Energy Security: Issues Related to Potential Reductions in Venezuelan Oil Production
Published: 2006-06-27T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Venezuela is the world's eighth-largest oil exporter and among the top 10 countries in total proven oil reserves. Venezuela also supplies about 11 percent of current U.S. imports of crude oil and petroleum products and wholly owns five refineries in the U.S. Consequently, Venezuela is a key player in the future energy security of the United States and the world. The current global oil market is tight and may be more susceptible to short-term supply disruptions and higher and more volatile prices. Recently, tension between Venezuela and the United States has caused concern about the stability of Venezuelan oil supplies. On several occasions, Venezuela's President has threatened to stop exporting oil to the U.S. or to close Venezuela's U.S.-based refineries. In this context, GAO analyzed: (1) how Venezuela's crude oil production and exports of crude oil to the U.S. has changed in recent years, (2) the potential impacts of a reduction in Venezuelan oil exports to the U.S., and (3) the status of U.S. government programs and activities to ensure a reliable supply of oil from Venezuela. Commenting on a draft of the report, the State and Commerce Departments generally agreed with the report, but DOE contended that the report presents an "alarmist view" of U.S. energy security. We disagree and believe the report presents a contextually balanced treatment of the issue.
section_title: What GAO Found
paragraphs: Venezuelan oil production has fallen since 2001, but exports of crude oil and petroleum products to the United States have been relatively stable--except during a 2-month strike in the winter of 2002-2003, during which the oil sector was virtually shut down and exports to the United States fell by about 1.2 million barrels. Energy Information Administration data show that total Venezuelan oil production in 2001 averaged about 3.1 million barrels per day, but by 2005 had fallen to about 2.6 million barrels per day. Following the strike, Venezuela's President ordered the firing of up to 40 percent of Venezuela's national oil company employees. U.S. and international oil industry experts told us that the resulting loss of expertise contributed to the decline in oil production. In 2005, the Venezuelan government announced plans to expand its oil production significantly by 2012, but oil industry experts doubt the plan can be implemented because Venezuela has not negotiated needed deals with foreign oil companies as called for in the plan. A model developed for the Department of Energy estimates that a 6-month disruption of crude oil with a temporary loss of up to 2.2 million barrels per day--about the size of the loss during the Venezuelan strike--would, all else remaining equal, result in a significant increase in crude oil prices and lead to a reduction of up to $23 billion in U.S. gross domestic product. A Venezuelan oil embargo against the United States would increase consumer prices for petroleum products in the short-term because U.S. oil refiners would experience higher costs getting replacement supplies. A shutdown of Venezuela's wholly-owned U.S. refineries would increase petroleum product prices until closed refineries were reopened or new sources were brought on line. These disruptions would also seriously hurt the heavily oil-dependent Venezuelan economy. U.S. government programs and activities to ensure a reliable supply of oil from Venezuela have been discontinued, but the U.S. government has options to mitigate short-term oil disruptions. For example, activities under a U.S.-Venezuela oil technology and information exchange agreement were stopped in 2003, in part, as a result of diplomatic decisions. In recent years, U.S. oil companies have not sought assistance from the U.S. government with issues in Venezuela because the companies do not believe that federal agency intervention would be helpful at this time. To mitigate short-term oil supply disruptions, the U.S. government could attempt to get oil-producing nations to increase their production to the extent possible, or could release oil from the U.S. Strategic Petroleum Reserve. While these options can mitigate short-term oil supply disruptions, long-term reductions in Venezuela's oil production and exports are a concern for U.S. energy security, especially in light of current tight supply and demand conditions in the world oil market. If Venezuela fails to maintain or expand its current level of production, the world oil market may become even tighter than it is now, putting further pressure on both the level and volatility of energy prices.

section_title: Letter
paragraphs: The United States imports about 13 million barrels of crude oil and refined  The United States imports about 13 million barrels of crude oil and refined  petroleum products each day, or about 65 percent of its total daily  petroleum products each day, or about 65 percent of its total daily  consumption. Venezuela is the world’s eighth largest crude oil exporter  consumption. Venezuela is the world’s eighth largest crude oil exporter  and supplies about 1.5 million barrels per day of crude oil and refined  and supplies about 1.5 million barrels per day of crude oil and refined  petroleum products, such as gasoline and fuel oil, to the U.S. market,  petroleum products, such as gasoline and fuel oil, to the U.S. market,  comprising about 11 percent of current U.S. imports. In addition,  comprising about 11 percent of current U.S. imports. In addition,  Venezuela ranks among the top 10 countries in the world in the size of its  Venezuela ranks among the top 10 countries in the world in the size of its  proven oil reserves—oil that has been proven to exist in the ground and  proven oil reserves—oil that has been proven to exist in the ground and  could be produced. Venezuela is also one of the founders and an  could be produced. Venezuela is also one of the founders and an  influential member of the Organization of the Petroleum Exporting  influential member of the Organization of the Petroleum Exporting  Countries (OPEC), whose 11 members control over three-quarters of the  Countries (OPEC), whose 11 members control over three-quarters of the  world’s total oil reserves and can greatly affect world oil prices.  world’s total oil reserves and can greatly affect world oil prices.  Consequently, Venezuela is a key player in the future energy security of  Consequently, Venezuela is a key player in the future energy security of  the United States and the world.  the United States and the world.
Most of Venezuela’s crude oil that is not consumed domestically in  Most of Venezuela’s crude oil that is not consumed domestically in  Venezuela is exported to the United States. The United States is a natural  Venezuela is exported to the United States. The United States is a natural  market for Venezuelan oil because it is so close—about 5 days by tanker to  market for Venezuelan oil because it is so close—about 5 days by tanker to  the U.S. Gulf Coast compared to about 30 to 40 days for supplies coming  the U.S. Gulf Coast compared to about 30 to 40 days for supplies coming  from the Middle East. Moreover, Venezuela’s national oil company,  from the Middle East. Moreover, Venezuela’s national oil company,  Petroleos de Venezuela S.A. (PDVSA), wholly owns five refineries in the  Petroleos de Venezuela S.A. (PDVSA), wholly owns five refineries in the  United States and partly owns four other refineries in the United States  United States and partly owns four other refineries in the United States  and U.S. Virgin Islands, either through partnerships with U.S. companies  and U.S. Virgin Islands, either through partnerships with U.S. companies  or through PDVSA’s U.S. subsidiary, CITGO, Inc. These refineries are  or through PDVSA’s U.S. subsidiary, CITGO, Inc. These refineries are  unusual in their capacity to refine large volumes of the heavy, sour (high- unusual in their capacity to refine large volumes of the heavy, sour (high- sulfur) crude oil that constitute a large part of Venezuela’s oil exports.  sulfur) crude oil that constitute a large part of Venezuela’s oil exports.
Political strife within Venezuela and political tension between Venezuela  Political strife within Venezuela and political tension between Venezuela  and the United States have caused concern about the stability of  and the United States have caused concern about the stability of  Venezuelan oil production and exports to the United States. The election  Venezuelan oil production and exports to the United States. The election  of Hugo Chavez as President of Venezuela in 1998 signaled a major change  of Hugo Chavez as President of Venezuela in 1998 signaled a major change  in how the Venezuelan government views the country’s oil industry. For  in how the Venezuelan government views the country’s oil industry. For  example, the government took steps to shift managerial authority for  example, the government took steps to shift managerial authority for  Venezuela’s oil resources from PDVSA to the Venezuelan Ministry of  Energy and Petroleum. The government also changed the way it deals with  foreign companies—it raised the maximum royalty rates paid by foreign  oil companies from 16-2/3 to 30 percent, established a new “extraction  tax,” raised income taxes for those companies, and instituted provisions  requiring joint ownership structures with majority shares for PDVSA.  Opposition to the new government culminated in a general strike that  lasted from December 2, 2002, until February 2, 2003, and virtually shut  down the oil sector of the economy. This strike temporarily decreased  world oil supplies by about 2.3 million barrels per day, or about 3.0  percent of total world daily oil supply, and reduced oil exports to the  United States by about 1.2 million barrels per day—equivalent to about 11  percent of total U.S. oil imports at the time. More recently, in April 2006,  Venezuela seized two oil fields operated by two foreign oil companies  because the companies did not comply with new rules unilaterally  imposed by the Venezuelan government.
Instability in Venezuela’s oil sector exists in a broader context of a  tightening global oil supply and demand balance. Surplus global oil  production capacity—the amount by which oil production could be  increased immediately without additional investment—was as high as 5.6  million barrels per day in 2002, but has since decreased to only about 1  million barrels a day; Saudi Arabia provides most of this surplus capacity.  Meanwhile, demand for crude oil is growing rapidly in China and other  countries. Market tightness, along with the fact that much of the world’s  supply of oil is in relatively unstable regions, may make the global oil  market increasingly susceptible to short-term disruptions and lead to  higher and more volatile oil prices. In this context, instability of oil supply  from any significant individual oil-producing country can create oil price  volatility, which can cause an economic slowdown. Studies of past oil  supply disruptions indicate that sudden increases in oil prices can  contribute to inflationary pressure and economic slowdowns. In extreme  cases, such as the large oil price increases associated with the Arab oil  embargo and Iranian revolution in the 1970s, these high prices were  associated with severe economic recessions.
Four U.S. government agencies have significant involvement in  implementing U.S. energy security policy regarding Venezuela.
