Tulsa's Venezuelan ties: pricey spot-market oil pressures profits at Citgo, Pdvsa's U.S. gasoline retailer. (Special Report).

State oil monopoly Petroleos de Venezuela's influence on Tulsa, Oklahoma is hard to miss: A bronze bust of South American liberator Simon Bolivar stands in the middle of a downtown plaza. At the 1991 unveiling ceremony, former Venezuelan President Carlos Andres Perez proclaimed, "We are part of the history of Tulsa, and now Tulsa has become a part of Venezuela."

Never has that message been truer than today. The national strike in response to the Venezuelan government's "Bolivarian revolution" has sent tremors through Tulsa, home to Citgo Petroleum Corporation, the U.S. refining and marketing arm of the state-owned oil giant, known as Pdvsa.

Many Tulsans are sweating out the turmoil, staying abreast of the latest developments as if they were unfolding the next town over. "Chavez just went to the U.N. to talk with [Kofi] Annan," says Tulsa oil distributor Jim Beavers. "That's the newest thing out."

Beavers, co-owner of B and M Oil, has been bracing for shock ever since Pdvsa workers joined the strike in early December. Citgo has kept B and M Oil's delivery trucks loaded with crude, but Beavers is worried about the trickle-down effect, especially since Citgo's credit rating was downgraded in January. "There might be some companies wanting to tighten up on how much credit they give them," says Beavers, who distributes to about 60 Tulsa-area gas stations. "I worry about the unknown."

Middlemen aren't the only nervous people in Oklahoma these days. In a January filing with U.S. Securities and Exchange Commission, Citgo said that it would postpone US$200 million in investments in 2003 because financing of $350 million had been suspended or postponed and because suppliers had shortened payment times. Of Citgo's 4,500 employees, 950 work in Tulsa. Normally, the company obtains 50% of its crude oil under longterm contracts from Pdvsa, 7.5 million barrels per month.

In December and January, the company was receiving only about 70% of its normal shipments from Pdvsa. So Citgo began buying oil on the open market to run its refineries at "optimal" levels and to meet all its fuel supply agreements, says Citgo spokesman Jim McCarthy. "Our operations are unaffected by the current situation," he says.

On the spot. Yet purchasing replacement supplies on the spot market is more expensive. Citgo's crude oil expenses jumped US$22 million during the first nine months of 2002 after the April 2002 coup attempt in Venezuela disrupted oil shipments, forcing it to buy higher-priced crude from alternative suppliers. The company won't disclose how much extra it's paying now.

Since late November, spot market crude oil prices have risen 66% to approximately $33.70 per barrel in January, a two-year high for U.S. markets. "That's a very high price considering before all this started we were talking about oil in the $20 range," says John Lichtblau, chairman of The Petroleum Industry Research Foundation in New York.

Buying crude on the spot market has additional cost implications for Citgo. Venezuela generates mostly heavy crude, which must be processed in refineries outfitted with hundreds of millions of dollars worth of special equipment. Citgo operates four such refineries, representing about 5% of U.S. refining capacity.

Pdvsa bought half of Citgo in 1986 and the rest in 1990, looking for a way to refine its heavy crude in the United States. Its network of 13,400 retail outlets, which has grown by more than 5,000 gas stations under Pdvsa, is the country's fifth-largest.

A barrel of Venezuelan heavy crude yields 65% of a barrel of gasoline and other finished products. A lighter Middle Eastern or African crude sold on the spot market yields more than 90% of a barrel of finished products, but Citgo's refineries are not equipped to process lighter crude. The result: Short on cheaper Venezuelan crude, Citgo is buying more expensive light crude yet ends up with the same low productivity. Margins are getting squeezed.

Even if Citgo purchases the same volume of light crude as heavy crude, low-productivity refining means the company winds up with less products to sell, Lichtblau says. "The quality of the oil is a big factor."

Citgo has $400 million in available credit, enough to meet near-term obligations, according to credit-rating agency Fitch. Yet the gasoline company is seeking assistance from an unlikely source: the U.S. government. In December, the company requested oil from the U.S. government's strategic petroleum reserve to compensate for lost supplies of Venezuelan crude.

A favorite target of Venezuelan President Hugo Chavez's tongue-lashings, the U.S. government did not respond favorably to the request, according to a Department of Energy spokesman.