My World; My Life:

Today's analyst, Jephraim P. Gundzik, is president of
Condor Advisers, http://www.condoradvisers.com/
a firm that provides investment risk analysis on developing countries.

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American media attention is fixated on Venezuela's endemically deteriorating relations with the United States. In the shadow of this coverage, however,
the Chavez government has dramatically improved its foreign commercial and diplomatic ties with many countries. During the next several years, these ties
will be crucial for the development of Venezuela's petroleum sector, which has growth potential that is unrivaled anywhere in the world. Accelerating development
of the petroleum sector could make Venezuela Latin America's wealthiest country within the next decade.

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American media attention is fixated on Venezuela's endemically deteriorating relations with the United States. In the shadow of this coverage, however,
the Chavez government has dramatically improved its foreign commercial and diplomatic ties with many countries. During the next several years, these ties
will be crucial for the development of Venezuela's petroleum sector, which has growth potential that is unrivaled anywhere in the world. Accelerating development
of the petroleum sector could make Venezuela Latin America's wealthiest country within the next decade.

Weakening Links to the United States

Relations between Caracas and Washington have deteriorated continuously during the past six years. Diplomatic links have completely evaporated and have
been replaced by mutual political interference. Washington started the game by supporting President Hugo Chavez's domestic political opposition both monetarily
and strategically in 2001. This support continued through the 2005 legislative elections in Venezuela. In 2006, the Bush administration appears to have
focused its anti-Chavez support on Manuel Rosales who will run against Chavez in the December presidential election.

Chavez has also demonstrated Venezuela's ability to interfere in domestic politics in the United States. Beginning in 2005, Chavez offered subsidized heating
oil to poor Americans through Citgo, a subsidiary of Venezuela's state-owned oil company Petroleos de Venezuela (P.D.V.S.A.). In 2006, the program expanded.
Chavez has used the program to suggest that the Bush administration has little regard for the poor in the United States.

Mutual political interference has been accompanied by increasingly harsh treatment of U.S. diplomats by Venezuela and Venezuelan diplomats by the United
States. Beginning in early 2006, U.S. Ambassador to Venezuela William Brownfield began to encounter protests at official functions in Venezuela. In April
2006, Brownfield's diplomatic convoy was assaulted by motorcyclists throwing garbage, sparking a diplomatic row between Caracas and Washington. Nicholas
Burns, the U.S. undersecretary of state, said the attack had been condoned by the city government in Caracas.

In September 2006, Washington seemingly retaliated by subjecting Venezuelan Foreign Minister Nicolas Maduro to secondary screening after he arrived late
for a flight from New York's J.F.K. airport to Caracas. Maduro claimed that Port Authority officials verbally abused and strip searched him even after
he showed them his diplomatic passport. A subsequent U.S. apology was discarded by Chavez who described the incident as a provocation. The mudslinging
that preceded the incident, most notably Chavez calling Bush "the devil" at the September 2006 U.N. General Assembly in New York, continued in early October
with Chavez describing U.S. Secretary of Defense Donald Rumsfeld as a "dog of war."

The collapse in diplomatic ties has been accompanied by weakening commercial links. Venezuela is reducing its petroleum product exports to the United States
and selling its U.S.-based refining assets. Many analysts continue to believe that Venezuela's ability to redirect its oil exports away from the United
States is limited by economic factors such as the added cost of shipping oil to Asia. Although such shipments reduce Venezuela's oil export revenue by
$3 to $4 per barrel, this added cost has not reduced Venezuela's zeal for shipping increasing quantities of crude oil to Asia.

Venezuela's oil shipments to both China and India are increasing. This crude oil is not coming from increased production in Venezuela; it is being redirected
from the United States to Asia in an obvious effort by Caracas to weaken its commercial links with the United States. According to data produced by the
U.S. Energy Information Administration, U.S. imports of crude oil from Venezuela declined by five percent in 2005 compared to 2004. In the first seven
months of 2006, U.S. imports of crude oil from Venezuela declined 13 percent from the same period in 2005. This data makes it clear that Venezuela's crude
oil exports to the United States are declining.

Many analysts also believe that the concentration of Venezuela's oil refining capacity in the United States further hinders the reorientation of the country's
oil exports away from the United States. Yet, Venezuela is involved in a myriad of new refinery projects in Asia, the Middle East and in Latin America.
These new and upgraded refineries will all have the capacity to process Venezuela's crude oil. Meanwhile, Venezuela has been gradually unloading its U.S.-based
oil refineries and terminating its long-standing gasoline supply contracts.

Venezuela Opens Up to the World

The Bush administration has tried to isolate the Chavez government in order to provoke political change in Venezuela. Rather than becoming isolated from
the rest of the world, the Chavez government has worked diligently to deepen its foreign commercial and diplomatic ties with many countries. Venezuela
has signed numerous trade and investment deals with Russia, Iran, Syria, India and China. Venezuela has also expanded trade and investment with its neighbors
in Latin America. Strengthening commercial ties with many countries have also produced much stronger diplomatic ties.

Venezuela and Russia have substantial trade in military equipment. In addition, Russia's state-owned energy companies are undertaking significant investments
in Venezuela's petroleum sector. Gazprom has invested in natural gas exploration and production as well as oil production in the Gulf of Venezuela. Lukoil
has begun to drill test wells in the oil-rich Orinoco belt. Russia is also considering investing in massive oil and natural gas pipeline projects in Venezuela.

