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The following is an article written by Veninvestor’s Alexandria Beech on a conversation with two oil experts that characterize the real issues related to the government’s ability to raise oil production. As the weeks roll on, the oil strike in Venezuela emerges as the main card in the opposition's favor. Those who understand the oil strike, including details of the Venezuelan oil industry, will have a firm idea of whether the government will be forced to negotiate, or whether all sides will sink in obstinacy. Oil represents not only revenues but the nation's life blood. As the government announces higher and higher levels of production, it's important to keep a tight finger on the actual pulse of production, so that we aren't swindled or misled. Recently, I spoke with two local oil experts, Charles Beech, an Oil Contractor, and José Torres, a PDVSA production superintendent, who spend time with the on-site workers who actually see figures right off the barrel counters on pipe lines and tank storage levels. Charles told me that neither investors nor the opposition should feel worried when the government announces production increases, such as the 1.6 million barrels announced by Vice President José Vicente Rangel earlier this week.  It's all psychological warfare. The government thinks that if it can convince the world that it's back in the oil game, it will demoralize the opposition and gain an upper hand in negotiations. It hopes that PDVSA workers will wander back to work. However, the people on the oil fields have a very different take on production, which they say will only increase up to a maximum of 1. 5 million barrels a day, and then level off. The only wells functioning in Venezuela today are natural flowing, that is, they pump light oil that naturally flows to the surface. Both experts told me that the government is already starting to have production problems with the natural flowing wells in Pirital and El Carito in Monagas state. The problems are due to the formation of asphaltene, a very heavy substance made of hydrocarbon molecules that bind and harden at high pressures. This "asphalt-like" substance creates plugs on the anulars on production tubing and formations.  It also builds up on the walls of production tubing and lines - slowly choking a well.    Therefore, chemical and mechanical procedures need to be implemented to counteract the effects of the asphaltene. This is called "servicing an oil well." Wells are serviced by specialized national and international companies that have materials, equipment, and know-how.  Mr. Torres said that most of the companies that service oil wells are currently on strike.  Charles says that "most well service contractors are not willing to work until PDVSA sets a payment schedule for old debts owed since last year.  In the case of transnational companies running marginal fields, these companies bill and get paid every quarter; the last payment cycle was due in December. Since none of these companies were paid, they were unable to pay the contractors who then suspended their services or are in the process of suspending their services." Until they are serviced, the wells that are "plugged up" will remain inoperable.  In Northern Monagas, the "contractors who service the wells are mostly international; due to the depth and high pressures of the wells, the service is a highly technical and dangerous work ." Many companies refuse to operate in that region.  The government is attempting to reactivate secondary wells to offset production drop-offs on these wells.  On Tuesday, "they opened up production in the Musipan field and closed it up again today for unknown reasons."    Besides the formation of asphaltene, other problems are likely to cap off production at naturally flowing wells. Part of the process of production is separating oil from water. American companies normally supply the chemicals that separate these two substances. However, these companies have stopped providing the proper chemicals. Moreover, the government is having difficulties with water handling, according to Mr. Torres. Due to a lack of skilled labor, the government is experiencing difficulties processing the water properly.  As more oil is produced, the government will likely face greater problems disposing of the water filtered from the process. Another problem confronting the government is that some wells are being "overproduced". Like a car that is too revved up to run, over production takes place when production is "run at greater speeds than the capacity of a unit," according to Mr. Torres. This damages the wells and the reservoirs of water. Allegedly, while Mr. Chávez has succeeded in reaching peak production in Northern Monagas, government oil workers are panicking because of overproduction in several wells. A final problem slowly turning into a media nightmare for the government is the amount of gas it is burning. The government's own rules limit burning up to 2% of daily gas production. Currently, Mr. Torres says that “the government is burning 20% to 30% of daily gas production”. As a result, the government is running out of gas supplies. Further, when burned at high levels, according to environmentalist Luis Alfredo Brunicardi, "gas contains high levels of hydrogen sulfur contents, generating sulfur dioxide, which produces acid rain and contributes to the greenhouse effect and global warming." The oil currently being produced in Venezuela is light, which accounts for 62% of total Venezuelan oil. A common myth is that most Venezuelan oil is heavy crude.  But of the total 3.3 million barrels of oil produced under normal circumstances, only 1.28 million barrels or 38% were heavy crude, according to Mr. Torres. Still, the government will not be able to produce heavy crude until the strike ends, because of the pumping procedures required.  Heavy crude, however, is not as profitable and commercial as is light crude. Furthermore, Charles adds "to restart the heavy crude fields will require that personnel start each well individually since production was stopped without circulation in the majority of these wells. Therefore, it will be extremely difficult to start these wells since they use the common methods of electrical submersible pumps and progressive cavity pumps as artificial lifting systems." Currently, Zulia state is producing approximately 600,000 barrels a day. The wells in Monagas State in Eastern Venezuela are producing around 700,000 for a total of 1.3 million barrels of light crude. All experts agree that it is impossible that this number will increase beyond 1.5 million barrels per day while the strike lasts. I'd like to end this piece with a human angle that in the end matters the most. Both Mr. Torres and his wife worked for PDVSA for many years. Each day, dissident PDVSA workers find out that they have been fired by reading their names in the local newspaper. Mrs. Torres already read her name on the list of workers fired. We can only hope that the international community steps up pressure to restore democracy in Venezuela so that day never comes when Mr. Torres reads his name too.

