COMPLETE ARTICLE IN HOUSTON CHRONICLE ON THE VENEZUELAN OIL INDUSTRY PROBLEMS

HoustonChronicle.com

http://www.chron.com/cs/CDA/ssistory.mpl/business/energy/2183523

Oct. 27, 2003, 11:53PM

Oil firings in Venezuela take toll down the line
By BRIAN ELLSWORTH
Copyright 2003 Houston Chronicle Foreign Service
ARACAS, Venezuela -- With oil prices hovering around $30, those in the energy
business have every reason to be looking for more crude.
But here in Venezuela, famed for its abundant fields, spiking oil prices seem to
be doing nothing for the dozens of contractors who work on everything from pumps
to pipelines. Private contractors who provide equipment or services to
Venezuelan state oil giant Petroleos de Venezuela, or PDVSA, say they are
billing only 60 percent of what they did last year.
In the oil-rich area of Lake Maracaibo, tugs and rigs are sitting idle on the
docks rather than drilling wells or exploring new fields. Contractors who
service wells and equipment say their business has plummeted, and some even talk
about leaving the country.
"I used to repair 200 to 300 pumps per month, but I haven't been called to
service anything since February," said one contractor, who spoke on condition of
anonymity. Buyers complain of high water content of crudes, and contractors
report high sand presence in wells and constant problems maintaining well
pressure.
The business slowdown for contractors, many of whom have ties with Houston, may
be a crucial piece of evidence in the debate over how much oil Venezuela is
actually pumping. And it may mean continued production declines to come.
Even though left-wing President Hugo Chavez survived a crippling two-month
strike by PDVSA workers launched last December, international observers believe
the work stoppage is now taking its toll.
Chavez broke the strike in early February, fired half of PDVSA's workers on Feb.
12 and staged a remarkable comeback that government leaders say has left
Venezuela producing 3.3 million barrels per day.
But agencies around the globe say the damage from the strike and the abrupt
dismissal of 18,000 workers has left PDVSA struggling to maintain an output of
only 2.6 million barrels per day.
Venezuelan authorities assure that this is a manipulation of figures, but 10
contractors reported that their slumping business confirms that production is
declining.
"We're at 60 percent drilling of pre-strike levels," one drilling contractor
said. "Where we should be drilling three holes we're drilling two; each drilling
takes longer and there is more time between each well we drill. That all says to
me that Venezuela can't be producing more than 2.6 million barrels per day."
He and the other contractors interviewed asked not to be identified to avoid
getting in the middle of the war of words between PDVSA and fired employees who
have launched an assault on the national oil company's credibility.
These contractors are probably the only ones in Venezuela who know what is
happening but have no political ax to grind. Many of the contractors even
complained of corruption on the part of former PDVSA employees, who government
leaders accuse of spinning production numbers to discredit the company that
fired them.
Other contractors estimate that 15 to 20 percent of PDVSA's rigs are out of
commission and that 80 to 90 percent of its equipment is due for maintenance.
"We have seen a total paralysis in well maintenance," another contractor said,
alleging that this has caused a spate of accidents, including one last month in
which an oil rig operating in Lake Maracaibo caught on fire.
However, there is little reliable information to compare the current accident
rates with those of previous years.
Venezuela has, in fact, already lost considerable production capacity over the
last five years. Venezuela was producing 3.7 million barrels per day in 1997,
before the start of the four heavy crude upgrading projects that now provide
500,000 barrels per day.
Therefore, even if Venezuela is producing 3.3 million barrels per day as the
government claims, the figure represents a loss of 900,000 barrels per day since
1997.
"Quite apart from what happened in the strike, in the coming months we are going
to see production declines resulting from five years of underinvestment," says
economist Robert Bottome of the business magazine Veneconomy.
And although current production figures are still in dispute, almost all signs
point to continued production slumps.
Venezuelan wells face annual decline of 25 percent, meaning that PDVSA must have
an average of 55 drilling rigs active at any given time to make up for lost
output in older wells.
Baker Hughes' rig count shows between 30 and 40 active drilling rigs -- at a
time when Venezuela is trying to make up for production lost during the strike.
Furthermore, experts indicate that an increasing proportion of drilling rigs are
run by international companies, which by Venezuelan law are required to operate
in marginal fields.
In addition, contractors indicate noticeable declines in work-over rig activity,
which spells considerable future declines in production, especially in western
Venezuela's mature fields.
According to Larry Goldstein, president of the energy think-tank Petroleum
Industry Research Foundation, Venezuela cannot be faulted for not bringing
production back to pre-strike levels, because most expected the strike would
cost the country at least 500,000 barrels per day.
"A company can't fire 18,000 employees without losing the institutional memory
of how to operate its fields," Goldstein said. At this point Venezuela is just
exaggerating the production data.
Goldstein says the primary problem that PDVSA faces is a lack of expertise in
everything from well maintenance to billing.
While PDVSA had the legal right to fire managers who had called for the strike,
doing so stripped the company of those who spent years studying Venezuelan wells
and production methods.
And the strike, which cost the country an estimated $7 billion, has left the
cash-strapped government with few options for reinvesting in future production.
Data on PDVSA's earnings also indicates that production levels are close to 2.6
million barrels per day. Venezuelan Central Bank Director Domingo Maza recently
said that the Central Bank is receiving only $1 billion in oil revenue per
month, rather than the $1.3 billion per month that would correspond to
production of 3.3 million barrels per day.
"Though there may have been a recovery in the production and export of oil,
there is no corresponding recovery in foreign currency payments," Maza told
Venezuela's National Assembly.
Figures provided by the Organization of the Petroleum Exporting Countries and
the U.S. Department of Energy show Venezuelan oil production close to 2.6
million barrels per day, down from almost 3 million barrels per day in November
2002 and considerably below its quota of 2.9 million barrels per day.
This comes after Venezuela has been one of the most noticeable of the OPEC quota
cheaters, despite Chavez's pro-OPEC rhetoric.
Furthermore, Venezuelan authorities now insist on including upgraded synthetic
crude as part of petroleum production figures, whereas Venezuela previously
categorized synthetic crude as bitumen and therefore not part of quotas. While
Venezuela used to understate its production figures, now it is doing its best to
inflate them.
Leaders of Venezuela's political opposition hope to remove President Chavez
through a recall referendum this spring, which would allow fired workers to
return to the industry.
But no matter who is heading Venezuela's government next year, it looks like oil
production for this crucial OPEC member cannot go anywhere but south.