Venezuela Set to Assume Control of Its Oil Fields

By Juan Forero
Washington Post Foreign Service
Tuesday, May 1, 2007

CARACAS, Venezuela, April 30 -- President Hugo Chavez's government will take control Tuesday of what might be the world's richest oil fields, a huge swath known as the Orinoco Belt that Big Oil has spent a decade and nearly $20 billion developing.

In the past two years, Venezuela, like energy-rich countries from Russia to Bolivia, has exerted increasing control over its oil. But now, Chavez's administration will take its biggest leap yet, with the state oil company assuming a 60 percent stake in four projects previously run by multinationals, including ExxonMobil, ConocoPhillips and Chevron.

The shift is being greeted with revolutionary fervor. "For the country's workers, it's a day to celebrate," Energy Minister Rafael Ramirez said recently.

Despite the pomp of the occasion, many oil analysts question whether the state company, Petroleos de Venezuela, is prepared to oversee the development of projects in the country's north that, if fully exploited, could give Venezuela the largest certified oil deposits in the world.

The firm, which previously had a minority stake in each of the projects, will now be better positioned to make key decisions on production and refining, and on how to manage the workforce. It will also assume more responsibility for investments. But the fields contain a heavy, molasses-like oil that is highly expensive and problematic to refine -- and the state company could face severe financial and technical challenges, analysts say.

On the surface, PDVSA, as the company is best known, appears stronger than ever. It is among the world's top five oil companies and exports to the United States, Europe and distant China. Last year its revenue, including refineries and the Citgo retail arm in the United States, topped $100 billion.

PDVSA has also become a tool for social change in the president's self-styled revolutionary government, spending nearly $12 billion last year to alleviate poverty and helping run programs from home building to literacy training.

But oil analysts say the pace and scope of the expenditures on social programs, up from $549 million in 2003, are hitting the company hard, leaving it vulnerable.

Company filings and interviews with oil analysts show that PDVSA has failed to invest in infrastructure and is unable to ratchet up production. If prices tumble -- unlikely in the near term, but almost certain in a historically volatile industry -- the company would have difficulty making up for the shortfall, troubling for a country that depends on PDVSA for three-quarters of its export revenue.

"I think the consensus is that the company is in a very weak position," said David R. Mares a Latin America expert at the University of California at San Diego and co-author of a study of the firm. "For PDVSA, that's a particular problem because it means that with their inefficiencies, with higher prices, it's difficult for them to explore and to do more. They have multiple points where they're significantly weaker."

Francisco J. Monaldi, an oil expert at the Institute of Superior Administrative Studies in Caracas, said that a fiscal crisis could take time to materialize, given the huge financial reserves the government has accumulated because of high oil prices. But he said the government could be in trouble if the price falls below $50 a barrel for more than a year.

"The current rate of increase in public expenditures is not sustainable," he said. Monaldi argued that a significant drop in oil prices would leave the government with two difficult options, cutting social programs or raising production. "If Venezuela wants to increase production, it will be hard, very hard, because it will require a lot of investments, $7 billion or $8 billion a year," he said, noting that investment has fallen fall short of that.

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