Chavez steers PDVSA down

QUERETARO, Mexico, Feb. 11 (UPI) -- It was an unusual appointment by Venezuela's President Hugo Chávez. His tendency has been to replace civilians with army officers. This time he did the opposite. The problem was that Gen. Guaicaipuro Lameda, head of PDVSA, the state-owned oil company, was proving unwilling to obey orders.

Lameda, himself a Chávez appointment, was replaced Saturday by an economist from the Central Bank, Gaston Parra. The post in question is one of the most important, perhaps the most important, for Venezuela's economy. PDVSA extracts and exports the oil that is the source of 90 percent of the country's export earnings. Investment in oil and the output of oil also tend to determine overall growth in the Venezuelan economy. For Venezuela, nothing could be more important than oil.

The importance of PDVSA is reflected in the fact that Chávez has changed the man at the helm no less than three times in the three years he has been in power. Lameda had earlier been a Chavez appointee at OCEPRE, the budget office, which has overall control of public spending. Though Lameda's career has been in the army, he had held a number of senior financial positions, was very well qualified for the post and was widely respected.

Your correspondent met Lameda when he was at OCEPRE and found that he had a very high regard for Chávez. He reminisced about serving with Chávez in the armed forces many years before. Yet even at OCEPRE it is rumored that Lameda's budgetary discipline clashed with Chávez's plans.

Nonetheless Chávez put Lameda in charge of PDVSA where his stewardship was generally applauded by PDVSA's own staff. The feeling within the oil company was that it had regained some of its independence from the government and was planning more sensibly for the future.

But Lameda is reported to have been unhappy with the new Hydrocarbons Law that was passed last year. Under the law, PDVSA was obliged to pay royalties to the government at a level of 30 percent, when a 20 percent rate had been expected. PDVSA also pays income tax at a rate of 30 percent to the government and is required to pay dividends. In 2001 the required dividend payment was a huge $4 billion.

But Chávez, it appears, is looking for still more from Venezuela's cash cow. He is believed to want PDVSA to cut its spending by a quarter. Parra is believed to be willing to go along with these cuts. He is being brought in to do Chávez's will.

But the cuts create the risk that PDVSA's investment spending will prove inadequate and oil output will fall.

James Williams, an oil industry consultant, says, "A year ago PDVSA's goal was to build capacity to 5.5 million barrels per day by 2006. This goal has obviously been scrapped."

Williams' view is that under Chávez Venezuela is declining as an international oil power.

"At the current level of investment Venezuela's capacity and therefore power within OPEC is on the decline," Williams says. "Worse it is diminishing Venezuela's potential for future revenue."

Why is Chávez doing this? In the first place, he sees oil as the means of funding a higher standard of living for Venezuelans. The cash PDVSA generates must be taken and distributed. The problem with this is that there is a limit to which even the biggest of cash cows can be milked. Chávez appears not to recognize that limit. Another factor is that Chávez is fully committed to oil cuts by the Organization of Petroleum Exporting Countries. He believes it makes sense for Venezuela to produce less oil and gain a higher price for it.

But Chávez's view of the oil industry is simplistic. By failing to invest in high-quality, low-cost production and by failing to maintain some spare capacity, Venezuela is likely to lose market share. That will be disastrous for the country. Oil is going to earn Venezuela less. A country that has been getting poorer for 20 years is going to get poorer still.

Chávez's folly has already turned most of the educated population against him. Now that Parra has been appointed at PDVSA, the company's best hope would appear to be that Chávez's days are numbered.

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