Venezuela's oil industry faces long, slow recovery from strike

By PATRICE M. JONES, Knight Ridder Newspapers March 01, 2003

CARACAS, Venezuela -- The lifeblood of Venezuela's economy, its oil industry, is slowly rebounding, analysts say, after a crippling strike disrupted exports to the United States and left Venezuela's president clinging to power. Venezuela's energy minister, Rafael Ramirez, had a rosy forecast for Washington officials last week. He described the emergence of a reorganized, leaner, better-run state oil company that is recovering well despite operating with about 40 percent fewer workers. But despite progress, many analysts say Venezuela's sick oil industry is far from full recovery. Venezuelan officials say the oil giant should be close to producing 3.1 million barrels daily -- nearly matching prestrike levels -- by the end of this month. But analysts and oil experts say those claims are too optimistic and could hide dangers both for Venezuela and its most important client, the United States. Analysts say the state oil company, Petroleos de Venezuela S.A., was severely damaged by the strike and it could be years before the company restores its worldwide reputation, if it ever does. Venezuela lost billions of dollars in oil exports during the two-month strike that fizzled in early February. The government fired 16,000 workers who took part in the stoppage, which was aimed at pressuring the government of President Hugo Chavez. With the dismissals, much of the oil company's knowledge and expertise from its senior managers, scientists, economists and technicians was lost. ''You cannot take a something that took decades to build and rebuild it in a few months,'' said Ramon Espinasa, former chief economist for the oil company and now a consultant for the Inter-American Development Bank. ''There are many reasons to believe the government's statements about the future are not very credible,'' added Michael Gavin, managing director in emerging markets research for UBS Warburg investment bank. The fallout for Venezuela if its oil industry does not fully recover could be devastating. Oil has long been Venezuela's claim to international prestige, and its most important economic engine. Venezuela's government depends on oil for half its revenue and 80 percent of the country's exports. Once the world's fifth-largest oil producer, Venezuela has long been a major supplier for the United States, accounting for about 15 percent of U.S. oil imports last year, or about 1.5 million barrels a day. ''Venezuela was by far the most reliable market for the U.S., and so the strike meant a very important change and rethinking,'' Espinasa said. Energy analysts have questioned whether other producing countries with spare production capacity, mainly Saudi Arabia, could replace both lost Venezuelan and Iraqi oil should war erupt in Iraq and Venezuela's problems are not be resolved. On Wednesday, Energy Secretary Spencer Abraham said at a Senate hearing it might be two to three months before Venezuelan imports return to normal. Adding to the uncertainty is Venezuela's continuing political instability. In the past week, Chavez has launched a crackdown on the architects of the nationwide strike that included a walkout in the oil industry as well as a strike among businesses and unions. Business chamber leader Carlos Fernandez was recently placed under house arrest and is facing up to 26 years in prison for his involvement in the strike. Seven other strike leaders, all former oil managers, also have had warrants issued for their arrest, although they are fighting to nullify the arrest order in the courts. ''Chavez is desperate to arrest anyone who opposes him,'' said Juan Fernandez, a former financial planning manager at the oil company, who is among the group of seven that could face jail time. ''To prove they have things under control and that they have the power, they will continue the arrests,'' he said. But there is also a problem in Venezuela's oil fields, where only minimal staffs are handling everything from managing computer systems to restarting inactive fields. Sand built up in some wells that were left inactive during the strike, which means now that some wells will have to be redrilled and some could simply be worthless. Experts estimate between 300,000 and 400,000 barrels a day of production could be permanently lost. On the other hand, Ramirez told Washington officials of current successes. Production has risen from nothing when Venezuela's December oil strike began to the current level of just over 2 million barrels a day. Striking workers recently pegged the level at 1.58 million barrels a day. And while Venezuela's government says it will reach prestrike production by the end of the month, many analyst forecast the company is likely to reach only about 2.3 million barrels daily by the end of the year.