Venezuela's oil strike may be over, but industry faces high hurdles - National oil production will not return to normal levels this year, analysts say.

www.csmonitor.com from the February 19, 2003 edition

By David Buchbinder | Special to The Christian Science Monitor CARACAS, VENEZUELA – With most of Venezuela back at work, President Hugo Chávez has emerged from a devastating 2-1/2-month strike with control of a key asset - the petroleum industry.

Mr. Chávez's opposition had taken control of the state-run oil company, Petroleos de Venezuela (PDVSA), on Dec. 2 and slowed production to a trickle. But Chávez consolidated power by firing as many as 12,000 of the company's 38,000 workers and calling in retirees as replacements. Reporters on the Job The Monitor gives the story behind the story.

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The company has raised production faster than many industry analysts had expected - up to 1.9 million barrels a day, according to the government. Ali Rodriguez, PDVSA's president, says that he expects production to rise to "near normal" levels by mid-March. Venezuela produced 2.8 million barrels a day before the strike.

But some analysts say it could be months, if not years, before Venezuela returns to the ranks of the world's oil elite. For a country that relies on oil revenue for 80 percent of government funds, this could be a blow to funding of social programs and even lead to oil-industry privatization.

"At the end of the day, PDVSA will not get back to where it was any time this year," says Larry Goldstein, President of the International Petroleum Research Foundation in New York.

Getting pumps and refineries going again is not as simple as throwing a switch. The oil behemoth's skeletal staff has to tussle with complex engineering tasks, from gauging oil flow in dormant pipes to reconfiguring computer systems to replacing a catalytic cracker module on a stalled refinery. Half of Venezuela's petroleum comes from particularly viscous oil deposits, and many wells became filled with sand after the oil pressure was cut.

"Some fields you should never shut down, and they were shut down," says Ramon Espinasa, a consultant at the Inter-American Development Bank in Washington and a former PDVSA economist. "A large number [of wells] will have to be redrilled."

Mr. Goldstein says that some wells will have to be abandoned altogether. He estimates that 400,000 barrels per day have been permanently lost.

A crowded slate of technical challenges falls to a PDVSA workforce that is practically headless, as most of the firings occurred in the ranks of senior managers, scientists, and economists. PDVSA is severely short-staffed, and workers who have been brought out of retirement are scrambling to learn new computer systems.

Reaching prestrike production levels will call for further exploration, and that requires cash - yet another problem. PDVSA announced it will tighten its belt by $2.7 billion this year, nearly one-third of its budget.

"To run this corporation they need capital and labor, and they have neither," says Mr. Espinasa.

With a battered credit rating making borrowing expensive, to raise money PDVSA may have to sell assets in Germany, Sweden, and the Caribbean, as well as portions of company-owned Citgo, which operates 13,400 gas stations in the US.

Some analysts say that, eventually, Chávez will have to have to increase privatization, turning to large multinational oil companies already operating in Venezuela. To lure foreign investors, a law which dictates that Venezuela maintain at least a 51 percent stake in all joint ventures may have to be revised.

"The international oil companies are all here," says one Caracas-based analyst. "They're not vultures, but we can say that they're waiting on the wire fence to pick up the pieces."

The political struggle for control of PDVSA shows no signs of abating. Some strikers are refusing to return to work until Chávez agrees to early elections. Opponents accuse him of trying to turn the country into a Cuba-like socialist state and decimating the economy, which may contract by as much as 25 percent this year.

In the meantime, PDVSA is being split into two units, one for eastern Venezuela and one for western Venezuela, in order to avoid Caracas, where antigovernment sentiment runs high.

Antonio Herrera, general manager of the US-Venezuela Chamber of Commerce, is confident that the US will find other sources of oil to make up for Venezuela's shortfall. But he suspects that the worst is yet to come for the Venezuelans. "We're really heading for a calamity in the economy," he says. "The oil industry is decimated. It's a major annoyance for the United States.... It's a tragedy for Venezuela."