The Department of Energy’s (DOE) Office of Policy and International  Affairs establishes and implements U.S. international energy policy, and is  responsible for monitoring and analyzing world energy market  developments and the international political, economic, and strategic  factors that influence these developments; managing relevant bilateral  energy relationships; and ensuring protection of U.S. interests in bilateral  and multilateral treaties and obligations that affect energy services,  commodities, and technology. Also, according to DOE officials, the office  holds dialogues with energy producers, monitors national and global  energy security, and serves as the U.S. lead in coordinating oil supply  disruption-response issues and measures with the International Energy  Agency. The Office of Fossil Energy works with various countries through  bilateral agreements to identify areas of mutually beneficial collaboration  in promoting and developing fossil energy technologies. These agreements  also facilitate relationships that may lead to commercial development. The  Office of Fossil Energy also manages the U.S. Strategic Petroleum  Reserve, which is a U.S. stockpile of about 700 million barrels of light  crude oil maintained by the federal government for use in the case of a  major disruption of oil supplies to the United States. DOE is also  responsible for collecting and analyzing data and information through its  Energy Information Administration (EIA).
The Department of State’s Office of International Energy and Commodity  Policy is responsible for coordinating U.S. international energy policy,  participating in dialogue with energy producers, and monitoring national  and global energy security. The Department of State and DOE, in  conjunction with other stakeholders, advise the National Security Council  on energy security issues, including the potential impacts of oil supply  disruptions on the U.S. economy and on possible actions that could  mitigate these impacts.
The Department of Commerce’s Office of International Trade  Administration plays a role in advising U.S. business interests seeking to  invest in Venezuela’s oil sector.
The Office of the U.S. Trade Representative and Department of State co- lead the negotiations of bilateral and multilateral treaties, which may  contain specific aspects that affect energy security, trade, and investment.
Until the strike in the winter of 2002–2003, the United States and  Venezuela had steady diplomatic contacts with respect to oil. Since then,  the relationship between the two countries has become strained. On  several recent occasions, Venezuela’s President has threatened to stop  exporting Venezuelan oil and refined petroleum products to the United  States. He also has made statements regarding the possible sale or closure  of Venezuela’s refinery interests in the United States. Furthermore,  Venezuelan officials have repeatedly made statements that they are trying  to develop new markets for their crude oil.
In the context of effects on U.S. oil supplies, we addressed the following  questions: (1) How has Venezuela’s production of crude oil and exports of  crude oil and refined petroleum products to the United States changed in  recent years, and what are the future prospects? (2) What are the potential  impacts of a reduction in Venezuelan oil exports, a Venezuelan embargo  on oil exports to the United States, or sudden closure of Venezuela’s  refineries in the United States? (3) What is the status of U.S. government  programs and activities to ensure a reliable supply of oil from Venezuela  and to mitigate the impacts of a supply disruption?
We used a number of methodological techniques to address these  questions. To address the first objective, we reviewed studies and analyses  of the Venezuelan oil sector and its history and met with officials of  numerous U.S. oil companies and other oil companies, industry experts,  and federal agency officials. In addition, we visited Venezuela and met  with the U.S. Ambassador and embassy staff; Venezuela’s Minister of  Energy and Petroleum; PDVSA officials, including the president of the  company and a number of board members and senior managers; the  Venezuelan Auditor General; members of the financial community; and  other individuals with expertise in the Venezuelan oil sector. Both in the  United States and in Venezuela, we spoke with numerous former PDVSA  employees, executives, and directors, and oil company officials. We also  collected, evaluated the reliability of, and analyzed data on Venezuelan  production, consumption, and exports of oil and petroleum products. The  sources of our data include U.S. government agencies, especially the EIA;  the Venezuelan government and PDVSA; and other international and  private sources. We deemed these data to be reliable for the purposes of  addressing our objectives. Finally, we reviewed PDVSA’s plan to expand  oil production, and collected oil industry officials’ and experts’ views on  the likely implementation of that plan.
Regarding the second objective, we reviewed studies of oil disruptions,  including studies of the impacts of the Venezuelan strike. We also analyzed  current conditions in the world oil market to evaluate what might occur if  a similar disruption occurred today. Further, we evaluated the potential  impacts of several different scenarios involving reductions in Venezuela’s  oil production or exports to the United States—(1) a sudden and severe  drop in Venezuelan oil exports from the world market, (2) a sudden  diversion of oil from the United States to other markets through an  embargo, and (3) the closure by Venezuela of its wholly-owned U.S.-based  refineries. Regarding the first scenario, we asked a DOE contractor at the  Oak Ridge National Laboratory to use an economic oil-disruption model to  analyze the impacts of a hypothetical Venezuelan oil disruption on world  oil prices and on the U.S. gross domestic product (GDP). For this analysis  we constructed a hypothetical disruption scenario similar to the one that  actually occurred during the Venezuelan oil strike in the winter of 2002– 2003, but using assumptions regarding market and economic conditions  closer to those that prevailed at the time of the analysis (late 2005). We  also analyzed data from private entities and met with numerous industry  experts in Venezuela and the United States; officials in the Departments of  State and Commerce; DOE officials; and officials in the International  Energy Agency to determine the impact of potential oil supply disruptions.
To address the third objective—identifying the status of programs and  activities to ensure a continued supply of oil and to mitigate a disruption  of imports of crude oil and refined petroleum products from Venezuela— we met with officials at the Departments of State and Commerce, DOE,  and the Office of the U.S. Trade Representative. We also talked to oil  company officials. In addition, we spoke with Venezuelan officials and  U.S. embassy staff in Venezuela. This report focuses on federal programs  and activities related to U.S. energy security. Diplomatic and political  actions that may impact U.S. energy security may be undertaken for a  multitude of foreign policy goals that are beyond the scope of this report.  Therefore, our assessment of programs and activities related to energy  security is not an evaluation of the U.S. government’s approach to these  broader goals.
To obtain the official Venezuelan government position on questions  relating to all three objectives, we made arrangements with the  Venezuelan Embassy in Washington, D.C., for an official spokesperson.
A more detailed description of the scope and methodology of our review is  presented in appendix I. We performed our work between March 2005 and  May 2006, in accordance with generally accepted government auditing  standards.
subsections: section_title: Background
paragraphs: As the United States has become more dependent on foreign sources for  crude oil, our energy security has become increasingly intertwined with  that of other countries. Crude oil is a global commodity and, as such, any  world event that increases instability in crude oil prices reduces energy  security for all oil-buying countries in similar ways. Numerous empirical  studies have shown a correlation between oil price shocks and economic  downturns. When crude oil prices rise, this pushes up prices of petroleum  products. Consumers spend more of their income on energy and less on  other goods, which can cause an economic slowdown. In addition, since  much of the oil is imported, there is a greater flow of funds overseas rather  than increased domestic spending. World oil prices have more than  doubled since 2003 and are currently higher, when adjusted for inflation,  than in any time since the early 1980s. World demand for oil is projected to  increase by about 43 percent over the next 25 years—from about 82  million barrels per day in 2004 to about 118 million barrels per day in  2030—with much of the increased demand coming from China and other  countries. Some experts believe oil prices will remain high for the  foreseeable future as suppliers struggle to increase production to keep up  with demand. In this tight demand and supply environment, even small  supply disruptions can create large increases in prices. In this way, our  energy security is tied to events in all oil-producing countries.
subsections: section_title: Venezuela Has Been a Key Player for Almost a Century
paragraphs: Oil was first produced commercially in Venezuela in the early 1900s, and  by the late 1920s Venezuela was the world’s second largest producer, after  the United States. Today, Venezuela’s 78 billion barrels of proven  reserves—crude oil in the ground that geological and engineering data  have demonstrated with reasonable certainty is able to be produced using  existing technology—are the seventh or eighth largest in the world.  Outside of the Persian Gulf, only Canada’s proven reserves are considered  greater than Venezuela’s.
In 2005, Venezuela was the world’s eighth largest exporter of crude oil.  Most of Venezuela’s crude oil that is not consumed domestically in  Venezuela is exported to the United States because of its close proximity;  additionally, Venezuela owns significant refining assets in the United  States and the U.S. Virgin Islands that can refine its heavy sour oil. In the  1980s and 1990s, PDVSA bought CITGO, Inc. and acquired interests in  several other U.S. refineries that had the ability or could be reconfigured  to refine such crude oil. Today, the refining capacity of PDVSA’s share of  the nine U.S. refineries in which it has an interest is about 1.3 million  barrels per day. For example, CITGO’s five wholly-owned refineries have a  refining capacity of about 750,000 barrels per day and market their refined  petroleum products in the United States through about 14,000  independently owned service stations using the CITGO name. In addition,  PDVSA partners directly, or through CITGO, with ExxonMobil, Lyondell,  ConocoPhillips, and Amerada Hess in the U.S. Virgin Islands. These nine  refineries buy most of the crude oil and refined petroleum products  exported by Venezuela. While the United States is unique in its capacity to  refine large volumes of the heavy crude oil that constitutes a majority of  Venezuela’s oil exports, China and other countries, such as Brazil, have  plans to build refineries that can process heavy crude oil, which, if built,  may create other attractive markets for Venezuela’s oil. In addition, the  Venezuelan government has launched several regional initiatives to  increase its export base, including (1) PetroCaribe, through which  Venezuela offers oil and some refined petroleum products to 14 Caribbean  countries with favorable financing, and (2) PetroAndina and PetroSur,  which offer oil under similar terms to, respectively, the Andean countries  of Colombia, Ecuador, and Bolivia and the South American countries of  Brazil, Uruguay, and Argentina.
