- The Washington Times - Tuesday, January 12, 2010

Venezuelan President Hugo Chavez has been making overtures to foreign oil companies to try to rescue his country’s nationalized energy industry before legislative elections scheduled a year from now.

Venezuela’s national oil company, PDVSA, recently offered to reduce taxes levied on foreign firms from 50 percent to 34 percent in a bid to entice them to develop drilling projects and build new refineries on the Orinoco River basin. The basin is thought to contain one of the world’s largest oil reserves, estimated at 316 billion barrels.

Among the companies offered lower taxes are a Russian consortium composed of Gazprom, Lukoil and TNK-BP plus Italy’s ENI, Norway’s Statoil and France’s Total.

Many foreign oil companies have been reluctant to supply the high degree of investment and technology required to extract the Orinoco’s heavy crude oil because of Mr. Chavez’s nationalization policies, which have given his government increasing control over the energy sector.

Oil giants including Exxon Mobil, ConocoPhillips and British Petroleum PLC pulled out of Venezuela after PDVSA assumed 60 percent ownership of their operations in 2007, when the international price of oil stood at $137 per barrel.

Drastic drops in the price of crude because of last year’s global recession, combined with PDVSA’s chronic underperformance, have forced Mr. Chavez to try to lure back foreign companies.

Mr. Chavez has frequently brandished his oil weapon against the United States, threatening to cut off oil deliveries. A bigger threat is that PDVSA could simply cease to produce.

PDVSA’s revenues declined by 67 percent this year, according to the company’s most recent financial report, released in November. It attributed the fall “principally to the decline in export prices and a reduction, as of 1 January 2009, of production as a result of decisions derived from within the Organization of the [Petroleum Exporting] Countries,” or OPEC.

International oil experts and former PDVSA executives say mismanagement and corruption are also major factors in the decline.

“By overplaying his hands in the bonanza, Chavez is now having to bow and beg for investment,” said Pedro M. Burelli, a former member of PDVSA’s executive board.

“By having raised the country’s and PDVSA’s risk profile through demagoguery, technical and managerial incompetence, many oil companies today consider Venezuela the world’s worst risk return opportunity,” Mr. Burelli added.

On Friday, Mr. Chavez announced a currency devaluation for the first time since 2005, setting a two-tiered exchange rate designed to help Venezuela’s oil earnings go further domestically while holding down prices of priority imports such as food to counter soaring inflation.

Mr. Chavez said the bolivar will now have two government-set rates: 2.60 to the dollar for transactions deemed priorities by the government, and 4.30 to the dollar for other transactions. The devaluation dropped the currency’s value by 17 percent or 50 percent, depending on the tier.

The higher rate, which he called the “oil dollar,” will double the paper value of Venezuela’s petroleum earnings when converted to local currency.

Mr. Chavez said the priority exchange rate will be allotted for food, health care products, school supplies, machinery and equipment for economic development, among other things. Imports that will fall under the less favorable rate include automobiles, telecommunications goods, computers, appliances, alcohol and tobacco.

The currency’s official exchange rate has been held steady by the government at 2.15 bolivars to the dollar since 2005.

Venezuela’s sagging infrastructure has been blamed for a series of recent accidents at oil installations. Late last month, one of the country’s largest gas compression plants, located along a block of oil fields on Lake Maracaibo, suddenly blew up.

The deterioration of Venezuela’s power grid has similarly resulted in serious cuts of electricity throughout the country, including the capital, Caracas.

The government has introduced measures to reduce energy consumption by 20 percent, according to Electrical Energy Minister Angel Rodriguez. The government also is rationing the water supply “so that the Guri Dam (Venezuela’s main hydroelectric dam) can maintain sufficient levels of water to generate electricity,” Mr. Rodriguez was quoted as saying by Venezuela’s official news agency, ABN, on Dec. 28.

Mr. Chavez has used his Sunday talk show, “Hello President,” to urge Venezuelans to restrict bathing to a three-minute shower per day. He has said that $218 million has been allocated to the construction of new thermoelectric plants.

Reports in the main Caracas newspaper, El Universal, have pointed to official corruption and mismanagement as reasons for the energy shortage.

According to El Universal, problems began when key sectors of Venezuela’s electrical system were taken over by PDVSA, whose officials engaged in hugely overpriced purchases of electrical equipment from Europe and the United States. A dozen turbines desperately needed for power generation remain warehoused in the United States because of a “lack of resources for their transport,” wrote investigative journalist Nelson Bocaranda.

“The government’s lack of capacity to correct serious deficiencies in the management of the state is promoting increasing social unrest” said a recent report by the Brussels-based International Crisis Group. It warned that “the December 2010 legislative elections promise to further polarize an already seriously divided country.”

Recent opinion polls indicate shifts in public sentiment away from Mr. Chavez.

Still, analysts say Mr. Chavez still could prevail because much of the media is under state censorship; election authorities and the judiciary also are under state control; and the opposition remains weak, divided and subject to government harassment.

However, Mr. Chavez could have little to celebrate in 2010. Newsweek magazine, as part of a series of global predictions for the year, said the president could face a coup as his quest to convert Latin America to 21st-century socialism falls apart and the country “spins toward the familiar 20th-century tableau of scarcity, poverty and chaos.”

Speaking to reporters in late December, Mr. Chavez rejected speculation about an internal upheaval.

“They would have to import an army to topple me,” he said.

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