Venezuela's oil company is back to work, but troubles are far from over

www.kansascity.com Posted on Thu, Feb. 27, 2003 By JUAN FORERO The New York Times

CARACAS, Venezuela - Tankers are once again setting sail from Venezuela, loaded with crude oil bound for the United States.

Meanwhile, government planners busily try to rebuild and reorganize state-owned Petroleos de Venezuela, pondering how to function with 40 percent fewer workers.

Oil, the lifeblood of Venezuela's economy, is flowing again after a paralyzing two-month national strike. Production is now topping 2 million barrels a day, say officials of the $46 billion-a-year company. They predict that Venezuela's oil industry, with a leaner government-run company leading the way, will soon be back to pre-strike production.

"We are getting close to normal," said Enrique Salazar, a loading master on the Caribbean coast, peering from a control room as a tanker, the Morichal, 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.

Petroleos 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 Chavez's left-leaning government. That financial blow, and the loss of workers with 17 years of experience on average, 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 Chavez 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 war with oil-rich Iraq promises to batter energy markets.

The obstacles in the aftermath of the strike, which ended in early February, are daunting. A lack of maintenance has caused sand to build up in the gelatinous deposits and caused 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 Chavez'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 this year, with Venezuela facing "a fiscal crisis of major proportions." Fitch Ratings said 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 and the company's financial straits mean that Petroleos de Venezuela will be unable, in the short term, to reach pre-strike production levels, when Venezuela was a top 10 producer and 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 the end of this year.

"We believe the company's role in Venezuela society has been permanently altered," Deutsche Bank recently reported. Assuming average daily production of 1.7 million barrels for the year, the bank estimated that oil revenues will 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 this year. The sharp drop will make it especially difficult to raise the $5 billion the company would have spent to keep production steady.

Ali Rodriguez, the former leftist guerrilla who is now president of Petroleos de Venezuela, does not gloss over the obstacles. But in an interview, Rodriguez said the doomsday predictions originate with dissident executives who hoped to undermine international confidence in the oil company to weaken Chavez.

He predicted that through sharp budget and personnel cuts, the company will reach 3.1 million barrels a day. And "with its resources," he said, "it is perfectly possible that it will even surpass that level."

Oil analysts warn that the company will be debilitated for years from the loss of experienced workers. Those employees -- 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.

Chavez, who has referred to the employees as traitors and fascists, has promised that they won't 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 department that contracts with oil purchasers.

"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."