Outlook grim in Venezuela's essential oil industry

Posted on Saturday, 05.04.13

Outlook grim in Venezuela's essential oil industry
By FABIOLA SANCHEZ
Associated Press

MORON, Venezuela -- Only the filthy water from broken sewer pipes keeps
the dust down in front of Ramon Boet's shop, which sells statues of
saints and other religious objects.

In the distance, massive tankers pull up to a half-century-old refinery
that processes much of the oil that earns Venezuela more than $100
billion a year.

"It doesn't help us at all," Boet, 58, says as a blackout snuffs the
lights in his shop in this Caribbean coastal town. He closes before
dusk. Too many robbers.

The oil flowing from the El Palito refinery sells for more than five
times what it cost when President Hugo Chavez took office in 1999. Yet
when Chavez died in March he left Venezuela's cash cow, its state-run
oil company, in such dire straits that analysts say $100-a-barrel oil
may no longer be enough to keep the country afloat barring a complete
overhaul of a deteriorating petroleum industry.

The situation is more urgent than ever, analysts say. The price of crude
has slumped in recent weeks and Chavez's heir, Nicolas Maduro, appears
to have done little to address declining production, billions in debt
and infrastructure deficiencies that have caused major accidents
including a blaze that killed at least 42 people at Venezuela's largest
refinery last year.

Maduro has retained Chavez's oil minister and the head of state oil
company Petroleos de Venezuela S.A., Rafael Ramirez. And he appears
intent on continuing to send cut-rate oil to members of the 18-nation
Petrocaribe alliance, for which Venezuela is hosting a summit on Saturday.

Ramirez said Friday that Maduro would use the meeting to propose
creating a special economic zone for group members.

PDVSA, which accounts for 96 percent of the country's export earnings,
no longer "generates enough income to cover all its costs and finance
its commitments," said Pedro Luis Rodriguez Sosa, an energy expert at
the Institute for Advanced Studies in Administration in Caracas.

He said that "you can see PDVSA is in trouble" at the $100-a-barrel
level because of the many millions lost to gasoline subsidies and
spending on domestic social spending and PDVSA's use as a "geopolitical
tool" to maintain regional alliances.

Venezuela has the world's largest oil reserves but PDVSA's production,
earnings and income all appear to be on a downward slide and its debts
to suppliers rose 35 percent. Its debt to the Central Bank of Venezuela
reached $26.19 billion last year, a nearly eight-fold increase in two years.

The government makes no apologies. It says it is employing the country's
most important natural resource for the good of the people and promises
increased production and revenues in the immediate future.

Ramirez said that PDVSA's efforts remained focused on developing the
remote Orinoco belt, site of the world's biggest oil reserves, with the
aid of oil firms from China, Russia, the U.S., Italy, Vietnam, Malaysia,
Japan and Spain. Venezuela hopes to lift overall production to some 3.32
million barrels a day, 200,000 more than last year.

"We're in a process of trying to attract investment in dollars other
than ours," Ramirez said, assuring reporters that PDVSA would work with
private investors to not take on more debt to make new investment.

Outside experts, however, are deeply skeptical. They say PDVSA is badly
mismanaged and that even a radical overhaul would take years to show
results.

Rather than reinvesting enough profits in exploration and maintenance,
Chavez dedicated oil revenues to social spending such as building
hundreds of thousands of homes and free medical clinics for the poor,
they say. Last year PDVSA said it spent $28.83 billion, nearly a quarter
of its income, on various state programs.

PDVSA also loses billions subsidizing gasoline for Venezuelan drivers,
who pay less to fill up their tanks than people anywhere else in the world.

"The government of Venezuela today uses PDVSA as its petty cash box to
lead populist social programs," said Jorge R. Pinon, associate director
of the Latin America and Caribbean Program at the University of Texas,
Austin. "Whatever capital is left in PDVSA is being mismanaged,
mismanaged because they're just not focused on running the company. ...
They're focused on building hospitals and schools."

On top of that, state oil company PDVSA dedicates 42 percent of its
production to favored partners in the Caribbean and to consumption
inside Venezuela, where gasoline is almost free, which means it can sell
less than 60 percent at market price.

Ramirez said that a rise in daily domestic oil consumption to 650,000
barrels this year is expected to drive down exports by 7.8 percent to
2.36 million barrels a day, inevitably damaging revenues for PDSVA and
the broader Venezuelan budget.

The alliance's Caribbean and Central American member nations receive
hundreds of millions of dollars annually in deeply discounted oil, part
of Chavez's bid to project Venezuela's influence in the region.
Socialist ally Cuba is the largest recipient.

Maduro made his first major foreign trip as president to Cuba last
weekend, recommitting to sending it some 130,000 barrels of oil a day.

Now, Maduro must wrestle with the consequences of Chavez's energy and
economic policies, which included a campaign spending spree last year
ahead of Chavez's re-election.

In order to control capital flight, Chavez imposed controls that require
any business that wants to import goods to purchase dollars directly
from the government, which rations them out in relatively small amounts
at an artificially set official exchange rate.

Even with gasoline at roughly $100 a barrel over the last six months,
the government hasn't been meeting the demand for dollars. That's
created frequent and worsening shortages of staple goods such as flour,
sugar and cooking oil.

And despite promises to increase the flow of dollars it pumps into the
economy, independent economists don't see how it can be pulled off.
Crude prices fell about 10 percent over the last three weeks and
analysts say they could stabilize at $90 a barrel.

At the same time, official figures show Venezuela produced 3 million
barrels a day last year, a 95,000 barrel-a-day decline from 2011.
Independent organizations such as OPEC estimate Venezuela's production
could actually be around 2.7 million barrels a day.

Ramirez has played down questions about the company's performance, and
PDVSA says it invested billions in exploration last year, drilled 2,010
wells, more than double the previous year, and projects increased
production to reach 4 million barrels a day in 2014 and to 6 million by
2019.

Venezuelans such as Zaida Eleonora Mejicano are skeptical of such talk
and are impatient to see the benefits.

Mejicano used to travel around Venezuela buying gold jewelry that she
resold in Moron, her hometown. Now, she says, she's amazed by the
deterioration of the quality of life. She can't travel anymore for fear
of being robbed.

"You can't get anything here. Here women have to wait in line four, five
even six hours for a stick of butter," she said. "I've always worked
hard but now one's afraid to even travel. Things are really ugly here."

AP writer Michael Weissenstein contributed to this report.

http://www.miamiherald.com/2013/05/04/v-fullstory/3380160/outlook-grim-in-venezuelas-essential.html