www.morningjournal.com 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.

www.forbes.com Reuters, 02.28.03, 12:29 PM ET

CARACAS, Venezuela, Feb 28 (Reuters) - Venezuela's four foreign-financed extra heavy oil upgrading projects from the Orinoco region are back online following the restart of the Petrozuata joint venture on Friday. The projects, which partner state oil firm Petroleos de Venezuela PDVSA with international firms such as U.S. ExxonMobil (nyse: XOM - news - people) and French TotalFinaElf <TOTF.PA>, had been pumping over 400,000 barrels of extra heavy oil before shutting down due to an oil strike started Dec. 2. The Cerro Negro and Sincor projects resumed output this week after PDVSA restarted natural gas supplies needed as feedstock for processing units that upgrade the ultra heavy oil into synthetic crude for export. Ratings agency Standard & Poor's said on Friday Petrozuata's field production "is ramping up as upgrader charge rates rise." Petrozuata officials were not immediately available to give further details. A fourth project, Hamaca, has resumed limited output of the tar-like Orinoco oil mixed with lighter crude to create an exportable blend. Hamaca's synthetic crude upgrader has not been completed. Initial output from all four projects will increase as gas supplies improve. Venezuela's government has been battling to restore the strike-hit oil sector, which provides half of state revenue. President Hugo Chavez fired over 15,000 PDVSA workers who took part in the strike, hiring replacement workers and the military to staff abandoned posts. The OPEC nation, normally the world's No. 5 crude exporter, was pumping nearly 3.1 million bpd of oil including output from the Orinoco region before the strike. On Thursday, oil minister Rafael Ramirez said total oil production had been restored to 2.08 million bpd. But PDVSA employees and rebel oil workers said that output temporarily fell by 450,000 bpd to 500,000 bpd on Friday. The rebel workers say output is now 1.13 million bpd.

reuters.com Fri February 28, 2003 10:47 AM ET (The following statement was released by the ratings agency)

NEW YORK, Feb 28 - The Petrozuata Finance Inc. (B/Watch Neg/--) heavy oil production and processing project in Venezuela has restarted operations following the delivery of natural gas and hydrogen feedstocks to the upgrader. The company is operating the upgrader at 75% of capacity, and plans to return to normal production rates on March 1.

Field production is ramping up as upgrader charge rates rise. While these developments are positive, the ability of Petroleos de Venezuela S.A. and third parties to provide a stable supply of feedstocks remains questionable, given the continued political and social divisions in the country. Petrozuata plans to have 800,000 barrels of syncrude production shipped to ConocoPhillips in early March. The company's liquidity position remains adequate for the very near term, with about US$70 million in a six-month debt service reserve and about US$190 million to US$200 million in cash. This liquidity will enable Petrozuata to meet its April 2003 semiannual debt payment. To consider taking positive actions on Petrozuata's rating, Standard & Poor's will need a longer demonstration period of consistent feedstock supply and performance under recently announced foreign exchange controls. Furthermore, Standard & Poor's will need to achieve greater confidence that labor strife will not reignite in the near future.

www.freep.com

Energy Secretary Spencer Abraham said Tuesday it may be two to three months before Venezuelan oil shipments to the United States return to normal levels, now that the crisis that shut down production in the country has passed.

Abraham, appearing before a Senate committee, also said the Bush administration was ready to tap its emergency reserves, but would do so only if there are severe disruptions of supplies and only in consultation with other major energy-consuming nations.

His testimony came as energy prices across the board -- from gasoline to crude oil, heating oil and natural gas -- continue to soar.

Pressed on the matter, Abraham said he couldn't be specific on the level of Venezuelan imports. But he said a delay of 60 to 90 days could be expected between an increase in production in Venezuela and barrels of that country's oil arriving in the United States.

Asked about using the government's Strategic Petroleum Reserve to dampen prices, Abraham reiterated the administration's conviction that the emergency supplies of oil should be used only to counter severe shortages and not to influence prices.

www.forbes.com Reuters, 02.24.03, 8:50 AM ET

CARACAS, Venezuela, Feb 24 (Reuters) - Venezuela's strike-hit, extra-heavy oil project Sincor is in the process of restarting major processing units but short-term output will be determined by natural supplies, a project official said on Monday. Sincor, which upgrades ultra-heavy oil from Venezuela's Orinoco region into refineable synthetic crude, was shut when state oil firm Petroleos de Venezuela (PDVSA) cut supplies of natural gas needed to run processing units during an oil strike started on Dec. 2 by foes of President Hugo Chavez. "We are in the process of restarting. We sent out about 2 million barrels of finished crude (from storage) over the weekend," General Manager Joris De Smett told Reuters. Last week project officials said they hoped to restore production over the weekend, after storage levels built up before the stoppage were drawn down. De Smett said start-up volumes would be determined by the amount of natural gas provided by PDVSA for the project, which partners French TotalFinaElf <TOTF.PA> and Norway's Statoil <STAT.OL> with PDVSA. Full production could be reached by the end of the week if gas supplies are sufficient, he said. Sincor has the capacity to process 200,000 barrels per day (bpd) of the Orinoco region's tar-like crude into 180,000 bpd of syncrude. The strike, which had wide support from PDVSA employees, cut Venezuela's oil production from 3.1 million bpd to under 150,000 bpd at the lowest point. The government has fired over 12,000 of the the striking employees and used replacement workers to restart the industry. PDVSA says oil production is now over 2 million bpd, while the rebel oil employees say it is closer to 1.5 million bpd. The return of all four of the Orinoco ultra-heavy projects would add about 400,000 bpd to the OPEC nation's oil output.