The oil sector in Venezuela consists of a network of oil fields and wells  that produce crude oil, refineries to process the crude oil, and an  infrastructure to transport the crude and refined products. The bulk of  Venezuela’s production comes from the Lake Maracaibo area in the  country’s western region and from the Faja area in the Orinoco Belt in the  country’s eastern region. The crude oil is processed by PDVSA’s six  refineries in Venezuela or is exported to the United States or other  countries. Crude oil is shipped by way of 39 oil terminals from Venezuela’s  major oil ports, located in the western and eastern regions of the country.
section_title: U.S. and Other Foreign Companies Have Long Been Involved in the Venezuelan Oil Sector
paragraphs: Foreign oil companies began producing crude oil in Venezuela in the early  1900s. In 1976, Venezuela nationalized its hydrocarbon industry, bringing  control of oil—which is the main source of the country’s wealth—under  the control of the national oil company. However, beginning in 1992, the  Venezuelan government reopened its petroleum industry to foreign and  private Venezuelan oil companies in what was known as the “Apertura.”  Between 1992 and 1997, Venezuela signed 32 operating service agreements  to allow 22 private Venezuelan, U.S., and other foreign companies to  produce oil in fields that were considered, at the time, economically  marginal or high risk. The purpose of these 32 operating service  agreements was to allow foreign companies to assist PDVSA in producing  oil, and the contracts were structured so foreign-company operators did  not have any rights over the volumes, reserves, or prices of crude oil but  were reimbursed for their costs plus a service fee for production. The  Venezuelan government granted the foreign company operators an  indefinite “royalty holiday” whereby the companies paid no more than 1  percent royalty on the extracted crude, instead of the maximum of 16-2/3  percent at the time.
Also during this period, PDVSA entered into four joint ventures with  foreign companies, including ExxonMobil, ConocoPhillips, and  ChevronTexaco from the United States, to produce crude oil in the Faja.  These joint ventures, whose majority shares were owned by the foreign oil  companies, were considered high risk at the time, in part due to the  challenges of producing “extra-heavy” sour oil from the Faja, which is  among the lowest quality oil commercially produced anywhere in the  world. Venezuela’s extra-heavy Faja oil has higher density (is “heavier”)  and has a higher sulfur content than most commercially produced crude  oil. Commercial production of extra-heavy oil is relatively expensive— pumping it from the ground requires the use of techniques to improve its  flow characteristics and readying it for market requires “upgrading” to  prepare it for final refining. During upgrading, the extra-heavy crude oil is  processed to make it lighter and remove much of its sulfur content. In  1997, foreign companies began to produce extra-heavy sour crude oil in  Venezuela’s Faja region, and, by 2005, the four joint ventures were  producing about 600,000 barrels per day of Faja crude. The projects in the  Faja also paid only 1 percent royalty instead of 16-2/3 percent. Extra-heavy  crude from the Faja region is also used to produce Orimulsion, a boiler  fuel that is a mixture of bitumen and water. Orimulsion is marketed  internationally, especially to China.
Effective January 2002, a new law governing Venezuela’s hydrocarbon  industry went into effect. The new law increased maximum royalties from  16-2/3 percent to 30 percent, and increased the percentage of ownership  by PDVSA in all operating arrangements with foreign and domestic  companies to at least 51 percent. In 2005, the Venezuelan government took  steps to make foreign and domestic companies migrate from the terms of  the existing 32 operating service agreements to the terms of the new law.  Essentially, beginning in 2006, the companies that had been paying no  more than 1 percent in royalty fees under the operating service  agreements had to pay as much as 30 percent. Also, instead of paying 34  percent in income taxes as service providers, the foreign companies had to  pay 50 percent as part owners in the joint ventures. If the foreign  companies did not comply with the new rules, the Venezuelan government  took control of the operations. While the new rules had not been applied  to the four joint ventures in the Faja, in March 2005 the Faja projects  began paying 16-2/3 percent royalties. Also, in May 2006, the Venezuelan  government established a new extraction tax in addition to the 50 percent  income tax. According to a Venezuelan spokesperson, the extraction tax is  33.33 percent applied to well production, but royalty fees are deducted  from this tax. The Venezuelan tax authority also issued bills for millions of  dollars in back taxes to foreign companies conducting production  activities under the 32 operating service agreements after the effective  date of the law.
section_title: Political Situation in Venezuela
paragraphs: The oil industry is capital-intensive and heavily dependent on continuous  investment to maintain existing wells, establish new wells for crude oil  production, and develop and maintain the infrastructure supporting the  production network. According to the EIA, PDVSA is Venezuela’s largest  employer and accounts for about one-third of the country’s GDP, about 50  percent of the government’s revenue, and 80 percent of Venezuela’s export  earnings. PDVSA stated in 2005 that it plans to invest $26 billion to expand  its oil production to 5.8 million barrels per day by 2012.
After Hugo Chavez was elected president of Venezuela in 1998,  responsibility for the oil industry changed. Managerial authority for the  petroleum industry was shifted from PDVSA to the Venezuelan Ministery  of Energy and Petroleum; the way Venezuela does business with foreign  companies also changed, as discussed previously. Domestic resistance to  the Chavez administration and the changes in hydrocarbon sector  oversight resulted in a 63-day strike by nearly half of PDVSA workers in  the winter of 2002–2003. Oil production almost completely stopped, as oil  wells stopped pumping, refineries closed, oil tankers stopped running, and  storage facilities reached full capacity. The strike caused a temporary  decrease in world oil supplies of about 2.3 million barrels per day, an  amount equivalent to about 3.0 percent of total world daily oil supply.
section_title: Involvement of International Organizations
paragraphs: Venezuela is a founding member of OPEC, which controls about 40  percent of the world’s estimated 84 million barrels of production.  Venezuela is the third largest producer within OPEC, according to EIA  data. OPEC can wield great power in the international oil market,  particularly by setting production quotas for its member countries to raise  and lower the supply of oil, thereby influencing world oil prices. During  the mid-1990s, Venezuela was suspected of weakening oil prices by  producing above the country’s quota. Since Hugo Chavez became  President of Venezuela, the Venezuelan government has favored stricter  adherence to OPEC quotas, and currently Venezuela is considered a price  hawk in the ranks of OPEC, generally favoring production restraint to  keep oil prices relatively high.
Energy security is a national priority for the United States, and the United  States has long had programs and activities designed to foster energy  security. The United States government also strives to enhance  cooperation with energy consuming and producing governments to  mitigate the impact of supply disruptions and to support U.S. and world  economic growth. The United States is a member of the International  Energy Agency, an organization comprised of Organization of Economic  Cooperation and Development countries that was established to cope with  oil supply disruptions and coordinate an international response in case of  a disruption to the global oil supply market. International Energy Agency  member countries hold about 4.1 billion barrels of oil stocks, and for a  limited period can release an amount equivalent to 10 percent of global  demand each day in case of a disruption.
section_title: Venezuelan Government Actions Have Decreased Crude Oil Production, but Exports to the United States Have Changed Little
paragraphs: Venezuelan oil production has fallen since 2001, largely as a result of  actions by the Venezuelan government. Since that time the production of  Venezuelan crude oil decreased in oil fields operated by PDVSA and  increased in fields operated by foreign companies, but, as of 2005,  increased production by foreign companies was not enough to bring total  Venezuelan oil production back to the prestrike level. Despite production  declines, exports of crude oil and refined petroleum products to the  United States since shortly after the strike have remained close to  prestrike levels of about 1.5 million barrels per day. The Venezuelan  government announced plans in 2005 to expand its oil production and  exports significantly by 2012, but most experts with whom we spoke  doubted Venezuela’s ability to implement the expansion plan in the near  term.
subsections: section_title: Venezuela’s Total Crude Oil Production Has Fallen since 2001, Largely as a Result of Venezuelan Government Actions
paragraphs: Data from EIA, the International Energy Agency, OPEC, and the  Venezuelan government all indicate that Venezuelan crude oil production  decreased between 2001 and 2005. For example, EIA data show that  production decreased from 3.1 million barrels per day to 2.6 million  barrels per day, reflecting a decrease of about .5 million barrels per day, or  16 percent. OPEC, International Energy Agency, and Venezuelan  government data all indicate varying but higher levels of production in  2005. While Venezuelan production figures should be the most accurate  because they have access to all the production data, many oil industry  officials and experts told us that Venezuelan government figures have been  overstated. Figure 1 shows production levels for 2001 through 2005 from  four sources and illustrates the drop in production as a result of the strike  and the recovery following the strike.
While there are differences of opinion and uncertainty about the accuracy  of available production data, other data also support a significant decline  in production. For example, international financial data show that foreign  investment in Venezuela declined between 2001 and 2004. Specifically, net  foreign direct investment in Venezuela was about $3.5 billion in 2001,  declined to almost zero in 2002, and recovered to about $1.9 billion in  2004, the last year for which investment data are available. Because we  were unable to obtain reliable, independent data on specific investment in  Venezuela’s oil and gas sector, we analyzed total foreign investment in  Venezuela as a proxy for the condition of the oil sector. Our analysis  indicates a high correlation between Venezuelan oil production and net  foreign investments in Venezuela. In addition, experts told us that there is  a high correlation between the number of active oil drilling rigs and oil  production. However, the number of active rigs fell sharply during and  after the strike and, as of 2005, had not returned to their 2001 levels.  Specifically, there was an average of 66 active drilling rigs in Venezuela in  2001; the number of rigs fell to as low as 12 during the height of the strike  in January 2003; and the average increased to 60 in 2005. This provides  further evidence that Venezuela’s oil production has decreased.
The Venezuelan government’s firing of thousands of PDVSA employees  following the strike contributed to the decline in production. The  government dismissed about 40 percent of PDVSA’s approximately 40,000  employees, including many management and technical staff. Experts told  us that the loss of managerial and technical expertise caused a rapid  decline in the company’s oil production from existing fields. In fact, some  said that the loss of expertise was so critical that after the strike, PDVSA  was unable to issue invoices for contractor services.
