OIL PRESSURE - ChevronTexaco's fields in Venezuela crippled by strike, but higher prices worldwide will offset its lost income

www.sfgate.com Verne Kopytoff, Chronicle Staff Writer Sunday, January 12, 2003

Chevron knows how to pump oil under pressure. Over the years, the petroleum giant has kept the barrels flowing even in nations besieged by rocket attacks, kidnappings for ransom and corruption.

But the company's usual immunity to local inconvenience has been put to the test in Venezuela, where a riotous general strike has shut down most of the country's economy.

Because of a lack of workers, supplies and ships, ChevronTexaco, headquartered in San Ramon, has significantly curtailed its pumping of oil from three fields in Venezuela, according to analysts. The strike seems to be so protracted, they said, that the company's business there may be blocked for months to come.

But due to the complexities of the global oil market, ChevronTexaco may be financially untouched by the chaos, though it is Venezuela's largest private foreign oil producer. The strike has caused world oil prices to rise, allowing the company to charge more for what it pumps in other places, such as California, Nigeria and Angola.

"While what's going on in Venezuela is reasonably significant for ChevronTexaco, it's not a disaster," said Charles Lucas-Clements, a president in London for IHS Energy, an oil industry consulting firm. "Because of pricing dynamics, ChevronTexaco may in fact be slightly better off."

A spokeswoman for ChevronTexaco declined to comment.

GROUND TO A HALT

The most substantial effect on ChevronTexaco's Venezuelan business has been the closure of the Hamaca field, an expansive project on the nation's eastern plains that normally produces 104,800 barrels a day. The company owns 30 percent of the operation alongside its partners, Phillips Petroleum and the Venezuelan state oil monopoly, Petroleos de Venezuela S.A.

Pumping ground to a halt in Hamaca primarily because of a supply problem, according to a source familiar with ChevronTexaco's affairs. The strike has made it impossible to get deliveries of liquid diluent, which is needed to coax the heavy oil there up to ground level.

2 OTHER FIELDS HOBBLED

ChevronTexaco is having slightly better luck with the two other Venezuelan fields it oversees. They are operational, according to the source familiar with the company's business, though analysts suspect the output is a dribble compared with what it was before the strike.

One of the fields is LL-652, of which ChevronTexaco is a 27 percent owner. It normally produces 4,900 barrels a day from the depths of Lake Maracaibo, on the nation's western coast.

The other field is Boscan, on a dry, western savannah, which ChevronTexaco manages as a contractor on behalf of Venezuela's oil monopoly. The field's usual output is 35,000 barrels a day.

ChevronTexaco does not disclose its revenue from Venezuela.

"This kind of wholesale shutdown is very unusual for oil companies," said Lucas-Clements. "You get them occasionally, like in Alaska after an earthquake or because of environmental activism."

WIDESPREAD DISRUPTION

Venezuela normally produces 3.1 million barrels of oil a day and is the world's fifth-largest oil exporter. The government says the total output has fallen since the strike to around 800,000 barrels, though analysts say that figure is inflated and that the real output is between 200,000 and 600,000 barrels.

Virtually all oil companies operating in Venezuela have been affected by the country's unrest. They include ExxonMobil, Shell and British Petroleum.

The current problems began Dec. 2, when Venezuelan workers from an array of industries left their jobs in protest against the foundering economy and the leftist policies of President Hugo Chavez. Among the strikers were many of the state oil monopoly's 35,000 employees.

ECONOMY IN CHAOS

Currently, the two camps are at an impasse marked by huge protests and street clashes. The nation's economy is in shambles from the loss of oil money,

which accounts for nearly 80 percent of the nation's export revenue.

"It's an unfortunate situation," said Fadel Gheit, an analyst for the investment bank Fahnestock & Co., who has no financial ties to ChevronTexaco. "It's obviously hurting Venezuela, but it's hurting the world, too."

American oil companies are the principal buyers of Venezuelan crude. But with the nation's troubles, they have had to look elsewhere for petroleum, pushing the price for a barrel up several dollars to above $30. Just a year ago, a barrel cost half as much.

DOUBLE WHAMMY

The spike is troublesome to U.S. drivers and industry because it comes on top of a so-called war premium already levied on oil. Analysts estimate that concerns about war in Iraq have driven the price for a barrel up an extra $5.