In August 2006, Venezuela and Iran agreed to jointly build an oil refinery in Indonesia. This follows an agreement by Iran to build an oil refinery in Venezuela,
which compliments the Chavez government's own plans to build three new oil refineries in Venezuela. Iran and Venezuela also agreed to jointly build an
oil refinery in Syria. Finally, Iran's state-owned oil company, Petropars, has begun to invest in petroleum exploration and development in the Orinoco
belt.

China has become a major investor in Venezuela's energy sector and is also investing in the country's transportation infrastructure, including railroads,
ports and crude oil tankers. Beijing and Caracas have also recently signed agreements paving the way for Chinese investment in Venezuela's telecom, mining
and agricultural sectors. In return for this investment, Venezuela is directing more and more of its oil exports to China. In 2004, Venezuela exported
just 12,000 barrels of oil per day to China. At the end of 2006, these exports will amount to about 200,000 barrels of oil per day.

Venezuela plans on shipping 500,000 barrels of oil per day to China by 2009. Caracas and Beijing are planning on building a joint refinery in China to process
Venezuelan heavy crude oil. In addition, the China National Offshore Oil Corporation has already begun to build a refinery capable of processing heavy
crude oil in China. China is also investing in Orinoco belt exploration and development through the China National Petroleum Company.

Venezuela has also buttressed its ties with India. In 2005, both countries agreed to jointly explore for heavy crude oil in India. Caracas agreed to invest
in India's oil refineries and has contracted to begin supplying India with Venezuelan crude oil. India's state-owned Oil and Natural Gas Company is investing
in Orinoco oil exploration and development. In Latin America, Venezuela is investing in oil refinery projects in Uruguay and Cuba. Venezuela is also undertaking
significant joint petroleum-related investments with Argentina, Bolivia and Brazil. Brazil's state-owned oil company, Petrobras, is investing in Orinoco
oil exploration and development.

The Last Frontier

Many analysts view dimly the nationalization of Venezuela's petroleum industry by the Chavez government, believing that it will induce the collapse of oil
production in the country. Assertions that oil production is already declining in Venezuela support this belief. This assertion, however, is incorrect.
Despite taking majority ownership in most of the country's joint ventures with foreign companies and significantly increasing tax and royalty rates on
these ventures, there has not been an exodus of foreign oil companies from Venezuela. Out of 33 joint operating contracts with foreign oil majors, only
two were abandoned by foreign oil companies. The remaining 31 were renegotiated on government terms.

Many analysts, including those at the U.S.-based Energy Information Agency, also believe that oil production in Venezuela is declining and that it will
never recover to the pre-strike levels of 2001. While production of conventional crude oil has declined in the past five years, this decline has been entirely
offset by increasing production of formerly unconventional extra-heavy crude oil in the Orinoco belt, which has climbed from 200,000 barrels per day in
2001 to almost 700,000 barrels per day in 2005.

This extra-heavy crude oil is refined into syncrude by several major foreign oil companies including ConocoPhillips, Chevron and Total. Combined, these
companies will have Orinoco-related investment plans worth more than $12 billion in the next three years. By the end of 2006, the operating agreements
under which these companies produce syncrude will also be renegotiated by the Chavez government leaving Venezuela with majority control and higher tax
and royalty revenue. It is unlikely that these foreign oil majors will abandon Venezuela or their future investment plans since the Orinoco belt holds
the promise of containing the largest pool of crude oil reserves in the world.

Venezuela claims that the Orinoco belt holds approximately 300 billion barrels of extra-heavy crude oil and has begun the process of certifying this claim
with seismic studies in 27 blocks conducted with the state-owned oil companies of Brazil, Iran, China and India. These studies are expected to be followed
by aggressive exploration and development. The Chavez government contends that this development will allow Venezuela to produce more than five million
barrels of oil per day by 2010.

The attractiveness of developing Venezuela's extra-heavy crude oil reserves to foreign oil majors is substantial. Those companies already producing crude
oil in the Orinoco belt have perfected the technology of extracting and refining oil that has the consistency of peanut butter. Extraction costs have plummeted
in the past five years and refining losses have been whittled down to about ten percent. Improving extraction technology and falling costs have allowed
for the sharp increase of extra-heavy crude oil production in Venezuela.

Although Canada's oil sands have been touted as the greatest potential pool of crude oil reserves in the world, development and production of these reserves
is exponentially more expensive than development and production of Orinoco belt reserves. To produce one barrel of crude oil from oil sands takes nearly
the equivalent amount of energy. In addition, recovering oil sands takes massive amounts of water to convert sand into pumpable slurry. Development of
oil sands has yet to be proven commercially viable. The same cannot be said for Venezuela's extra-heavy crude oil, which has already become a viable alternative
to lighter, sweeter crudes.

Foreign investment in Venezuela's petroleum sector, targeting primarily the Orinoco belt, is already increasing. According to statistics produced by Banco
Central de Venezuela, foreign direct investment in Venezuela increased to $3 billion in 2005 from just over $1 billion in 2004. Foreign direct investment
in the petroleum sector is expected to continue increasing during the next several years as oil majors fight to improve their extra-heavy crude oil extraction
and refining capabilities. Many countries, including China and India, have considerable untapped extra-heavy crude oil reserves.

Rapidly increasing foreign direct investment and rising crude oil production during the next several years will be an enormous boon for Venezuela's economy.
The social mission of P.D.V.S.A. should help to spread the country's new oil wealth among the population. In addition, increasing oil production will also
boost growth across all sectors of Venezuela's economy, pushing unemployment down and wages up. This places Venezuela's economic outlook above all other
Latin American countries. For this reason, Venezuela could become Latin America's wealthiest country within the next decade.

Report Drafted By:
Jephraim P. Gundzik No Trackbacks

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