—  Alexandria Beech      Veninvestor

www.forbes.com Reuters, 03.07.03, 1:49 PM ET CARACAS, Venezuela, March 7 (Reuters) - Venezuela's foreign-financed Cerro Negro extra-heavy oil project has restarted its synthetic crude processor after a boiler problem shut the unit on Thursday, project partner ExxonMobil Corp. (nyse: XOM - news - people) said on Friday. "Operadora Cerro Negro SA (OCN) informs that its upgrader unit is restarting operations today," said a statement from ExxonMobil, which is partnered with state oil firm Petroleos de Venezuela (PDVSA) in the Cerro Negro joint venture. The upgrader, which has the capacity to process 120,000 barrels per day (bpd) of extra heavy oil from the Orinoco region into 108,000 bpd of light synthetic oil, was shut due to a problem with one of its furnaces, the statement said. Cerro Negro and three other projects which upgrade Orinoco oil are in the process of restarting after being shut by an oil strike started on Dec. 2. The strike, widely supported by PDVSA employees, caused a disruption in the Orinoco projects' natural gas feedstocks from the state oil firm. Cerro Negro, which has been producing about 60,000 bpd of extra heavy crude since it resumed operations in late February, continued pumping oil into storage tanks despite the one-day shutdown at the processor. The four Orinoco projects, which partner PDVSA with international oil firms, had been producing over 400,000 bpd of Venezuela's total output of 3.1 million bpd in November.

www.voanews.com VOA News 07 Mar 2003, 01:33 UTC

Venezuelan President Hugo Chavez has lifted the emergency status on crude oil and most petroleum exports, telling customers the state-run oil company will be able to fulfill its contracts.

Mr. Chavez made the announcement Thursday during a swearing-in ceremony for Petroleos de Venezuela's new board of directors.

Company officials declared in December that it was impossible to live up to its oil export contracts because of the two-month general strike that crippled the industry and brought Venezuela to a standstill.

President Chavez says output, which fell to less than 150,000 barrels a day during the strike, is now up to more than 2.6 million barrels a day. It was more than three million a day before the strike.

But oil workers who were fired because of their participation in the walkout said earlier this week that production is only about one million barrels a day.

Venezuelan's opposition called the general strike in December in a failed bid to force President Chavez to resign. They say his economic policies are destroying the country.

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."

sg.biz.yahoo.com Saturday March 1, 12:28 AM

CARACAS -(Dow Jones)- Venezuela's state-owned oil monopoly Petroleos de Venezuela SA has shut in about 500,000 barrels per day of crude production as storage tanks have filled and exports from the Jose port in eastern Venezuela had to be slowed down, a PdVSA manager said Friday.

But output could get back to previous levels the moment the bottleneck of stored tanks is resolved, the PdVSA manager, who is based in eastern Venezuela, said. He spoke on the condition of anonymity. "This is just temporary, nothing to be worried about," the manager added.

ADVERTISEMENT It could take three to four days to empty storage facilities and get production back at previous levels, the manager added. Total production nationwide still stands at around 1.5 million b/d, the manager said.

The drop coincides with the latest report of ex-PdVSA staff early Friday that production dropped by about the same amount to 1.13 million b/d from 1.58 million b/d a day earlier. The government maintained Thursday production levels stood at 2.08 million b/d.

The company was hit by a strike that lasted two months and severely affected oil production and exports. The government has fired more than 15,000 employees that participated in the strike.

Earlier this week, the company lifted the force majeure in the eastern region after major shipping agencies and oil companies certified loading conditions at the port.

The company is struggling to reach or go beyond the 2 million b/d production level, analysts have said. After focusing on easy oil fields that don't require much added pressure to get the oil flowing, PdVSA faces difficulties as mature oil fields are more labor and capital intensive and take more time to pump oil.

Experts have said they doubt PdVSA would reach 2.5 million b/d any time soon due to a lack of financial and human resources.

By Fred Pals, Dow Jones Newswires; 58212-5641339; fred.pals@dowjones.com;