Venezuelan officials told us that strikers did deliberate damage to the  company and that this sabotage accounts for some of their difficulties  since the strike. PDVSA employees with whom we spoke, some of whom  were fired and others who resigned, disputed the claims of sabotage and  said that strikers had originally planned only a two- or three-day strike, but  that the government shut them out before they could return to work.  Venezuelan officials acknowledged that the loss of expertise initially  hampered operations and said that they have been replacing and training  lost workers as quickly as possible. However, many industry experts told  us that a black list of former PDVSA managerial and technical staff that  the Venezuelan government will not rehire is limiting Venezuela’s ability to  acquire the necessary staff to meet its production goals. In addition,  officials from foreign oil companies with operations in Venezuela told us  that since the strike, PDVSA has become highly politicized and that PDVSA  officials are often slow to make key decisions, which have complicated  foreign companies’ decisions to invest in the Venezuelan oil sector. Many  oil industry officials told us that PDVSA’s lack of managerial and technical  expertise still remains one of the biggest challenges in continuing  operations in Venezuela with PDVSA as a partner. In addition, experts told  us that Venezuela had underinvested in oil field maintenance since the  early 1990s, and that this had contributed to PDVSA’s declining  production.
section_title: Declines in Production by PDVSA Have Been Partly Offset by Increases in Foreign Oil Companies’ Production, but Not by Enough to Reach the PreStrike Production Level
paragraphs: Data from EIA, the International Energy Agency, OPEC, and the  Venezuelan government indicate that, from 2001 through 2005, Venezuelan  crude oil production controlled by PDVSA decreased, while production  controlled by foreign companies increased. For example, using EIA data  as the base for total Venezuelan crude oil production, of 3.1 million barrels  of crude oil produced per day in 2001, PDVSA produced about 2.4 million  barrels per day (or 77 percent), and foreign companies produced about .7  million barrels per day (or 23 percent). By 2005, these data indicated that  of 2.6 million barrels produced per day, PDVSA produced about 1.5 million  barrels per day (or about 58 percent), and foreign companies produced  about 1.1 million barrels per day (or 42 percent). International Energy  Agency, OPEC, and Venezuelan government data show similar trends, but  the relative proportion of PDVSA’s production differs because each of  these data sources reflects a different total volume of Venezuelan crude oil  production. All of the data sources indicate that increases in production by  foreign companies were not enough to totally offset decreases in PDVSA’s  production, resulting in a net crude oil production loss. Figure 2 shows the  increase in foreign companies’ production and decrease in PDVSA’s  production for 2001–2005 using EIA’s figures as the base for total  production.
section_title: Venezuela’s Exports of Crude Oil and Refined Petroleum Products to the United States Have Remained Relatively Stable in Recent Years
paragraphs: Since shortly after the Venezuelan strike ended, Venezuela’s exports of  crude oil and refined petroleum products to the United States have  remained close to the prestrike levels. EIA data show that Venezuelan  exports of crude oil and refined petroleum products to the United States  (excluding the Virgin Islands) have fluctuated month-to-month, but prior  to the strike had averaged about 1.5 million barrels per day. These exports  reached a low of about .4 million barrels per day during the strike, but by  April 2003 had returned to approximately the average prestrike level.  Specifically, EIA data show that such Venezuelan exports averaged  between 1.5 million and 1.6 million barrels per day between April 2003 and  August 2005, as shown in figure 3. The EIA data also show that Venezuela  exports most of its crude oil to the United States. For example, the data  show that exports to the United States accounted for about 66 percent of  Venezuela’s total exports of crude oil in 2004. Most of Venezuela’s  exported crude oil goes to refineries on the U.S. Gulf Coast that are owned  wholly or partially by the Venezuelan government.
Venezuelan government data show that, like exports to the United States,  Venezuelan domestic consumption has remained close to the prestrike  level—about .5 million barrels per day. Given that Venezuelan crude oil  production has decreased and Venezuelan domestic consumption and  exports to the United States have remained relatively constant since  shortly after the strike, most of the loss of Venezuelan crude oil must have  been absorbed by decreased Venezuelan exports to countries other than  the United States. Some oil company officials also told us that in recent  years there have been smaller amounts of Venezuelan oil available for  purchase on world spot markets, which would also indicate that less  Venezuelan oil is going to non-U.S. markets. Venezuelan officials gave us  data that showed exports to non-U.S. markets were greater than EIA’s  numbers, but we were unable to verify the Venezuelan data.
section_title: Future Venezuelan Production Is Uncertain
paragraphs: The Venezuelan government announced plans in 2005 to expand its oil  production to 5.8 million barrels per day by 2012, which is more than  double the figure reported by EIA for 2005. Some industry experts told us  that the expansion plan is technically feasible and that Venezuela’s oil  revenue in recent years has been sufficient to fund the plan. However,  many oil industry officials and experts expressed doubt about the  government’s ability to implement the expansion plan in the near term for  several reasons.
According to Venezuelan officials, as of late 2005, no agreements had been  signed or investments made to start implementing the major oil production  expansions detailed in the plan; experts told us that, without agreements,  the plan will face significant delays, at best. The absence of such deals  increases the likelihood that Venezuelan oil production will continue to  fall because, given that PDVSA’s own production is in decline, Venezuela  needs willing foreign oil company partnership to maintain its current level  of oil production.
PDVSA has not been able to maintain its own level of oil production in  recent years. U.S. and international oil industry officials and experts, as  well as Venezuelan government officials, told us that PDVSA faces  significant challenges in overcoming the 20 to 25 percent per year rate of  production decline in its mature oil fields. Venezuelan officials and other  experts told us that Venezuela faces a challenge in overcoming the normal  decline in productivity of its older fields, especially in the Maracaibo area  where oil production dates back to the 1920s.
Future foreign investment is uncertain given the Venezuelan government’s  recent decision to unilaterally change its business dealings with foreign  companies. Beginning in 2005, the Venezuelan administration took steps to  make private Venezuelan and foreign companies producing crude oil  under the 32 operating service agreements renegotiate those agreements.  Essentially, the new agreements increase the maximum royalty from 16-2/3  percent to 30 percent, increase income taxes from 34 percent to 50  percent, and give PDVSA at least a 51 percent share of the operations  covered by the agreement. Oil industry officials and experts have generally  reacted negatively to the changes in the agreements. Most company  officials we contacted told us that Venezuela’s move to unilaterally impose  new agreements increased their risk and eroded the investment climate in  Venezuela, likely leading to future production declines. Many oil industry  officials and experts told us that the changes in the foreign company  participation structure, such as mandating a majority share of the  operation for PDVSA, pose investment risks and uncertainty for foreign  companies because the Venezuelan government has ultimate control in  decisionmaking. When France’s Total and Italy’s Eni oil companies failed  to sign new agreements, the Venezuelan government seized control of  their operations in April 2006; five other fields were turned over to PDVSA  after negotiations, according to the Venezuelan spokesperson. Also,  ExxonMobil and Norway’s Statoil chose to sell their minority stakes in  smaller fields rather than accept Venezuela’s required changes.  Furthermore, in May 2006, the Venezuelan Congress approved a new oil   extraction tax. According to the Venezuelan spokesperson, the extraction  tax is 33.33 percent applied to well production, with royalty fees deducted  from this tax.
Venezuela’s decision to spend a significant part of its oil revenues on  social programs such as education and health care, instead of reinvesting  it in the oil industry, could slow further development of the country’s oil  sector. Venezuela’s new hydrocarbon law imposes significant social  commitments on PDVSA. Venezuelan government officials told us that  they directly spent about $3.7 billion of oil revenues on social programs in  2004 and about $5 billion on social programs in 2005. This spending was in  addition to money companies paid to the Venezuelan government as  royalties and income taxes, and therefore reduces the amount of funds  available for investing in oil production.
Future production could be impaired by the Venezuelan government’s  preference to use national oil companies from developing countries (such  as China) and other geopolitically strategic countries (such as Brazil) as  partners to explore and develop new fields in Venezuela, instead of relying  on experienced international oil companies. Several oil industry officials  and experts told us that national oil companies generally do not have the  expertise of the international oil companies to develop heavy oil fields.
section_title: A Drop in Venezuelan Oil Exports Would Have Worldwide Impacts, while Impacts of a Venezuelan Embargo against the United States or Closure of Its U.S. Refineries Would Be Felt Primarily in the United States and Venezuela
paragraphs: The potential impacts of a disruption of production and exports of  Venezuelan crude oil and petroleum products on world oil prices and on  the U.S. economy would depend on the characteristics of the disruption.  The greatest impacts would occur if all or most Venezuelan oil were  suddenly removed from the world market due to a Venezuelan oil industry  shutdown. A Venezuelan oil embargo against the United States would have  smaller impacts that would primarily affect the United States. Similarly, if  Venezuela shut down its U.S. refineries, the impacts would be felt  primarily in the United States. Venezuela would suffer severe economic  losses from all three types of disruption, especially a shutdown of its oil  production.
subsections: section_title: A Sudden Drop in Venezuelan Oil Production Would Have Significant Worldwide and U.S. Impacts
paragraphs: Given the current tight global supply and demand conditions, a sudden  loss of all or most Venezuelan oil from the world market, for example due  to a strike, would, all else remaining equal, result in a marked spike in  world oil prices and a decrease in the growth rate of the U.S. economy as  measured by GDP. Because Venezuela’s economy is so dependent on its  oil sector, Venezuela would likely try to restore oil production as quickly  as possible following a strike or similar disruption to avoid large losses of  export revenues.
