Big hurdles ahead for Venezuela's oil company

www.chron.com March 2, 2003, 12:04AM By JUAN FORERO New York Times

CARACAS, Venezuela -- Tankers are once again setting sail loaded with crude oil bound for the United States, while government planners busily try to rebuild and reorganize the state-owned Petroleos de Venezuela, pondering how to function with 40 percent fewer workers.

Oil, the lifeblood of Venezuela, is flowing again after a paralyzing two-month national strike, with production now topping 2 million barrels a day, officials of the $46 billion-a-year company say. They predict that Venezuela's oil industry, with a leaner government-run company leading the way, will soon churn out 3.1 million barrels daily, matching the prestrike level.

"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 and quickly became one of Latin America's more highly regarded multinationals.

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, on average, 17 years of experience could permanently hobble the company, keeping it from assuming its role as a world-class 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 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 on prized oil fields has caused gelatinous deposits to sand up and pressure to drop, making some 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 plans, 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 says Venezuela's "image as a reliable crude oil supplier has been undermined" and will be 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 prestrike production levels, when Venezuela was 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 would 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.

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 hope to undermine international confidence in the oil company to weaken Chavez.

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

To be sure, the Petroleos de Venezuela now emerging will be a far different company, in both its management and philosophy.

Gone will be the highly autonomous octopus that Rodriguez said functioned with great independence from the state, controlling revenues and influencing oil policies.

"There is no investment, so there is no doubt that the company at this moment is very debilitated," Bernard Mommer, a close adviser to Rodriguez who is helping guide the restructuring, said in an interview. "Up ahead, we are going to have problems like how to recover the quality of the company."

Venezuela will benefit little from the higher world oil prices projected in coming months, since production capacity remains limited. By the time Petroleos de Venezuela is producing close to 3 million barrels daily -- if it ever does -- prices are likely to have stabilized, analysts say.

In the meantime, Rodriguez and his managers are busy splitting the company into three divisions: a natural gas branch that would develop the largest deposits in Latin America, and companies in the east and west designed to make obsolete the executive offices in Caracas, where antigovernment activities percolated.

Venezuela may also unload foreign assets, like refineries in the United States that operate under the Citgo chain, which is wholly owned by Petroleos de Venezuela, and other installations in Europe and the Caribbean.

Publicly, officials deny the companies are for sale. But Mommer said Citgo remained overly expensive while providing scant returns.

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 will not 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 crucial commercialization department, which 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."