Thursday, April 24, 2003

The New York Times

February 26, 2003
Venezuela's Lifeblood Ebbs Even as It Flows

CARACAS, Venezuela - Once more, tankers are setting sail loaded with crude
bound for the United States, while government planners busily rebuild and
reorganize the state-owned Petróleos de Venezuela, pondering how to
function with 40 percent fewer workers.
Oil, the lifeblood of Venezuela, is running again after a paralyzal, took on 25,000 barrels an hour.

But oil analysts and economists say the government's rosy picture hides a
painful truth about a 27-year-old company that was born when Venezuela
nationalized oil production and quickly became one of Latin America's more
highly regarded multinationals.

Petróleos de Venezuela has lost $4 billion in exports and nearly 16,000
workers, fired by the government for taking part in a walkout aimed at
debilitating President Hugo Chávez's left-leaning government. That
financial blow and the loss of workers with, on average, 17 years of
experience could permanently hobble the company, keeping it from assuming
its role as a leading world oil provider, analysts here and abroad say.
"It will not be the company it once was," said Mazhar al-Shereidah, an oil
economist in Caracas who helped write oil regulations for the Chávez
government. "For a country that depends on petroleum, now more than ever,
the challenges are too great. You have to pray for Venezuela."

The dire predictions, if true, would indeed be disastrous for this country
of 24 million, which depends on oil for half of government revenues and 80
percent of exports. It would also leave the United States - which has
counted on Venezuelan oil for decades - without one of its most reliable
suppliers as a possible war with oil-rich Iraq promises to batter energy

The obstacles are daunting after the strike, which started to fizzle in
February after two months. A lack of maintenance has caused sand to build
up in the gelatinous deposits and the pressure to drop, making some fields
worthless and threatening to cut production capacity by 300,000 or more
barrels a day. And perhaps most troubling is that no one knows what Mr.
Chávez's government has in store, though it has promised a wholesale
revamping of what was once the world's second-largest oil company.

Reports from international analysts are blistering. UBS Warburg predicts
that oil's contribution to gross domestic product will fall 22 percent in
2003, with Venezuela facing "a fiscal crisis of major proportions." Fitch
Ratings says Venezuela's "image as a reliable crude oil supplier has been
undermined" and will he hard to recover.

Analysts say the lack of technical expertise, combined with the financial
straits, means that Petróleos de Venezuela will be unable, in the short
term, to reach production levels of the prestrike days, when Venezuela was
the world's fifth-largest oil exporter. Most recent production has been in
fields that were easiest to restart, leading independent analysts to
predict that Venezuela will, at best, produce 2.3 million barrels daily by

"We believe the company's role in Venezuela society has been permanently
altered," a recent Deutsche Bank report said. Assuming average daily
production of 1.7 million barrels for 2003, the bank estimated that oil
revenue would reach only $14.1 billion, down nearly 50 percent from 2001.
The government is already preparing for the worst. The 2003 budget for the
oil company was cut by $2.7 billion, to about $6 billion, while the income
the government draws from oil is forecast by UBS Warburg to fall from
$11.5 billion in 2002 to as little as $5 billion in 2003. The drop will
make it especially difficult to raise the $5 billion the company would
have spent to keep production steady.

Alí Rodríguez, the former leftist guerrilla turned president of Petróleos
de Venezuela, does not gloss over the obstacles. But in an interview, Mr.
Rodríguez said the doomsday predictions originated with dissident
executives who hoped to undermine international confidence in the oil
company to weaken Mr. Chávez.

He predicted that through sharp budget and personnel cuts, the company
would reach 3.1 million barrels a day. And "with its resources," he said,
"it is perfectly possible that it will even surpass that level."
To be sure, the Petróleos de Venezuela now emerging will be a far
different company, in both its management and philosophy.

Gone will be the highly autonomous octopus that Mr. Rodríguez said
functioned with great independence from the state, controlling revenues
and influencing oil policies. The new company, taking advantage of some of
the world's largest oil deposits outside the Middle East, "must give
maximum contribution to the nonpetroleum sector, which is the majority of
the people," Mr. Rodríguez said.

Still, even inside the gleaming office tower in Caracas where the company
is based, the short-term outlook seems dismal as managers pore over
financial statements.
"There is no investment, so there is no doubt that the company at this
moment is very debilitated," Bernard Mommer, a close adviser to Mr.
Rodríguez who is helping guide the restructuring, said in an interview.
"Up ahead, we are going to have problems like how to recover the quality
of the company."

Venezuela will benefit little from the higher world oil prices projected
in coming months, since production capacity remains limited. By the time
Petróleos de Venezuela is producing close to three million barrels daily -
if it ever does - prices are likely to have stabilized, analysts say.
In the meantime, Mr. Rodríguez and his managers are busy splitting the
company into three divisions: a natural gas branch to develop the largest
deposits in Latin America, and companies in the east and west intended to
make obsolete the executive offices in Caracas, where antigovernment
activities percolated.

Venezuela may also unload foreign assets, like refineries in the United
States that operate under the Citgo chain, which is wholly owned by
Petróleos de Venezuela, and other installations in Europe and the

Publicly, officials deny the companies are for sale. But Mr. Mommer said
Citgo remained overly expensive while providing scant returns.
"The sophisticated part of our business, refining, that's not our
business," Mr. Mommer said. "Exploration and production, that is where the
big money is."

Such a sale would "dismember" the company, warned José Toro Hardy, an
influential former board member, because Citgo refineries are specially
outfitted to process Venezuela's particularly gummy brand of heavy crude.
"There are few refineries in the world that can refine" this crude, Mr.
Toro Hardy explained. "Without Citgo, Venezuela's heavy oil would lose

Oil analysts also warn that the company will be debilitated for years from
the loss of experienced workers. Executives, office workers, engineers and
highly trained technicians joined the walkout and, in some cases, damaged
computers and software and stole files to hinder reactivation efforts.
Mr. Chávez, who has referred to the employees as traitors and fascists,
has promised that they will not be rehired.

But already, oil analysts say, the shortage of experienced workers is
being felt in every corner of the company. In the patents and technology
department, which develops technology for exploration and refining, 800
were fired. The department that trains executives has lost hundreds, as
has the crucial commercialization department, which contracts with oil

"Even if you replace the bodies, you don't replace institutional
memories," said Larry Goldstein, president of the Petroleum Industry
Research Foundation, an industry-supported analysis group in New York.
"It's a hidden loss. You can't touch it or taste it, but it's there."