A model developed for DOE by a contractor, using a hypothetical oil  disruption scenario that we developed to resemble the disruption caused  by the Venezuelan strike during the winter of 2002–2003, predicted that, by  the second month of a disruption, worldwide crude oil prices would  temporarily increase by about $11 per barrel—from an assumed pre- disruption price of $55 per barrel to almost $66 per barrel. The increase  in world crude oil prices would, in turn, drive up prices of refined  petroleum products. Later, as the lost oil was replaced with oil from other  sources or production resumed, the price of crude oil would return to the  previous level. The model further predicted that the temporary increase in  world oil prices caused by a disruption would lower the U.S. GDP by about  $23 billion relative to what it would have been otherwise—about $13  trillion. A loss of this magnitude for a given year is likely to cause a small  decline in the growth rate of the U.S. economy, but is unlikely to result in a  recession. In this analysis, the rate of GDP growth would be about 0.18  percent less than what it would have otherwise been for the year.
Our hypothetical disruption scenario lasts only a few months because  Venezuela, like any other country that is heavily dependent on oil revenue,  is likely to exert a great effort to end any severe disruption of crude oil  production. The country’s economy in general, and government revenues  in particular, depend heavily on the revenues that the country obtains  from petroleum production and exports. For example, oil revenues  accounted for between 45 and 50 percent of Venezuelan government  revenues in recent years. A severe drop in oil revenues for more than a few  months would cripple the economy, resulting in lower economic growth  and lost jobs; Venezuelan authorities would consider a prolonged oil  industry shut down as a very grave threat to the government and to the  country as a whole. Indeed, PDVSA officials told us that they restored  most of their lost production during the first few months after the strike.
It should be noted that the model somewhat understates the impacts on  the United States of a sudden and severe loss of oil from Venezuela  because it treats any disruption of oil supplies as equal, regardless of the  location or the characteristics of the lost oil. In other words, the model  does not differentiate between heavy sour crude oil (such as that  produced in Venezuela) and any other type of crude oil—for example,  “Arab Medium” (which is Saudi Arabia’s medium-quality crude oil). Thus,  the model does not consider the economic cost of replacing, for example,  100,000 barrels of heavy sour oil with the same amount of lighter, sweeter  oil. In fact, Arab Medium may cost more than some Venezuelan crude oils  because of its higher quality, and because the transportation cost of a  barrel of oil from Saudi Arabia is higher than that of a barrel of oil from                                                                                                                                     Venezuela. In addition, there may be an economic penalty associated with  some U.S. refineries’ switching from their normal significant reliance on  Venezuelan oil to replacement oil from alternative sources. For example,  one U.S. oil company that refines Venezuelan crude oil ran its refinery  optimization model for us to illustrate the impact of switching crude oil  types on its refining costs. Its model showed that replacing a large quantity  of the Venezuelan oil that it uses on a regular basis with oil from Mexico  and the Middle East would cause a 7 percent drop in the capacity  utilization of one of its refineries. This would reduce supplies of petroleum  products, putting upward pressure on consumer prices.
The DOE contractor who developed the model acknowledged that the  model does not account for the effects of higher transportation costs or  changes in refinery capacity utilization caused by switching from one type  of crude oil to another. He said that higher transportation costs and  switching crude oil types could result in larger impacts than the model  predicts, but that the price impact of switching crude oil types is not  understood well enough to be accurately modeled and is likely to be small.
We also did an analysis of the impact of the same hypothetical Venezuelan  disruption scenario on world oil price and on U.S. GDP using parameters  developed by EIA to evaluate oil price disruptions. EIA has also done  similar analyses, including (1) a slightly larger oil supply disruption and (2)  an analysis of the impacts of the actual Venezuelan strike. The impacts on  the price of oil are quite close in all the analyses. However, the impacts on  U.S. GDP vary significantly as a result of differing assumptions about how  sensitive the economy is to increases in oil prices. DOE officials told us  that the impact of such a disruption on the U.S. economy would likely fall  somewhere between the estimates derived in the model and our analysis.  The results of the analyses and studies are shown in table 1.
section_title: A Venezuelan Oil Embargo against the United States Would Have Smaller Impacts, Primarily in the United States
paragraphs: An EIA analysis shows (and several industry experts told us) that a  Venezuelan oil embargo against the United States would have a smaller  impact on oil prices than a sudden and severe drop in production. The  impact of an embargo would be smaller because the Venezuelan oil would  go to other destinations instead of being taken off of the world market.  However, since most replacement supplies are farther away than  Venezuela, U.S. oil refiners would experience higher costs and delays in  getting oil supplies; such an embargo would therefore increase U.S.  consumer prices for gasoline and other petroleum products in the short  term. Also, as discussed previously, some U.S. refineries that are designed  to handle large amounts of Venezuelan heavy sour crude oil would operate  less efficiently if they had to switch to different types of crude oil.
EIA’s March 2005 analysis estimated that a Venezuelan oil embargo against  the United States would cause the price of West Texas Intermediate crude  oil (a commonly used benchmark oil) to increase in the short term by $4 to  $6 per barrel from the then-current price of $53 per barrel—an increase of  between 8 to 11 percent, as opposed to the 19 to 34 percent increase  associated with a sudden and severe loss of oil. The price would rise  because the embargo would cause (1) higher transportation costs resulting  from longer distances to transport oil from locations farther away than  Venezuela; (2) refinery inefficiencies resulting from switching crude oil  types; and (3) a market psychology premium reflecting fears of further  escalation.
The EIA analysis did not quantify the impact of an oil embargo on U.S.  prices of gasoline and other refined petroleum products. However, an  increase in U.S. crude oil prices by 8 to 11 percent per barrel would raise  costs of refined petroleum products to the extent that the increase would  be passed on to the consumer. All else being equal, such an increase would  add 11 to 15 cents to the price of a gallon of gasoline, assuming the  conditions in March 2005.
DOE officials told us that their analysis assumes the $4 to $6 per barrel  increase would last as long as the disruption. However, adjustments would  reduce this price impact over time. Refineries, for example, could  reconfigure some of their processes and make other adjustments over time  to improve their ability to efficiently handle replacement crude oil types.  Transportation costs could also adjust over time. For example, Venezuela  likely could switch from the relatively small tankers used for the short  haul to the United States to very large tankers to move its oil to more  distant locations, thereby helping offset Venezuela’s increased  transportation costs for shipping the oil longer distances.
A Venezuelan oil embargo against the United States would also affect the  Venezuelan economy, but the impact would not be as great as the impact  of a sudden loss of oil. According to a U.S. company that produces oil in  Venezuela, such an embargo would reduce PDVSA’s oil revenues from  between $3–4 billion dollars per year due to the following factors:    Refinery operations that Venezuela wholly and partly owns in the United  States, which take about 70 percent of Venezuela’s oil exports to the  United States, would be adversely affected by the embargo because they  would have to obtain crude oil from locations farther away than Venezuela  and the replacement crude oil would likely be of a different quality.
Venezuela’s crude oil revenues would be adversely affected by the higher  cost of transporting oil to locations farther away than the United States  market.
In addition, oil company officials and industry experts told us that few  countries have significant refining capacity that is designed to efficiently  process the heavy sour oil from Venezuela. Therefore, it would be difficult  for Venezuela to find markets for all the oil it currently exports to the  United States.
section_title: Closure of Venezuela’s U.S. Refineries would Increase U.S. Petroleum Product Prices and Reduce Venezuelan Revenue
paragraphs: If Venezuela shut down its wholly-owned U.S. refineries, the supply of  gasoline and other refined petroleum products made from crude oil would  decrease and, correspondingly, the prices of these refined petroleum  products in the United States would increase. Venezuela wholly owns five  refineries in the United States through its PDVSA subsidiary, CITGO, and  these account for about 750,000 barrels per day of refining capacity—4  percent of total U.S. refining capacity. The impacts of shutting down  CITGO refineries would continue until the closed refineries were reopened  or new sources of refined petroleum products were brought on line. The  impacts would be obviously most severe in the United States, although  increased demand by U.S. oil companies to buy petroleum products from  other countries could cause prices to rise in those countries as well.  Venezuela would also lose the profits of these refineries for as long as they  were shut down, and could face sanctions by the U.S. government— including freezing Venezuelan assets in the United States—if the closure of  the refineries were deemed a threat to U.S. security.
We identified no studies of the impacts of oil refinery shutdowns on the  prices of refined petroleum products, but a shutdown of several large U.S.  refineries as a result of hurricanes Katrina and Rita in 2005 clearly  contributed to sharp increases in U.S. fuel prices. For example, Hurricane  Katrina caused a shutdown of 879,000 barrels per day, or 5.2 percent of  U.S. refining capacity. Figure 4 shows that following hurricanes Katrina  and Rita in late August and late September 2005, gasoline prices increased  by over $1 per gallon on the U.S. Gulf Coast Wholesale Market. While  these price spikes are indicative of what can happen in the event of  refinery shutdowns, it must be noted that there were other very important  disruption factors that affected these prices—such as major pipeline  shutdowns and damage—which make it difficult to isolate the impact of  the refinery shutdowns.
section_title: U.S. Government Programs and Activities to Ensure a Reliable Long-Term Supply of Crude Oil from Venezuela Have Been Discontinued, but the Government Has Options to Mitigate Supply Disruptions in the Short Term
paragraphs: The U.S. government has programs and activities intended, in part, to  ensure a reliable long-term supply of oil from Venezuela and other oil- producing countries to U.S. and world markets; these programs include  bilateral technology and information exchange agreements, bilateral  investment treaties, and multilateral energy initiatives. However, these  programs and activities have not been pursued with regard to Venezuela in  recent years. The U.S. government has options to mitigate the impacts of  short-term oil disruptions to global oil supplies, such as the disruption  caused by the Venezuelan strike. These options include diplomacy to  persuade oil-producing countries to increase production and using oil in  the U.S. Strategic Petroleum Reserve, with or without the release of oil  from other International Energy Agency countries’ strategic reserves.  However, none of the U.S. government agencies, and few of the U.S. oil  companies that we contacted, have contingency plans specifically to  mitigate a Venezuelan oil disruption, although DOE conducts analyses of  the effects on the market of potential supply disruptions.
