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Ch?vez Starts Punishing America


There was a time when Pat La Vecchia was glad that the fuel he sold came from friendly Venezuela and not some sheikdom with a history of oil embargoes. "For years, people would come in and say, 'You don't get your oil from the Middle East, right?"' says the owner of Pat's Auto Service, a Citgo station in the Cleveland suburb of Rocky River. That was before Venezuelan President Hugo Ch?vez came to power in 1998, promoting his anti-U.S. agenda. And it was before Citgo Petroleum Corp., the refining giant owned by the Venezuelan government, informed La Vecchia in July that it was cutting him from its dealer network. Now La Vecchia has no great love for Venezuela or its controversial President. "If the CIA took him out tomorrow," he says, "I wouldn't cry."

Ch?vez has always marched to his own drummer, spewing anti-U.S. vitriol while hobnobbing with the likes of Fidel Castro. In the past, the 52-year-old former paratrooper's rants against "American imperialism" seemed more bark than bite. But in recent months he has been making good on his long-standing vow to reduce his ties to the U.S., moves that could slow the slide in gasoline prices. "There's nothing he'd like more than to rub Uncle Sam's nose in the gutter," says Matthew Simmons, founder of a Houston-based oil investment bank that bears his name.

Although Venezuela is still the No. 4 supplier of crude to the U.S., its U.S. exports fell 18% from January to June of this year. And in July the company announced plans to reduce its network of U.S. gas stations by 14%, to 11,200, saying it didn't have enough refining capacity to supply them all. Then, in mid-August, Citgo completed the sale of its interest in one of its largest refineries in Houston to partner Lyondell Chemical Co. (LYO) for $2.1 billion. Still on the block are stakes in two large pipelines and Citgo's asphalt business, the largest producer on the U.S. East Coast. "Part of this is the Venezuelan government's desire to loosen economic ties to the U.S.," says Ben Toscanos, an analyst at debt rating agency Standard & Poor's Corp. (MHP). "They have to make significant investments in their oil industry, and this is one way to fund them."

CHINA BECKONS

America's loss may turn out to be China's gain. In the last year, Venezuela's oil shipments to China have more than doubled, to 75,000 barrels a day, according to the U.S. Energy Dept. During a recent visit to Beijing, Chávez said shipments to the oil-hungry mainland would hit 200,000 by yearend. Chávez signed contracts with China to build 18 oil tankers and 13 new drilling rigs.

Since gaining power, Chávez has put his own mark on Citgo, which Venezuela began acquiring in 1986 to ensure a market for its crude. He has replaced many American senior managers with Venezuelans. The company, which still owns three major refineries in the U.S., is believed to be quite profitable. It earned $625 million on sales of $32 billion in 2004, the last year for which financials were made public. So far this year it has sent $400 million in dividends back to the Venezuelan government.

Last year, Venezuela considered selling Citgo, but decided against it. Unloading the company in pieces frees up cash for investment, while keeping refineries needed to process Venezuela's high-sulfur crude. "My marching orders are not to sell Citgo [but] to optimize Citgo's businesses," says Felix M. Rodriguez, Citgo's chief executive. "The U.S. has always been an important market for us. It's not our intention to leave."

Few in the oil industry believe Chávez will unload Citgo entirely. It will take years for oil importers such as China to build sophisticated refineries capable of handling heavy Venezuelan crude, notes Enrique Cira, a Caracas-based analyst for Cambridge Energy Research Associates. For that reason, Venezuela may hold onto some Citgo assets for now. But the Venezuelan strongman is unpredictable -- and determined to use oil to exert his influence in global affairs.

By Christopher Palmeri and Geri Smith


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