- The Washington Times - Wednesday, February 7, 2007

Venezuela’s national oil company is buckling under the burden of financing President Hugo Chavez’s more than $9 billion a year in social and political ventures.

Production at Petroleos de Venezuela is declining, and any major drop in oil prices or failure to reverse declining investment and production could lead to bankruptcy of the goose that lays the golden egg for Venezuela, Moody’s Investors Service warned yesterday.

Cambridge Energy Research Associates also questions whether the once well-run oil company is being overstretched by $20 billion in joint energy ventures Mr. Chavez has started with other Latin American countries, which are a further drain on scarce funding and personnel from the projects the company needs to survive and maintain its obligations.

Mr. Chavez boosted social spending out of oil revenues by 50 percent last year when he was running for a second term in office, sending inflation surging by 18.4 percent.

The inflationary spiral was further fed by a 21 percent plunge in the value of the Venezuelan bolivar last month — the result of citizens and investors pulling money out of the country after Mr. Chavez announced he would nationalize “strategic” industries not already under state control and assert majority control over pioneering projects by major Western oil companies in Venezuela’s oil-rich Orinoco River basin.

“I do believe that the president of Venezuela is really, really destroying his own country, economically, politically,” Secretary of State Condoleezza Rice told lawmakers at a congressional hearing yesterday. She added that Mr. Chavez’s forced nationalizations and newly secured powers to rule by decree represent “an assault on democracy.”

Mr. Chavez is known for his fierce anti-American rhetoric and is a close ally of Cuban President Fidel Castro, but his country has maintained a business-as-usual relationship with the U.S. behind the scenes. Venezuela remains the fourth-largest supplier of petroleum to the United States, relying on a legacy of close ties that were forged between U.S. and Venezuelan oil companies before he took office in 1999.

But the well-tuned Venezuelan network of production facilities, Caribbean and U.S. Gulf Coast refineries and U.S. gas stations operated by Citgo has begun to falter after six years of Chavez rule, and the outlook for the once-thriving oil company looks bleak in light of the president’s announced agenda to further squeeze profits from the oil sector.

Mr. Chavez’s skimming of more than half the oil company’s profits is forcing it to go deeply into debt, with plans to issue $5 billion in bonds to finance a backlog of projects needed to maintain Venezuela’s 2.3 million barrels a day of oil production and attempt to boost it to 4 million barrels a day.

“The growing financial burden has put [the oil company’s] future at risk, raising serious questions about the sustainability of the government’s strategy,” the Cambridge research group said in a recent report.

Mr. Chavez’s emphasis on “oil rent distribution over wealth generation” not only could bankrupt the oil company, but Mr. Chavez’s joint energy ventures with other Latin countries also are “straining the technical and personnel capabilities” of the oil company, “which are already challenged by domestic operations alone.”

“The resulting financial burden has raised doubts about [the company’s] capacity to deliver on its business plan and continue to contribute to government-led social programs,” it said.

Moody’s also questions whether the oil company can make the costly investments it needs and keep contributing the cash that Mr. Chavez demands.

Beyond that, the nationalizations are throwing into question whether the oil company will get the technical expertise and cooperation it needs from Western oil companies to complete the heavy oil projects in the Orinoco basin that hold the key to future production in Venezuela, Moody’s said.

“The current price environment has allowed [the company] both to fund its capital and to make ever-larger social payments” — which Moody’s estimated at $9 billion in the first nine months of 2006, versus $6.6 billion for all of 2005. Social spending by the company now outpaces its $7 billion a year in spending on maintenance and expansion of oil operations.

“Ultimately, the biggest challenge will be to retain more of the cash it needs internally” in the face of increasing government demands, Moody’s said. “Without significant re-investment, the company’s ability even to continue to deliver cash to the government could be compromised, particularly if there is a return to lower commodity prices.”

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