subsections: section_title: U.S. Programs and Activities to Ensure a Long-Term Supply of Venezuelan Crude Oil for the United States Were Discontinued
paragraphs: The United States has had a bilateral technology and information  exchange agreement with Venezuela since 1980, and this agreement was  expanded in 1997 to include policy dialogue on topics such as energy data  exchange, natural gas policy, and energy efficiency. Also, in the 1990s, the  two countries entered negotiations for a bilateral investment treaty and  worked together under the multilateral energy initiative to organize  hemisphere-wide meetings on energy security. By 2004, however, these  programs and activities had been discontinued as the result of strained  relations between the two countries and diminished technical capacity in  Venezuela.
subsections: section_title: Oil Production Technology and Information Exchanges between the United States and Venezuela Occurred until 2003
paragraphs: According to DOE, it maintains bilateral technology and information  exchange agreements with Venezuela and 21 other oil-producing  countries: Angola, Argentina, Australia, Azerbaijan, Brazil, Canada, China,  Equatorial Guinea, Kazakhstan, India, Italy, Iraq, Mexico, Norway,  Pakistan, Peru, Russia, Saudi Arabia, the United Kingdom, Ukraine, and  West Africa/Nigeria. DOE officials told us that bilateral technology and  information exchange agreements are generally designed to offer avenues  to leverage publicly funded domestic research, accelerate scientific  achievement through technical cooperation, and support U.S. economic  competitiveness by providing U.S. scientists with opportunities to gain  access to (and build upon) other countries’ research. They also said that  the agreements with four countries—Venezuela, China, Canada, and  Mexico—include provisions for cooperation on oil and natural gas  recovery technology that DOE requires be based on joint research of  mutual benefit. In the case of Venezuela, the specific purpose of the  bilateral technology exchange agreement was to cooperate on oil and gas  technology and, after 1997, incorporate policy dialogue on such issues as  the exchange of information regarding the design and implementation of  energy regulatory systems, the development and evaluation of energy  resources and production, and the application of alternative energy  sources. DOE headquarters and field staff told us that the technical  exchanges between the United States and Venezuela under the agreement  were robust. For example, meetings were held about twice annually where  technical staff from both countries exchanged information.
Since November 21, 2003, however, no formal meetings of the countries’  technical staff have occurred. DOE headquarters and field officials told us  they were directed in 2003 by DOE headquarters to stop activities under  the agreement to accommodate diplomatic decisions. In addition, DOE  officials also told us that the last few technical meetings involved very  little exchange of technology information. Specifically, they said that after  the Venezuelan government fired a significant number of technical  employees following the Venezuelan strike, DOE technical staff had  difficulty identifying technical counterparts in Venezuela to maintain  activities under the agreement.
Venezuelan officials told us that attempts to encourage DOE to continue  activities under the technology exchange agreement were unsuccessful.  For example, Venezuela sent two letters to DOE in 2005 to arrange  meetings between Venezuela’s Minister of Energy and Petroleum and the  Secretary of DOE, but DOE’s response to one letter stated that the  Secretary of DOE was unable to meet, and, according to the Venezuelan  spokesperson, DOE did not respond to the other letter. Also, the  Venezuelan spokesperson told us that in November 2003, Venezuela  presented DOE with a plan to reactivate projects under the agreement but  DOE demonstrated no interest. The spokesperson also said that in March  2006, DOE officials told PDVSA’s vice president of production that DOE  would not resume activities under the agreement until the political  relationship between Venezuela and the United States improved. DOE  officials confirmed this, but said DOE also told PDVSA’s vice president of  production that part of the reason activities could not be resumed was  because DOE research on technology to extract extra-heavy oil and gas  was not a high priority, as it had been at one time, because high energy  prices removed the need to subsidize such research.
section_title: Negotiations for a Bilateral Investment Treaty Ceased in 1999
paragraphs: According to Department of State and the Office of the U.S. Trade  Representative officials, informal bilateral investment treaty discussions  with Venezuela began in 1992 and formal negotiations began in October  1997. The United States has bilateral investment treaties in force with 39  countries, including many oil- and gas-producing countries such as Bolivia,  Kazakhstan, Trinidad and Tobago, and the Ukraine. These treaties provide  rules on investment protection, binding international arbitration of  investment disputes, and repatriation of profits, and assist U.S. companies  doing business in foreign countries. In our 1991 report on Venezuelan  production and conditions affecting potential future U.S. investment there,  we observed that most of the 22 oil companies with whom we spoke  during that effort told us that a bilateral investment treaty would help  increase their investment protection. In that report, we also noted that an  official in the Office of the U.S. Trade Representative said that, in order for  negotiations to be successful, Venezuela would have to meet standards set  forth in the model U.S. treaty—including provisions prohibiting  nationalization of property, providing for repatriation of profits, and  providing for international arbitration to resolve disputes.
U.S. and Venezuelan government officials said that bilateral investment  treaty negotiations broke down in 1999 because of significant policy   differences between the two countries. A Venezuelan spokesperson and  U.S. officials identified three major differences, including the model treaty  provisions relating to performance requirements, such as rules stipulating  minimum content requirements and obligations to compensate investors  for damage done by internal strife.
In May 2001, the U.S. National Energy Policy Development Group  recommended that the United States conclude bilateral investment treaty  negotiations with Venezuela. Department of State officials told us that  later in 2001, when they revisited the issue in response to this  recommendation, they made an effort to reengage Venezuela, but the  effort proved unsuccessful because of continued major differences  between the two countries. Department of State officials said they decided  that the probability of negotiating a treaty that contained the high  standards the United States expects was very unlikely, and they pursued  the treaty no further.  Department of State officials told us that in bilateral  investment treaty negotiations generally, it is overall policy to insist on the  high standards contained in the U.S. model treaty to avoid a dilution of  standards across agreements.
Many oil company officials and experts said that a bilateral investment  treaty could have helped protect oil companies’ investments in Venezuela  when the Venezuelan government unilaterally required them to change  their existing operating service agreements to comply with the new  hydrocarbon law. For example, officials from one U.S. oil company said  new agreements that companies were required to sign did not contain  provisions allowing international arbitration to settle disputes. The  officials said their company was concerned about the fairness of having  Venezuelan arbitrators settle disputes between U.S. companies and PDVSA  or the Venezuelan government. International arbitration was required  under the company’s old agreements, and the current U.S. model bilateral  investment treaty provides for it. Some U.S. oil company officials also told  us that some companies are considering incorporation in other countries  that have bilateral investment treaties with Venezuela, such as the United  Kingdom and the Netherlands, because the treaties would help protect  their investments. Similarly, some oil experts also told us companies from  countries with bilateral investment treaties have assurances that they can  repatriate profits if Venezuela seizes control of their operations.
section_title: The United States and Venezuela Participated in the Multilateral Hemispheric Energy Initiative until 2004
paragraphs: In 1994, DOE and the Venezuelan Ministry of Energy and Petroleum  became the principal coordinators of what was known as the Hemispheric  Energy Initiative. The goal of this activity was to stimulate dialogue and  cooperation on energy issues among countries in the Western Hemisphere  and identify and promote actions to foster regional interconnections  through the development of energy sector projects in the hemisphere. As  the coordinators, DOE and Venezuela’s Ministry of Energy and Petroleum  organized a series of hemispheric-wide summit meetings to discuss energy  cooperation beginning in 1995. For example, at the third hemispheric  meeting in Caracas, Venezuela, in January 1998, officials from the 26  countries in attendance agreed to promote policies that facilitated trade in  the energy sector and facilitate the development of the energy  infrastructure, develop regulatory frameworks that are transparent and  predictable, and promote foreign private investment in the sector  throughout the hemisphere. DOE officials told us that this initiative ended  with the meeting in Mexico in 2002, but that, in 2004, Trinidad offered to  host a meeting of hemispheric energy ministers in a less formal setting to  discuss energy security. The meeting, which was held in Trinidad and  Tobago in April 2004, was organized by DOE and Trinidad, without  Venezuela playing a significant role organizationally. The meeting focused  on hemispheric energy security and included high-ranking energy officials  from 35 countries, including the United States, Canada, Mexico, and  Venezuela, as well as other key energy-producing countries from Central  and South America. DOE officials told us that, during the meeting,  Venezuela’s Minister of Energy and Petroleum met with DOE’s Secretary  and agreed that it was very important not to politicize the oil trade  between the United States and Venezuela and that both countries  recognized the importance of that trade. According to DOE officials, no  action has taken place since the meeting in Trinidad and Tobago.
section_title: Relations between the United States and Venezuela Have Become Strained
paragraphs: According to Department of State and other U.S. government officials, the  United States has had historically strong ties to Venezuela with respect to  oil issues, and the dialogue between the two countries in the past was  robust. But the relationship between the two countries with respect to  energy issues has changed in recent years—some energy related activities  previously used to foster energy security have been discontinued. For  example, DOE officials told us that 3 years have elapsed since the last  formal discussion between DOE and the Venezuelan Ministry of Energy  and Petroleum regarding energy security. Also, officials in the Commerce  Department and in the Office of the U.S. Trade Representative reported  there is no current engagement between them and their counterparts in  Venezuela regarding energy security. Officials in Department of State  headquarters said that they have worked hard for years to build a  productive energy relationship with Venezuela by participating in frequent  consultations with Venezuelan energy officials, meeting most recently in  March 2006. DOE officials also said they have maintained open dialogue  with Venezuelan energy officials.
