VHeadline.com - Venezuela would only cut oil supplies if threatened by the United States

VHeadline.com - Venezuela would only cut oil supplies if threatened by the United States

Venezuela would only cut oil supplies if threatened by the United States

VHeadline.com oil industry commentarist Oliver Campbell writes: David Lynch has written an extensive article in the January 11 edition of USA Today, entitled �Has CITGO become a political tool for Hugo Chavez.�

The question is rhetorical since the article goes on to suggest

a) CITGO is a political tool and cites the provision of subsidized heating oil,

b) Hugo Chavez has the power to cut off oil supplies to the USA and close down CITGO�s refineries, and

c) suspension of oil supplies would cripple the USA economy in 90 days.

Before commenting on these, I must declare an interest since I have always been a great supporter of CITGO, maintained it is an excellent investment and been strongly against the sale of any of its refineries.

Keeping warm when the weather turns cold is a problem for many poor people. So the motive for selling subsidized heating oil to poor US citizens can certainly be altruistic as the government states. But others believe there is a political motive because the United States of America is a rich country that should be able to look after its own, poor citizens.

* Venezuelans are divided on whether their government ... rather than that of the USA ... should be should be the one to provide financial assistance.

The power to cut off supplies and close down the refineries is certainly there, but it makes no commercial sense and would only happen if Venezuela felt threatened in some way by the United States of America.

That such action could cripple the US economy is a gross exaggeration that borders on the ridiculous.

If Venezuela did cut off supplies, the United States would be able to obtain its oil elsewhere. As regards closing the refineries, Venezuela has always realized the vulnerability of holding real property in foreign lands. It has always been apprehensive the refineries could be expropriated if it took any action which damaged the vital interests of the USA. It is most unlikely the refineries would remain idle for long if they were needed to provide the USA motorist with gasoline. A legal solution for their takeover would doubtless be found.

The idea the US economy would be on its knees in 90 days after Venezuela cut off supplies makes a good story but is short on credibility.

The United States of America has the financial and political muscle to obtain oil quickly from other sources ... also Venezuela would have to sell its oil to other countries and that would free up a similar volume elsewhere.

The article goes on to suggest CITGO�s present management is weak, that the company did better when it was left to be managed at arms length and that its competitors do better financially. I don�t know any of the Board and certainly cannot comment on their competence.

The fact CITGO is no longer managed at arms� length is, in my opinion, a step forward and I have advocated the closer control PDVSA now exercises for a long time. For instance, they now look more carefully into proposed capital expenditure, keep a closer eye on the cash flow, and insist a reasonable part of the net income is paid as dividends.

Would you expect ExxonMobil to let one of its largest subsidiaries have a free rein?

You can bet they keep a close watch on what is going on.

* Also, the fact PDVSA has made a Venezuelan the CEO is not unusual ... many large companies with subsidiaries abroad put one of their own nationals in the top job.

The story that CITGO is financially less successful than its competitors has been around for many years and often been repeated by those who wanted CITGO to be sold. The fact CITGO makes less profit per dollar of sales than others appears to support this but, from my own experience, I know how difficult making comparison of financial results with competitors can be.

No two companies are the same, and CITGO has one decided peculiarity: the transfer price for the oil it obtains from PDVSA is calculated on a formula basis, derived from deemed yields, and not on the current spot price for each cargo. For many years, the transfer price favored CITGO at the expense of PDVSA but, since oil prices took off, the position has reversed and now benefits PDVSA.

The CEO of Lyondell Chemical estimates CITGO is at present paying more than US$5 a barrel over the current spot price. Though, as regards consolidated profits, CITGO�s loss is PDVSA�s gain (and vice versa), it obviously depresses CITGO�S corporate profits vis-a-vis competitors.

So the net profit figure is not a good indicator depending, as it does, on the transfer price at any one time between PDVSA and CITGO.

As you would expect from a professional journalist of Mr. Lynch�s caliber, his article makes entertaining reading -- you just have to take some of it with a pinch of salt.

Oliver L Campbell, MBA, DipM, FCCA, ACMA, MCIM was born in El Callao in 1931 where his father worked in the gold mining industry. He spent the WWII years in England, returning to Venezuela in 1953 to work with Shell de Venezuela (CSV), later as Finance Coordinator at Petroleos de Venezuela (PDVSA). In 1982 he returned to the UK with his family and retired early in 2002. Campbell returns frequently to Venezuela and maintains an active interest in political affairs: "I am most passionate about changing the education system so that those who are not academically inclined can have the chance to learn a useful skill ... the main goal, of course, is to allow many of the poor to get well paid jobs as artisans and technicians." You may contact Oliver L Campbell at: oliver@lbcampbell.com