May 2006
(21) "Venezuela Sends Chalmette Oil To China - Ramirez," AFX News Limited, March 31, 2008