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Venezuela's oil model: Is production rising or falling?

High oil prices keep profits up, but output may be down.

By Danna HarmanStaff writer of The Christian Science Monitor / May 31, 2006


In recent weeks, both Bolivian president Evo Morales and Ecuador's president Alfredo Palacio have taken a page out of Venezuelan populist president Hugo Chávez's natural resources manual.

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It's the page that features politicizing the oil and gas industries and nationalizing them - keeping more of the petro dollars at home but alienating longtime foreign investors. A good model? Many oil industry analysts are skeptical.

While the government denies it and high oil prices mask it, analysts say Venezuelan oil production is declining. Since Chávez took over in 1999, production in the state-run oil fields has fallen almost 50 percent, say analysts at PFC Energy, a global energy consulting firm based in Washington, D.C., who spoke on condition of anonymity rather than risk the wrath of the Venezuelan government.

During the same period, no new significant oil reserves have been discovered. And with new, smaller profit margins for outside companies, foreign investors are now slowing the rate of investment in the jointly run oil and gas fields.

"The outlook for increases in the future is starting to go up in smoke and we see a petroleum industry in contraction," said Luis Giusti, the former president of Petroleos de Venezuela (PDVSA), in an interview earlier this month with Venezuela's Union Radio. "The day the prices change, the situation is going to be evident once and for all," he said.

The Venezuelan government and PDVSA declined repeated requests for comment. Official figures show oil production has bounced back after a 2002 strike and decline, but oil analysts doubt the veracity of those figures.

It's not clear how many fields are operated solely by PDVSA because the company reports production totals without details as to how many fields or wells are under their control and how many are operational.

But such claims of a poorly managed oil industry don't seem to bother the neighboring countries.

On May 1, Morales announced that "foreign companies will not be able to steal from Bolivia any longer," and summarily nationalized the country's gas industry. A week later, in the middle of a contract dispute, Mr. Palacio endorsed the confiscation of assets of the US company Occidental Petroleum Corp., the biggest producer of hydrocarbons in Ecuador.

The moves played well at home. Bolivia and Ecuador, like Venezuela, are countries where anti-Americanism is on the rise and poverty is often blamed on foreign companies, who, according to the argument, are exploiting the natural resources, making exorbitant profits and leaving insufficient money behind for anti-poverty programs.

And yet, while popular, and clearly profitable initially, such nationalizations - and more particularly the way in which they are carried out - are unwise, say critics, and are likely, in the long-term, to hurt those who are applauding now.

"These are politically and ideologically inspired moves and are not in the national best interest," argues Orlando Ochoa, an economist at Caracas' Catholic University. Presidents Morales and Palacio should look carefully at Venezuela's example and take heed, he suggests. "It's clear this oil-rich country is moving backward and eventually it will all end badly."

That Venezuela, the world's fifth-largest oil exporter, is moving backwards is not clear to everyone.

The state oil company, PDVSA, reports production of 3.3 million barrels a day. There is no way to independently confirm this, and most outside analysts, including the International Energy Agency, say PDVSA's numbers are inflated and production is closer to 2.6 million barrels per day. The Financial Times reported this month that Venezuela's shortfall in production is such that it was actually forced to strike a $2 billion deal to buy about 100,000 barrels per day of crude oil from Russia to avoid defaulting on contracts - a claim the Chávez government says is false.

But whatever the real output, Venezuela - because of the high price of oil - is raking in more petrodollars than ever before. When Chávez came into office in 1999, the country reported production of 3.5 millionbarrels per day and, with oil selling at about $15 per barrel, was making just over $18 billion a year. This month, with oil at about $70 a barrel, PDVSA Finance Director Eudomario Carruyo told Reuters he expects revenue to top $85 billion this year. PDVSA officials have reportedly said that oil production will increase to 4 million barrels per day by 2012.