Editors note: Every Sunday we publish a relevant story from our magazine archives. In light of the death of Venezuelan President Hugo Chavez, this week we turn back to 2005 for a look at how Chavez controlled one of the greatest oil reserves in the world.
By Nelson D. Schwartz; Reporter Associate Jenny Mero
Bound for places like Boston, Baltimore, and Port Everglades, the five supertankers sit low in the shimmering blue-green Caribbean water, their hulls brimming with oil, gasoline, and jet fuel. Filling at a rate of 36,000 barrels an hour, these ships can be loaded and on their way from Venezuela in half a day, which is a good thing, since five more tankers are waiting in the distance for their fill-up. Americans are paying $15 million for each cargo, but the plant's manager just shrugs. "It's business," he says, already focusing on tomorrow's manifest: 500,000 barrels of high-sulfur fuel oil, destination China.
The problem for the U.S. is that we may have to ante up more--a lot more--for that petroleum in the future if Venezuelan President Hugo Chavez has his way. Venezuela is now the key to satisfying America's oil habit: By some measures this volatile Latin American nation, just a four-day sail from the U.S. Gulf Coast, has leap-frogged Canada and Saudi Arabia to become America's leading foreign source of crude. In the first half of 2005, Venezuela supplied one-seventh of our imported oil, or 1.6 million barrels a day. And that's helping the fiery socialist Chavez challenge Big Oil. He's hiking taxes and royalties on the international giants, even as he strengthens the hand of OPEC and state-owned energy companies around the world. What's more, Chavez has threatened to shut the spigot if the Bush administration challenges his grip on power in Caracas.
Naturally, that's raising the temperature both in boardrooms in Texas and in the corridors of power in Washington, D.C. In August the Rev. Pat Robertson made headlines with a call for U.S. special forces to "take out" Chavez--he later apologized--and even normally cool heads in Congress are eager to confront what they claim is a dangerous regime close to U.S. shores. Representative Connie Mack (R-Florida) says, "We must all recognize that when we purchase Hugo Chavez's gasoline, we line the pockets of a staunch enemy of freedom." Representative Mark Kirk (R-Illinois) goes even further, calling Chavez "Venezuela's Mussolini."
Ironically, even as the political rhetoric gets hotter, with politicians like Mack arguing that Chavez is "Castro with oil," the U.S. and Venezuela's oil-fueled symbiosis is growing closer. "He depends on us as much as we depend on him," says consultant Rob Cordray of PFC Energy, noting that about 50% of Venezuela's crude exports go to the U.S. The devastation wrought by Hurricane Katrina has offered Venezuela an even greater opportunity: In early September, Venezuelan authorities announced they would send an extra one million barrels of gasoline north to make up for the output of U.S. refineries shuttered by the storm. And while the Robertson-Chavez exchange was portrayed as a dustup between crackpots from opposite ends of the spectrum, Chavez is a smart, canny operator--and his hunger for both petrodollars and petro-power is something America needs to take very seriously.
The point man in Venezuela's contentious relationship with the U.S. is a tall, prematurely gray 42-year-old engineer named Rafael Ramírez. As both Venezuela's Energy Minister and CEO of its national oil company, PDVSA (pronounced ped-a-VAY-sa), Ramírez is arguably the most powerful oilman Americans have never heard of. (If some Americans do know the name Rafael Ramírez, they're probably thinking of the all-star shortstop who played for the Atlanta Braves in the 1980s.) But if you've visited one of Citgo's 14,000 U.S. service stations recently, Ramírez appreciates your business. Citgo is among America's biggest gasoline providers and PDVSA owns it. With Venezuela now the world's sixth-largest oil producer and possessor of the biggest reserves of any country in the Western Hemisphere, Ramírez is becoming increasingly visible in global energy circles.
In a rare interview in his spacious Caracas office--which features an impossible-to-miss portrait of Chavez--Ramírez lays out for FORTUNE his plan to bend Venezuela's oil industry to Chavez's socialist vision and change the balance of power between oil-producing countries and private companies. He may be dressed in a conservative dark suit and tie, but Ramírez is an agitator of the highest order on subjects like how to extract more money from Big Oil. He is tightening his grip on U.S. giants like Exxon Mobil and Chevron as well as European players such as Shell and Total. Through higher taxes and royalties, all foreign oil companies are being forced to turn over a bigger share of their profits to the government in order to fund Chavez's new social programs. "We are working on becoming a tool for the state to recover its sovereignty," Ramírez explains. "When the private companies have control over production, it's impossible to conduct your own national oil policy."
Ramírez isn't just setting his sights on foreign oil firms in Venezuela. He wants PDVSA to work with national oil companies (NOCs) in countries like Iran, Saudi Arabia, and Algeria so that the NOCs can wrest power away from the likes of Exxon and other private corporations worldwide. "This does not mean we will refuse to work with private companies," says Ramírez. "But when oil companies have the high hand over a country, there is no way for a country to resist the pressure coming from these companies." Ramírez also wants a bigger say within OPEC. Venezuela was a founding member of the cartel in 1960 and remains its most powerful non-Arab member. Before Chavez took over, Venezuela routinely flouted OPEC's production quotas. That's no longer the case--and Ramírez wants to make sure OPEC enforces its quotas in order to keep prices high.
