Venezuela struggles with new oil realities

Posted: Thursday, September 18, 2003

CARACAS, Venezuela By some accounts, Petroleos de Venezuela S.A., one of the world's biggest oil companies, is unrecognizable from its former self after months of political turmoil and restructuring.

Gone are nearly half the people who worked for PDVSA a year ago, fired by President Hugo Chavez after joining a two-month general strike against his leftist government. Also banished are the symbols of PDVSA's corporate opulence its impressive corporate art collection is being donated to national museums and its fleet of chauffeur-driven cars has been reduced from hundreds to just 50.

Chavez began overhauling the state-owned monopoly to fund and serve his leftist ''revolution'' for Venezuela's majority poor. And with oil prices still high, PDVSA hands over bumper amounts of cash to Chavez's government.

But the oil company is still recoiling from the upheaval and restructuring, which cost 18,000 people their jobs, and some observers are concerned about its future.

''It is amazing what they have accomplished in light of the number of people they lost,'' said Larry Goldstein, president of the Petroleum Industry Research Foundation in New York. ''But we don't know at what long term cost.''

Much of the uncertainty centers around PDVSA's production levels.

The strike had slowed the company's output from 3 million barrels a day to a trickle of 25,000. PVDSA beat all analysts' predictions in restoring its production, which returned to pre-strike levels in April. But PDVSA president Ali Rodriguez has boasted that the company was slashing costs, including reduced drilling of new wells, and independent reports suggest Venezuela's production has fallen since April to just 2.6 million barrels a day.

Venezuela still supplies about 15 percent of U.S. oil imports. But if PDVSA loses 400,000 barrels a day in production capacity this year, as some analysts predict, both countries will be worse off in 2004.

Rodriguez insists production is higher than before the strike and that PDVSA is investing enough to keep output well over 3 million barrels a day. PDVSA's investment plan is to spend $43 billion to raise production to 5 million barrels a day by 2008, he said.

''We have normalized all operations and production after the tremendous blow of the strike, which is an impressive feat,'' Rodriguez said. ''Now we are consolidating our results and continue to reduce costs.''

The restructuring began in January, in the midst of the strike. PDVSA was split into East and West divisions, based on Venezuela's main oil producing regions. This eliminated the need for most of PDVSA's administrative offices in Caracas, where thousands of strikers worked. It also demolished entire departments that dealt with the complexities of international marketing and company financing.

The split helped PDVSA succeed in cutting costs, a move Rodriguez called critical for a state-owned industry that must answer to Venezuelans, most of whom live in poverty.

''PDVSA used to be an enclave company, devoid of any real connection or relationship with society and its problems, particularly poverty,'' Rodriguez said.

PDVSA has already relinquished two of its three main office buildings in Caracas. One is being turned into a public university and the other into a military academy.

''Our (goal) is to optimize the fiscal contribution so that the state can attend to the needs of the population. We are also helping with the development of national industry using PDVSA's huge service-buying power,'' Rodriguez said.

PDVSA's dominance of Venezuela's economy is overwhelming. It accounts for almost a third of gross domestic product, 80 percent of export earnings and half the government's income.

Private companies contracted for maintenance or technological support haven't escaped PDVSA's overhaul. PDVSA managers reportedly were ordered not to use any service providers which supported the strike. PDVSA also asked foreign oil companies working here not to hire workers it fired for striking.

To replace blacklisted companies, PDVSA is promoting popular cooperatives for many tasks. Gasoline trucks repainted with the slogan ''The new PDVSA belongs to the people'' are being distributed to such groups at super-low financing rates, bypassing private tanker fleets that joined the strike.

Goldstein warns that PDVSA's cost savings and social initiatives must be balanced out by the ''real but invisible cost of losing so much collective institutional knowledge'' among the thousands of fired workers.

Formed after Venezuela's oil industry was nationalized in 1976, PDVSA was praised as an oasis of efficiency within an often corrupt public sector.

Its engineers and researchers won international acclaim, and the company was recognized as one of the best run state firms in the world.

Fired workers say the new PDVSA is destroying this proud past and will end up another underperforming, politicized company.

Already, reported political infighting among pro-Chavez factions inside PDVSA has led to new managers being replaced and rumors that Rodriguez is on his way out as company president.

Rodriguez suggests another shake-up can be expected as a possible response to production and labor problems at the decentralized West and East divisions.

But despite its turbulent transformation, PDVSA is slowly recovering its international reputation and is attracting foreign investment in areas like the multibillion dollar Deltana Platform natural gas project, Goldstein said.

''The strike made everyone very nervous, but it is a symbiotic relationship.

People are willing to look beyond the current situation, and capital is available and willing to flow into Venezuela,'' Goldstein said.

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