Most U.S. oil companies have not relied on assistance from the U.S.  government to help with issues in Venezuela in recent years although,  according to DOE officials, DOE stays in contact with companies  regarding the situation in Venezuela, and senior DOE officials frequently  report on the status of U.S. energy investment and overall energy  production in Venezuela at senior-level meetings of the U.S. government.  The U.S. Ambassador to Venezuela told us he does not have good access  to Venezuelan government officials and, correspondingly, it is difficult to  help U.S. companies doing business in Venezuela obtain access to  Venezuelan officials. Officials in the Departments of Commerce and State,  and in the Office of the U.S. Trade Representative, told us companies that  might otherwise seek their assistance in negotiating with foreign  governments do not do so in Venezuela because the companies do not  believe that federal agency intervention would be helpful. For example, an  official from the Department of Commerce said that U.S. government  involvement would be extremely harmful to the relationship between U.S.  companies and their business interests in Venezuela. Officials in several  U.S. oil companies told us that the poor bilateral relationship between the  United States and Venezuela makes it difficult for them to operate and  compete for new investment contracts in Venezuela.
section_title: The U.S. Government Has Options to Mitigate the Impacts of Short-Term Venezuelan Oil Supply Disruptions
paragraphs: Key activities and programs that the U.S. government has used to mitigate  the impacts of short-term oil supply disruptions include diplomacy,  whereby U.S. government officials negotiate with senior officials in oil- producing countries to increase their supply of crude oil in case of a  disruption; using oil in the U.S. Strategic Petroleum Reserve; and  coordinating with the International Energy Agency, whose members hold  stocks equal to 90 days or more of its net imports to address supply  disruptions. Officials in the Department of State and DOE, as the lead  agencies in crafting U.S. energy security policy, consult with each other,  with other U.S. government agencies (as appropriate), and with U.S.  companies doing business in foreign countries to identify potential oil  disruptions and craft responses to the disruptions, if necessary.
U.S. government agencies used diplomacy to mitigate the impact of the oil  disruption resulting from the Venezuelan strike. Anticipating a potential oil  supply problem in Venezuela, representatives from key DOE offices began  coordinating with the Department of State months before the strike to  produce a plan to bring together data and information about possible  supply problems and to produce an appropriate response to the potential  disruption. The overall effort was headed by the National Security Council  and top U.S. government administration officials, with Department of State  and DOE officials acting as subject experts. After the strike began, the  Department of State and DOE used diplomacy to encourage increases in  OPEC member and other countries’ crude oil production by 1.3 million  barrels per day. Also, according to DOE officials, DOE officials  responsible for coordinating oil supply disruptions responses with the  International Energy Agency upgraded their day-to-day contact with  emergency response officials at the agency, focusing on the strike’s  potential impacts and assessing possible mitigation measures. According  to an EIA study, most of the replacement oil came from Mexico and the  Middle East, especially Iraq.
Not withstanding this success, most oil industry officials and experts, as  well as U.S. government officials, said that using diplomacy to obtain  additional oil likely would be less effective today because there is less  surplus oil production capacity now than there was during the Venezuelan  strike. During the Venezuelan strike, as much as 5.6 million barrels per day  of spare oil production capacity was available from several regions,  including Mexico, West Africa, and the Middle East. Now, experts say that  the total world spare production capacity is only about 1 million barrels  per day, and most of it is in Saudi Arabia. If the oil balance continues to  tighten and surplus production capacity shrinks, increasing production in  response to disruptions will be more difficult, if not impossible.
Aside from using diplomacy, another tool for mitigating supply disruptions  is the use of oil reserves. The U.S. government can use the U.S. Strategic  Petroleum Reserve to increase the supply of crude oil available to U.S.  refineries in three ways: selling oil from the reserve, exchanging oil from  the reserve whereby Reserve oil is replaced at a specified date in the  future, and allowing oil companies to delay delivering oil to the reserve.   Federal law requires that the drawdown and sale of oil from the Strategic  Petroleum Reserve be authorized by the President. However, DOE can  authorize an exchange of oil from or a delay in delivery of oil to the  Reserve.  While no set criteria exist for triggering the release of oil from  the reserve in the case of a supply disruption, U.S. agency officials told us  that, during any disruption, the Department of State and DOE provide  analytical and technical advice through the National Security Council to  help the President evaluate his options. U.S. policy makers believe that  providing oil during a supply disruption is the most efficient mechanism to  counteract the impacts of the disruption.
The United States currently maintains about 700 million barrels of crude  oil in the U.S. Strategic Petroleum Reserve. If 1.5 million barrels a day  were released—the amount of crude oil exported by Venezuela to the  United States—the reserve is enough to replace over 450 days of lost  Venezuelan oil. During the Venezuelan oil strike, oil was not withdrawn  from the U.S. Strategic Petroleum Reserve, mostly because other oil- producing countries increased production by 1.3 million barrels a day.  However, the U.S. government allowed U.S. oil companies to delay  delivering oil that they were committed to deliver to the U.S. Strategic  Petroleum Reserve, which added about 18 million barrels to the U.S. oil  supply available to refineries—an amount equivalent to almost 1 day of  U.S. oil consumption, or almost 2 weeks of Venezuelan oil exports to the  United States.
In addition to using the U.S. Strategic Petroleum Reserve to mitigate the  impact of a supply disruption, the United States could also benefit if the  strategic reserves of International Energy Agency member countries were  released. Each International Energy Agency member country is required to  hold stocks equal to 90 days or more of its net imports. Presently,  International Energy Agency countries hold about 4.1 billion barrels of oil  stocks. According to a DOE official, the three countries with the largest  government controlled reserves—the United States, Germany, and  Japan—are able to release about 8 million barrels a day at the onset of a  disruption. This quantity is equal to about 10 percent of total world oil  demand. The International Energy Agency also requires member countries  to release stocks, restrain demand, and share available oil, if necessary, in  the event of a major oil supply disruption. While there are no criteria for  triggering the release of oil from the member countries’ reserves, the  International Energy Agency has specified arrangements for the  coordinated use of a drawdown, the restraint of demand, and other  measures that member countries could implement in case of a disruption.  Also, International Energy Agency officials say that a disruption of 7  percent or more of world supply is a de facto trigger.
During the Venezuelan strike, the Department of State and DOE  maintained steady diplomatic contact with members of the International  Energy Agency to discuss the evolving situation and to share concerns in  case a drawdown of member reserves was deemed necessary. A later  International Energy Agency analysis of the Venezuelan disruption  concluded that, although International Energy Agency member-country  stocks were not used during the Venezuelan disruption, the presence of  the International Energy Agency stocks played an important role in  reassuring the market. Furthermore, the availability of government stocks  muted speculation on the markets, according to an International Energy  Agency analysis of the disruption.
Although the U.S. government has options to mitigate impacts of short- term oil disruptions on crude oil and petroleum products prices, these  mitigating actions are not designed to address a long-term loss of  Venezuelan oil from the world market. If Venezuela fails to maintain or  expand its current level of production, the world oil market may become  even tighter than it is now, putting further pressure on both the level and  volatility of energy prices. In this context, the United States faces  challenges in the coming years that may require hard choices regarding  energy sources, foreign relations and energy-related diplomacy, and the  amount of energy Americans use.
Officials in the four U.S. government agencies we contacted said they do  not have contingency plans to deal with oil losses specifically from  Venezuela or any other single country. Officials at the lead agencies for  energy security, the Department of State and DOE, said they do not have  specific plans because the available mechanisms to mitigate the impacts of  an oil disruption—diplomacy to persuade oil-producing countries to  increase production and using oil from the U.S. Strategic Petroleum  Reserve—are adequate to deal with disruptions from any source.  According to DOE officials, it conducts scenario analyses of the  vulnerabilities of disruptions from certain countries and relies on these  options to deal with disruptions. They said that these options have been  proven to be adequate.
Officials in most oil companies we contacted also said they do not have  plans to deal specifically with a disruption of Venezuelan oil because, as  with any oil disruption, if a Venezuelan oil disruption were to occur they  would replace the lost oil with oil from other sources. The officials said  that oil is a fungible commodity and typically available on the spot market.  During the Venezuelan strike, for example, U.S. refiners replaced  Venezuelan crude oil with crude oil from other sources, including Mexico,  Brazil, Russia, Ecuador, and the Middle East.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided the Departments of State and Commerce, DOE, and the  Office of the U.S. Trade Representative with a draft of this report for their  review and comment.  The Department of State and the Office of the U.S.  Trade Representative told us that they generally agreed with the findings  of the report but did not provide written comments.  DOE and the  Department of Commerce provided written comments.  The Department  of Commerce agreed with the report’s overall findings; Commerce’s letter  is reproduced in appendix II.  DOE neither agreed nor disagreed with the  report’s overall findings, noting that the United States has had a long and  mutually beneficial relationship with Venezuela and that our report makes  valuable points regarding the challenges facing Venezuelan crude oil  production.  However, DOE raised two issues that it contends provide an  “alarmist view” of U.S. energy security.  DOE’s concerns and our response  to them are summarized below; DOE’s letter is reproduced in appendix III.   All four agencies also provided technical comments, which we  incorporated as appropriate.
