Falling oil production a challenge for Venezuelan President Hugo Chavez

CARACAS, Venezuela — For the better part of a decade, Venezuelan President Hugo Chavez has spent billions of dollars of his country's oil revenue to challenge U.S. interests, build influence around the world and fund a self-styled socialist revolution at home.

Yet as Chavez moves from one international crisis to another — most recently a near military confrontation with neighboring Colombia, an important U.S. ally — many wonder how long his oil-funded wild ride will last.

Not long, analysts in Venezuela and abroad said, if production continues to decline at the country's state-run energy company, Petroleos de Venezuela S.A., known by its Spanish initials PDVSA.

The state oil company is responsible for 80 percent of the exports from this country of 26 million people, but analysts think that PDVSA is falling apart.

"PDVSA is a company on the border of collapse," said Robert Bottome, the editor of the economic newsletter VenEconomia. "You don't have people, you don't have a corporate strategy and you don't have money."

PDVSA's problems are America's problems, since lost output in any oil-producing nation results in tighter supplies and higher global prices. Venezuela ranges from the third to the fourth biggest supplier of oil to the U.S. market.

PDVSA's woes include falling output, insufficient investment in current and future production, a work force bloated by patronage, and a shortage of oil field equipment and skilled personnel with know-how.

PDVSA is notoriously tight with financial information that other companies usually provide, but a study of official announcements, company figures and outside analyses suggest that it's bleeding money and racking up huge debt, even as international oil prices are at record highs.

Official PDVSA statements indicate that the company lost $3.6 billion last year, according to a study by the nonprofit Economic Research Center for the Caribbean, which is based in the Dominican Republic.

Figures from the International Energy Agency research center show an even bigger loss last year, $7.9 billion, which would be astonishing given skyrocketing oil prices. The difference comes from widely divergent estimates of PDVSA's production: The IEA calculates that Venezuela produces about 2.4 million barrels of oil per day, about a quarter less than PDVSA says it's pumping out.

Most independent experts use the IEA's figures, which indicate that production at PDVSA has dropped by 800,000 barrels per day since 1997. And despite the current high oil prices, PDVSA appears to be running out of cash.

Falling production means that Chavez eventually will have to cut back on popular social programs at home and on billions of dollars in charity to foreign governments.

"There are many signs that something's wrong at PDVSA," said Pietro Donatello, the Venezuela-based editor of the magazine Latin Petroleum. "You put together all the pieces of the puzzle, and things are not looking really good."

Chavez may have even less room to maneuver if U.S. officials make good on threats to declare Venezuela a state sponsor of terrorism because of alleged links to the guerrilla group the Revolutionary Armed Forces of Colombia.

That designation would cut off most commercial ties between the United States and Venezuela, including oil. Venezuela sells more than half of its oil to the United States, which is the only major buyer that has the capacity to easily refine Venezuela's heavy crude oil.

Venezuela's oil minister, Rafael Ramirez, said earlier this week that his country had begun shifting to payment not in U.S. dollars but in euros, the currency of the European Union. It was called a protective step against the weakening dollar, but the move also signaled worry about potential sanctions by the Bush administration.

Government energy officials, who didn't respond to requests for comment, have painted a brighter picture of PDVSA. They say that oil production has stayed largely steady at 3.3 million barrels per day, a little more than a decade ago, and will hit 6 million barrels per day by 2012.

That upbeat view assumes that Venezuela can obtain the financing for a $70 billion expansion to double its oil output in four years. The threat of U.S. sanctions would make it harder for PDVSA to find investors.

One important obstacle to that goal was removed this week, however. A judge in London dissolved an injunction that had allowed ExxonMobil Corp. to freeze $12 billion in PDVSA assets abroad. ExxonMobil and Venezuela are in international arbitration over the government's seizure of an oil field, and the freeze threatened Venezuela's ability to get financing for the expansion project.

With 80 billion barrels of proven oil reserves, Venezuela holds the world's seventh biggest reserves. PDVSA also claims extra heavy crude-oil deposits in the country's Orinoco belt that, if confirmed, would give Venezuela the world's biggest oil reserves.

Venezuela's economy has boomed with the oil bonanza, growing by 8.4 percent last year, although that's also fueled the region's highest inflation rate. And that's a problem for Chavez, high oil prices notwithstanding, because he's guaranteed government workers paychecks that are indexed to inflation. Chavez's popularity, measured in a recent national poll, has fallen to 34 percent amid economic problems, food shortages and rising crime.

The lack of foreign investment and know-how is particularly acute, analysts said, since Chavez fired 23,000 PDVSA employees during and after a 2003 strike.

They've been replaced in large part by political appointees, and the company's employee rolls have swollen to 115,000, almost three times what they were a decade ago, two former PDVSA officials said. The government says they've grown only to 75,000, though Chavez has said he wants to increase that to about 114,000 by the end of next year.

The lack of expertise has dragged down everything from the maintenance of drilling equipment to planning for future production. Production costs also jumped by 27 percent in 2006 while sales grew by 20 percent, PDVSA figures show.

Adding to the problem, foreign companies, including lenders of drilling rigs, are reluctant to work with Venezuela after Chavez seized the operations of ExxonMobil and other multinationals. The result has been a shortage of drilling rigs and other equipment needed to keep production flowing.

Former PDVSA director Eddie Ramirez, a Chavez opponent who isn't related to Rafael Ramirez, said the company also had invested heavily in social programs rather than in oil production, which had further hurt efficiency. PDVSA figures show that the company spent $13.8 billion in social funding in 2006, double the 2005 amount.

"It's distracting from the company's principal mission ... selling oil," Ramirez said. "You can't ask an oil company to take on what should be a function of the state."

Signs of trouble have come in bits and pieces so far, with the whole suggesting a company in need of cash.

Starting in January, PDVSA began requiring clients to pay for their oil eight days after purchase, rather than the standard 30 days. It's also been selling off foreign properties, including a Houston refinery in which it had held a 41 percent share.

That's thrown Chavez's revolution in doubt, even in an age of $109-a-barrel oil. How long the oil boom will keep him flush remains to be seen.

PDVSA'S problems are "leading to his downfall," Eddie Ramirez said of Chavez. "Between a PDVSA that he didn't control and an inefficient one, he preferred an inefficient PDVSA."

(Hall reported from Washington.)