Compared with its global oil output, ChevronTexaco's production in Venezuela is relatively small. Around 150,000 barrels a day are typically pumped from fields where the company operates. But the actual amount the firm owns is much less because it is merely a part-owner in two of the projects and is a contractor in a third.

Globally, ChevronTexaco produced an average of 1.959 million barrels a day in 2001, according to regulatory filings.

ChevronTexaco's biggest source of oil is actually the United States. It pumped an average of 614,000 barrels a day here, or 31.3 percent of its worldwide total, mostly in California, Louisiana and Texas. Next on the list was Indonesia, with 304,000 barrels a day, or 15.5 percent.

PART OF THE PIE

Oil companies are expected to withstand the troubles in Venezuela with varying degrees of success, depending on whether they produce oil, refine it or sell gasoline. ChevronTexaco engages in all processes, but the company is nonetheless expected to reap a financial windfall, analysts said.

Its production unit, the company's biggest business, will be able to charge more for the oil it drills around the world. The smaller refinery operation may take a hit, however, because it will have to pay more for the oil it buys.

Service station profits will probably be a wash. Gasoline prices may increase 10 cents a gallon in the next three months, according to the Energy Department, but ChevronTexaco will see no extra profits because of increased oil costs, analysts said.

COUNTER-PRODUCTIVE

In the final calculation, analysts agreed that the company will probably come out ahead. But, they added, it is not as if ChevronTexaco executives pray for revolution to erupt somewhere in the world to improve profits.

"The oil companies are enjoying higher prices," Gheit said. "They're not going to say no.

"But too much of a good thing turns out to be bad," he added. "Higher oil prices will hurt economic growth and, at the end of the day, you kill the goose that laid the golden egg." In past crises, consumers have lowered consumption and sought out alternative energy sources.

ChevronTexaco's history in Venezuela has been a love-hate affair, even before the current developments. The company began exploration there in the early 1920s and discovered a big oil field in 1946.

But the company was subsequently kicked out, when Venezuela nationalized its oil industry in the mid-1970s. The company returned in 1996 after the nation's laws were liberalized somewhat.

Now, ChevronTexaco is eager to expand in Venezuela if allowed to do so, analysts said. There is virtually no chance the company will pull out, they said, considering that it has held steadfast in some fairly unstable places over the years.

For example, ChevronTexaco operated in Angola during its long and bloody civil war. It also kept pumping in the Democratic Republic of Congo during its spate of coups, ethnic fighting and political assassination.

"They've been around the block in working in dicey places," said Terry Hallmark, who gives advice about political risk and policy assessment for IHS Energy. "Typically, oil companies are a very hardy breed. Unless something drastic or cataclysmic happens, they are willing to ride it out."

One exception came during the Gulf War. Prior to its merger with Chevron in 2001, Texaco temporarily pulled out of an oil field along the border between Kuwait and Saudi Arabia.

Hallmark said oil companies usually try to balance their risks by operating in relatively secure fields. For example, ChevronTexaco has big operations not only in the United States, but in the United Kingdom, Australia and Canada.

After the strike in Venezuela ends, ChevronTexaco will still have its work cut out for it. Simply getting the fields the company already operates back to full strength could take two months. Analysts said the process would be more complicated than simply flipping a switch back on.

Heavy oil, of the kind found in one field where ChevronTexaco operates, tends to gum up if left idle for too long. Other wells may have to be repressurized.

In any case, the Organization of Petroleum Exporting Countries will meet today to discuss boosting oil output elsewhere in the world. Members hope to scotch fears of an oil shortage created by the loss of production in Venezuela and a potential war in Iraq.

Oil prices have already modestly retreated from their two-year peak of just above $33 in the past couple weeks, to $31.68 on Friday.

If current world problems end, oil prices are expected to decline much further. Venezuela's oil spigot would be open again, while Iraq -- under a new leader -- could potentially expand its fields within a couple of years.

In that scenario, ChevronTexaco's fortunes would probably take a turn for the worse, analysts said. Profits would probably drop and there would be little that executives could do about it.

"When you see a tremendous rise in earnings, it's not because the oil companies got smart," said Gheit, the analyst. "It's because prices were high. But longer term, oil companies know that higher oil prices are unsustainable."

E-mail Verne Kopytoff at vkopytoff@sfchronicle.com.