DOE’s first concern is that a $23 billion loss to U.S. GDP, which we  reported and attributed to a model developed for DOE by a contractor, is  misleading and will be taken out of context because the prediction does  not take into account mitigating factors that could influence the impact of  an oil disruption on U.S. GDP.  Specifically, DOE said that the prediction  does not take into account worldwide response to an oil supply disruption,  the availability of Arab Heavy oil to replace lost Venezuelan heavy oil, and  the ability to use the U.S. Strategic Petroleum Reserve and worldwide  stocks to mitigate the impact of a disruption.  We disagree that our  reporting of the model results is misleading or out of context and believe  all the mitigating factors raised by DOE have been addressed in our report.   Contrary to DOE’s assertion, the model that predicted the $23 billion loss  incorporates the worldwide response and availability of replacement oil  from surplus production capacity, such as Arab Heavy oil.  However, as  our report notes, because there is much less surplus capacity available  today than there was in winter 2002-2003 when a similar disruption  occurred as a result of the Venezuelan strike, relying on surplus capacity  would not be as effective as it was at that time.  Also, our report discusses  in detail the options the U.S. government has to mitigate the impacts of an  oil disruption, including using strategic petroleum reserves, either  unilaterally or in concert with other countries.  DOE also states that the  report does not contain an analysis of the impact of a Venezuelan oil  supply disruption on that country’s economy.  We disagree with this  assertion.  Our report discusses the severe impact a Venezuelan oil  disruption would have on that country’s economy—the Venezuelan  national oil company is the country’s largest employer, and accounts for a  third of Venezuela’s GDP, four fifths of its export revenue, and half of  government revenue—and notes that Venezuela would likely take steps to  correct any such disruption as soon a possible to avoid that impact.
DOE’s second concern is that by focusing on the discontinuation of  bilateral programs with Venezuela our report leads the reader to believe  that such programs could guarantee U.S. energy security.  We disagree;  nowhere in the report do we imply that such programs with Venezuela  could guarantee the United States’ energy security.  On the contrary, we  point out that instability in Venezuela’s oil sector exists in a broader  context of tightening global oil supply and demand balance and that  instability of any significant individual oil-producing country can have a  significant impact on U.S. and world energy security.  Further we report  that a number of factors create energy security concerns, including a  reduction in global surplus oil production capacity in recent years, the fact  that much of the world’s supply of oil is in relatively unstable regions, and  rapid growth in world oil demand that has led to a tight balance between  demand and supply.  DOE also states that our report does not address the  comprehensive actions the U.S. is taking domestically and internationally  to ensure energy security.  While a comprehensive assessment of U.S.  energy security was beyond the scope of this report, our report  nonetheless notes that the United States has long had a number of  programs and activities designed to ensure energy security.  For example,  for those initiatives identified as within the scope of our report, we listed  the 21 other countries with which the U.S. government has negotiated  bilateral technology and information exchange agreements.
Overall, we disagree that our report, as written, presents an “alarmist  view” of U.S. energy security.  We point out that oil supply disruptions can  have adverse economic impacts but that the U.S. government has options  to mitigate such impacts.  However, we also point out that these mitigating  options are only designed for short-term disruptions and there remain  potential long-term concerns with regard to Venezuelan oil supply in the  event that Venezuelan oil production continues to fall.
We are sending copies of this report to interested congressional  committees, the Secretary of Energy, the Secretary of State, the United  States Trade Representative, and the Secretary of Commerce. In addition,  the report will be available at no charge on the GAO Web site at  http://www.gao.gov.
If you or your staff have any questions, please contact me at (202) 512-3841  or at wellsj@gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this report.  GAO staff who made major contributions to this report are listed in  appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The Chairman of the Senate Committee on Foreign Relations asked us to  answer the following questions: (1) How have Venezuela’s production of  crude oil and exports of crude oil and refined petroleum products to the  United States changed in recent years, and what are the future prospects?  (2) What are the potential impacts of a reduction in Venezuelan oil  exports, a Venezuelan embargo on oil exports to the United States, or  sudden closure of Venezuela’s refineries in the United States? (3) What is  the status of U.S. government programs and activities to ensure a reliable  supply of oil from Venezuela and to mitigate the impacts of a supply  disruption? We used a number of methodological techniques to address  these issues.
To address the first objective, we reviewed studies and analyses of the  Venezuelan oil sector and its history. We met with officials from 10 U.S.  and multinational oil companies, eight refiners, and two service  companies; industry experts from the International Energy Agency, the  Center for Strategic and International Studies, the National Petrochemical  and Refiners Association, an international energy consulting firm, and  other institutions; and officials from the Department of Energy (DOE),  Department of State, Department of Commerce, the Office of the United  States Trade Representative, the U.S. Geological Survey, and various other  U.S. government agencies. In addition, we visited Caracas, Venezuela, and  met with the U.S. Ambassador and embassy staff; Venezuela’s Minister of  Energy and Petroleum; Petroleos de Venezuela S.A. (PDVSA) officials,  including the president, the vice president of production, and a number of  PDVSA board members and senior managers; the Venezuelan Auditor  General; members of the financial community; and other individuals with  expertise in the oil sector of Venezuela. We met with operations officials at  various oil exploration, production, and refining centers in the Maracaibo  and Faja regions of Venezuela. Both in the United States and in Venezuela,  we spoke with numerous former PDVSA employees, executives, and  directors, and oil company officials. We also collected, evaluated the  reliability of, and analyzed data on Venezuelan production, consumption,  and exports of oil and petroleum products. The sources of our data  include U.S. government agencies, especially the Energy Information  Administration (EIA); the International Energy Agency; the Venezuelan  government and PDVSA; and other governmental and private sources. We  deemed these data to be reliable for the purposes of addressing our  objectives. Regarding Venezuela’s plans for future production, we  analyzed plans and data provided by the Ministry of Energy and Petroleum  and PDVSA officials. We also discussed the feasibility of Venezuela  implementing its plans with Department of State and DOE officials, as well  as with numerous oil company officials and industry experts.
To address the second objective, we reviewed several studies of the  impacts of oil disruptions, including the impact of the Venezuelan strike in  the winter of 2002–2003. We also analyzed current conditions in the world  oil market to evaluate what might occur if a similar disruption occurred  today. We also evaluated the potential impacts of—(1) a sudden and  severe drop in Venezuelan oil exports from the world market, (2) a sudden  diversion of oil from the United States to other markets through an  embargo, and (3) the closure by Venezuela of its wholly-owned U.S.-based  refineries. Specifically, we asked a DOE contractor at the Oak Ridge  National Laboratory to use an economic oil-disruption model to analyze  the impacts of a hypothetical Venezuelan oil disruption on world oil prices  and on the U.S. gross domestic product (GDP). For this analysis we  constructed a hypothetical disruption scenario similar to the one that  actually occurred during the Venezuelan oil strike in the winter of 2002– 2003, but using assumptions regarding market and economic conditions  closer to those that prevailed at the time of the analysis (late 2005). We  also conducted our own analysis of the same scenario using EIA’s oil  disruption rules of thumb that predict how oil prices and the U.S. GDP  respond to disruptions in world oil supplies. For the analyses of the  potential impacts of a Venezuelan embargo against the United States, we  relied largely on EIA analyses. For the impacts of Venezuela’s sale or  closure of its CITGO refineries in the United States, we analyzed the  response of gasoline prices to the major loss of refinery capacity that  accompanied hurricanes Katrina and Rita in 2005. In addition, we  discussed the impact of potential Venezuelan oil disruptions with  numerous industry experts in Venezuela and in the United States; officials  in the Departments of State and Commerce, and DOE; and International  Energy Agency officials.
To address the third objective, we met with officials at various U.S.  government agencies, including the Departments of State and Commerce,  DOE, and the Office of the U.S. Trade Representative, to identify the status  of programs and activities to ensure a continued supply of oil and to  mitigate a disruption of imports of crude oil and refined petroleum  products from Venezuela, as well as to determine whether the agencies  have Venezuelan-specific contingency plans. We also met with officials of  10 U.S. and multinational oil companies, eight refiners, and two service  companies; industry experts from the International Energy Agency, the  Center for Strategic and International Studies, the National Petrochemical  and Refiners Association; Purvin and Gertz; and other institutions. In  addition, we obtained information on Venezuelan decrees and legislation  governing foreign investment in the petroleum industry. We reviewed our  previous work on U.S. energy security, especially our 1991 study,  “Venezuelan Energy: Oil Production and Conditions Affecting Potential  Future U.S. Investment.”
Because the Department of State advised us that visiting port facilities  may be considered too sensitive to the Venezuelan government given that  government’s apprehension about the U.S. government, we did not assess  port or other facilities for vulnerability to sabotage or attack. However, the  Coast Guard, as part of its port security responsibilities, identifies  countries that are not maintaining effective antiterrorism measures.  According to Coast Guard officials, Venezuela has not been identified as  such a country.
This report focuses on federal programs and activities related to U.S.  energy security. Diplomatic and political actions that may impact U.S.  energy security may be undertaken for a multitude of foreign policy goals  that are beyond the scope of this report. Therefore, our evaluation of  programs and activities related to energy security is in no way intended to  evaluate the U.S. government’s approach to these broader goals.  Department of State officials reviewed a draft of our report to ensure we  did not include information in our report that could influence diplomatic  relations.
To obtain the official Venezuelan government position on questions  relating to all three objectives, we made arrangements with the  Venezuelan Embassy in Washington, D.C., for an official spokesperson.  Generally, we submitted questions to the spokesperson who then asked  for answers and explanations from the appropriate officials in Venezuela  and provided the answers to us, usually in writing. In addition, the  spokesperson made several presentations to provide information on  Venezuela’s oil sector. We did not verify the information provided by the  spokesperson. In addition, we did not independently review Venezuelan  laws and decrees, and relied on secondary sources such as interviews.
We performed our work from March 2005 through May 2006 in accordance  with generally accepted government auditing standards.
section_title: Appendix II: Comments from the Department of Commerce
section_title: Appendix III: Comments from the Department of Energy
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Philip Farah, Byron S.  Galloway, Carol Kolarik, Michelle Munn, Cynthia Norris, Melissa Arzaga  Roye, Frank Rusco, and Barbara Timmerman made key contributions to  this report.