Even as Ramírez challenges the status quo in the oil arena, his boss Chavez is upsetting Washington by courting U.S. foes like Cuba and Iran. He makes no secret of his admiration for Fidel Castro and Venezuela supplies Cuba with nearly 100,000 barrels a day of subsidized oil. In exchange, Venezuela receives medical help from more than 17,000 Cuban doctors and dentists stationed in Venezuela. Chavez has been a frequent visitor to Havana, most recently in August. A delegation from Tehran visited Caracas in March, and PDVSA employees are now getting technical training from Iran, a country the U.S. believes is supporting terrorists in Iraq. Chavez has also been signing deals throughout Latin America and the Caribbean to supply cheap oil to his neighbors, elevating Venezuela's influence--and his own profile.
PDVSA is no longer just an oil company--it's the engine of the Chavez revolution. After being crippled by an anti-Chavez strike in 2003 that resulted in the firing of more than 18,000 workers, PDVSA says it is on track to generate revenues of $75 billion this year. "La Nueva PDVSA," as the company is known, has earmarked $4 billion of its internal budget this year for social programs and projects like new highways and railroads. Nearly $10 billion more flows into the Venezuelan treasury, forming the backbone--35%--of the federal budget. "PDVSA was an enclave within the country with very expensive facilities surrounded by poverty and misery," says Ramírez, who's become a hero to Venezuela's poor because of PDVSA's largesse. "That's impossible today." Just in case anyone forgets who really deserves the credit for this "21st- century socialism," Chavez's image appears on the back of many company IDs, and his slogans decorate the hallways of PDVSA.
Like all skilled actors and politicians, Ramírez and Chavez are keenly aware of their audience. They walk a fine line, alternately assuring Americans that Venezuela will continue to supply El Norte with 1.6 million barrels of crude a day and telling Venezuelans that they will cut America's energy lifeline if the Bush administration makes any hostile moves against Caracas. Given the history of U.S. intervention in Latin America--encouraging the overthrow of Salvador Allende in Chile, the removal of Panama's Manuel Noriega by the first President Bush--it's no surprise that many Venezuelans think a U.S. invasion is a real possibility. Yet while the current President Bush would be happy to see Chavez replaced by a more pro-Western leader, any military action is unthinkable as long as the oil keeps flowing.
And despite this former paratrooper's authoritarian tendencies--he attempted to seize power in a coup six years before being elected democratically in 1998 and has recently tried to intimidate opponents through arrests and a new law aimed at the press--Chavez is hardly Fidel. At least not yet. Most privately owned media in Venezuela remain critical of Chavez, and U.S. companies have a major presence. In downtown Caracas, a sign urging solidarity with Chavez's Bolivarian revolution sits next to a huge green-and-white IBM billboard.
For the most part, the macho talk coming out of Caracas is just that. As Ramírez himself notes, America's location and enormous demand make it Venezuela's most natural customer. But the image of standing up to the U.S. plays well in the ranchitos, the Caracas slums that are Chavez's political stronghold. (Chavez has nicknamed Bush "Mr. Danger," while Defense Secretary Donald Rumsfeld is "Mr. War.") As Chavez knows, this kind of rhetoric has helped keep his political idol Castro in power through ten U.S. presidencies.
Still, foreign oil giants are definitely feeling the heat. In fact, the Venezuelan tax authority has created a special branch focusing exclusively on private oil companies. Ramírez accuses Big Oil of systematically cheating on their taxes, and back-tax claims of at least $1 billion are likely. Is this the start of a campaign akin to the Kremlin's attack on Yukos, the Russian oil giant that was bankrupted and then nationalized after being hit with back-tax penalties? "I don't think the situation is that bad," says Ramírez. "Most companies are willing to pay, and they are paying."
The key element in Ramírez's squeeze play is the forced renegotiation of 32 operating agreements under which foreign firms pump 500,000 barrels a day of oil that they deliver to PDVSA for a set fee. Instead of the old 34% levy, profits from these deals will be taxed at a 50% rate. And rather than operating agreements, Ramírez is insisting on joint ventures, with Venezuela controlling at least 51%. By forcibly rewriting the contracts, Ramírez can earn more per barrel and also avoid paying hundreds of millions in incentive payments that were due to foreign companies under the old agreements. What's more, in the tar sands of the Orinoco belt, where Exxon, Total, Chevron, and others have separate agreements and have invested billions to extract oil from what's basically asphalt, royalties on each barrel of oil are being raised from 1% to nearly 17%.
The new terms haven't been finalized, but they're not just being applied to U.S. giants; all foreign companies, including NOCs like Brazil's Petrobras and China's CNPC, are being hit. Most, if not all, are likely to swallow the changes Ramírez is imposing. If they don't go along, they'll lose access to Venezuela's 80 billion barrels of proven oil reserves--one of the biggest energy prizes on the planet.