VENEZEULA - Diversifying Markets - Emphasis On Independence & Latin America.

Venezuela has been steering its oil supply strategy towards diversification of its international clientele and emphasising both domestic development and integration with fellow Latin American countries, even if this means losing ground in the US oil market. The strategy was explained on Feb. 15, 2005 by Ivan Orellana, general director of hydrocarbons at the Venezuelan Ministry of Energy and Petroleum.

This is driven by the country's long-term strategic needs, which include strengthening national sovereignty over its hydrocarbon resources and fostering Latin American integration, Orellana said in an interview with Dow Jones Newswires on the sidelines of a conference in Houston. "Geopolitics has a price, and we're ready to pay that price", said Orellana, who sits on the board of directors of PDVSA and is Venezuela's governor for OPEC.

Venezuela has long ranked among the top four suppliers of crude oil to the US and Citgo, its Tulsa-based refining unit, accounts for 13% of US refining output. However, that relationship is being re-examined by the Caracas government, with President Chavez determined to expand the nation's exports to China and other Asian markets as well as to Venezuela's Latin American neighbours.

Orellana said PDVSA's ownership of Citgo had resulted in big losses for the Venezuelan state because the company's refineries receive PDVSA crude oil at a discout, but contribute little to domestic development in Venezuela. He said: "With all the money that we have lost in the internationalization program, we could have built three refineries in Venezuela".

The Caracas government has since been conducting studies to determine which assets are worth keeping. Orellana said that, going forward, PDVSA will focus on downstream partnerships rather than acquiring whole refineries. Integration with Venezuela's Latin American neighbours is a priority. He pointed to PDVSA plans to invest in oil refineries in Jamaica and Cuba, adding: "As an oil-producing nation, we have the moral obligation to help our neighbors. For that, we're willing to sacrifice a portion of our wealth".

Critics say the US is Venezuela's natural market due to its proximity to the South American nation and its refining capacity for heavy Venezuelan crude oils. Trying to export crude to far-away places like China and India would reduce PDVSA's economic benefits and require considerable investment. However, Orellana said his country's government was looking beyond economics and was ready to assume that cost, adding: "Every country has its objectives, and we're willing to pay for them".

Energy integration with fellow Latin American countries currently is proceeding via PetroAmerica, which Caracas calls "a mechanism to liberate the peoples of the region" and which consists of three regional alliances: PetroSur with southern markets like Brazil, Argentina and Uruguay, PetroAndina with fellow Andean states, and PetroCaribe with fellow Caribbean states. Almost 200,000 b/d of crudes and refined products are being sold to the PetroCaribe states on special terms (see Part 3 in OMT 20). From 2009 PDVSA will begin exporting natural gas to Latin American markets through pipelines to be built through neighbouring countries.

Oil exports to China and other Asian markets will go through Panama, via Colombia. Crude oil exports to China will reach 300,000 b/d by 2012 according to preliminary agreements signed with Chinese oil companies (see OMT 20).