CARACAS - Tightening polls in the prelude to Venezuela's weekend election sparked hopes that its nationalized oil industry might open up to more private investment and that its state energy company might operate more as a business and less as a development bank.
But incumbent President Hugo Chavez was reelected with a comfortable margin Sunday, fueling views that the country's sagging oil industry, which sits atop the world's largest crude oil reserves, won't get much of a lift.
The socialist leader has turned state oil monopoly Petroleos de Venezuela, or PdVSA, into a virtual ATM to finance the large-scale social programs that have kept his leftist government popular among the country's poor and undoubtedly helped him win another six-year mandate by an almost-ten-percentage-point advantage.
But the use of PdVSA's oil income to pay for Mr. Chavez's "21st century socialist Bolivarian revolution" has resulted in cash-flow problems for the company and a growing debt load. Diverting the company's revenue has challenged, among other things, plans to sharply raise crude oil output in recent years.
Analysts say the Chavez administration--which has earned a reputation for being hostile toward its private-sector partners--may need to make concessions to the foreign companies that are involved in developing its domestic oil and gas reserves if it wants to maintain a steady income to finance welfare programs. They say such measures could include giving tax incentives or even slightly lower the 60% stake that PdVSA has taken in most projects, to encourage foreign investment while maintaining majority control.
"The government will have to be pragmatic because if they don't, you might see some big oil players leaving," said Diego Moya-Ocampos, an analyst with IHS Global Insight.
Venezuela siphoned off $30 billion, about 24%, of PdVSA's 2011 revenue to pay for social programs that provide Mr. Chavez's key constituency with everything from houses to loans and food to whiteline appliances. Critics say that has eaten into what PdVSA can spend on project maintenance and development. They say the company's priorities are far from managing the oil industry, and that has contributed to the rising number of accidents at state-owned oil facilities--most notably an Aug. 25 gas-leak explosion at the Amuay refinery that killed dozens of people.
At the heart of Mr. Chavez's Bolivarian project is oil revenue, and more will be needed as his government adds to its ever-growing list of social expenditures. To that end, development of Venezuela's prized Orinoco heavy oil belt is vital.
PdVSA says it currently produces around 3 million barrels a day and plans to raise output to 3.5 million by the end of this year and then to 4 million by 2014. Output has declined slightly under the current administration, according to the Organization of Petroleum Exporting Countries, which says Venezuela was producing 3.1 million barrels a day in 1998, the year before Mr. Chavez took office, and posted an average of 2.84 million barrels a day in August.
"If the government fails to increase oil production, the whole thing is going to fall down," Mr. Moya-Ocampos said, noting that the government is handling a delicate balance between adhering to its statist principles and inviting the foreign investment and expertise needed to boost output. Indeed, Venezuela has repeatedly failed to meet new production targets, which the opposition tried to draw attention to in the presidential campaign as an example of the many unfulfilled promises of the current regime.
Transparency, too, has become another issue under Mr. Chavez's PdVSA as the company stopped publishing monthly export and production figures last year. It also releases financial reports just once a year.
Many independent industry analysts doubt that PdVSA, whose management of social programs is taking an increasing share of its operations, will be able to meet those production goals and will continue to face fiscal constraints that could eat into its investment into the oil sector. The company has laid out plans for $236 billion in capital expenditures between 2013 and 2018, which is expected to help it develop the Orinoco belt, but analysts say questions loom over how they will be able to obtain the financing.
Under Mr. Chavez's leadership, PdVSA's work force has almost tripled to more than 100,000 strong, often stacked with those loyal to his ruling PSUV party. It's his way to ensure control over the country's main breadwinner following a PdVSA strike early in his presidency that briefly paralyzed the economy, after which Mr. Chavez fired some 19,000 workers, about half its workforce.
The measure has allowed Mr. Chavez to use PdVSA as a strategic tool to consolidate support domestically through social programs and internationally through preferential oil deals with allied leftist countries.
The key is not to allow operational autonomy "but to have political control over the company," Federico Barriga, an analyst at the Economist Intelligence Unit, said.
Mr. Chavez has already sent a clear message of his intention to maintain the status quo at PdVSA as he recently named Oil Minister Rafael Ramirez, who doubles as PdVSA chief and is a close confidant of the president, to another six-year term.
"The only boss that we recognize at the head of our oil industry is comandante and president of Venezuela, Hugo Chavez," Mr. Ramirez told a gathering of petroleum sector workers last month.
Copyright (c) 2012 Dow Jones & Company, Inc.
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